# Prop. Treas. Reg. § 1.743-1: Special rules where partnership has a section 754 election in effect or has a substantial built-in loss immediately after transfer of partnership interest. Proposed regulation, not in force. REG-144468-05, 79 FR 3042, published 2014-01-16 . Interprets 26 U.S.C. § 743. Par. 8 . Section 1.743-1 is amended by: 1. Revising the section heading. 2. Revising paragraph (a). 3. Revising paragraph (b). 4. Redesignating paragraph (f) introductory text as paragraph (f)(1) introductory text and revising it. 5. Adding paragraph (f)(2). 6. In paragraph (h)(1), removing “§ 1.708-1(b)(1)(iv)” and adding in its place “§ 1.708-1(b)(4)”. 7. Revising paragraph (j)(3)(ii) Example 1. 8. Revising paragraph (j)(3)(ii) Example 3. 9. Revising paragraph (k)(1)(iii). 10. Adding paragraph (k)(2)(iv). 11. Redesignating paragraph (l) as paragraph (p). 12. Adding a new paragraph (l). 13. Adding paragraphs (m), (n), and (o). 14. Revising newly redesignated paragraph (p). The revisions and additions read as follows: (a) Generally —(1) Adjustment to basis. The basis of partnership property is adjusted as a result of the transfer of an interest in a partnership by sale or exchange or on the death of a partner if the election provided by section 754 (relating to optional adjustments to the basis of partnership property) is in effect with respect to the partnership, or if the partnership has a substantial built-in loss (within the meaning of paragraph (a)(2)(i) of this section) immediately after the transfer. (2) Substantial built-in loss —(i) In general. A partnership has a substantial built-in loss with respect to a transfer of an interest in a partnership if the partnership's adjusted basis in partnership property exceeds the fair market value of the property (as determined in paragraph (a)(2)(iii) of this section) by more than $250,000 immediately after the transfer. (ii) Impact of section 743 basis adjustments and section 704(c)(1)(C) basis adjustments. For purposes of paragraph (a)(2)(i) of this section, any section 743 or section 704(c)(1)(C) basis adjustments (as defined in § 1.704-3(f)(2)(iii)) (other than the transferee's section 743(b) basis adjustments or section 704(c)(1)(C) basis adjustments) to partnership property are disregarded. (iii) Determination of fair market value in tiered situation. For purposes of paragraph (a)(2)(i) of this section, an upper-tier partnership's fair market value in a lower-tier partnership is equal to the sum of— (A) The amount of cash that the upper-tier partnership would receive if the lower-tier partnership sold all of its property for cash to an unrelated person for an amount equal to the fair market value of such property, satisfied all of its liabilities (other than § 1.752-7 liabilities), paid an unrelated person to assume all of its § 1.752-7 liabilities in a fully taxable, arm's-length transaction, and liquidated; and (B) The upper-tier partnership's share of the lower-tier partnership's liabilities as determined under section 752 and the regulations. (iv) Example. A and B are equal partners in PRS, a partnership. PRS owns Property 1, with an adjusted basis of $3 million and a fair market value of $2 million, and Property 2, with an adjusted basis of $1 million and a fair market value of $1 million. In Year 2, A sells 50 percent of its interest in PRS to C for its fair market value of $750,000. PRS does not have section 754 election in effect. Under paragraph (a)(2)(i) of this section, PRS has a substantial built-in loss because, immediately after the transfer, the adjusted basis of PRS's property ($4 million) exceeds the fair market value of the property ($3 million) by more than $250,000. Thus, pursuant to paragraph (a)(1) of this section, PRS must adjust the bases of its properties as if PRS had made a section 754 election for Year 2. (b) Determination of adjustment. In the case of the transfer of an interest in a partnership, either by sale or exchange or as a result of the death of a partner, a partnership that has an election under section 754 in effect or that has a substantial built-in loss (within the meaning of paragraph (a)(2)(i) of this section) — * * * * * (f) Subsequent transfers —(1) In general. Where there has been more than one transfer of a partnership interest, a transferee's basis adjustment is determined without regard to any prior transferee's basis adjustment. In the case of a gift of an interest in a partnership, the donor is treated as transferring, and the donee as receiving, that portion of the basis adjustment attributable to the gifted partnership interest. The following example illustrates the provisions of this paragraph (f)(1): * * * * * (2) Special rules for substituted basis transactions. Where a partner had a basis adjustment under section 743(b) allocated pursuant to § 1.755-1(b)(2) through (b)(4) that is attributable to an interest that is subsequently transferred in a substituted basis transaction (within the meaning of § 1.755-1(b)(5)), the provisions of paragraph (f)(1) of this section do not apply. Instead, the transferee succeeds to that portion of the transferor's basis adjustment attributable to the transferred partnership interest. The basis adjustment to which the transferee succeeds is taken into account for purposes of determining the transferee's share of the adjusted basis to the partnership of the partnership's property for purposes of paragraph (b) of this section and § 1.755-1(b)(5). To the extent a transferee would be required to decrease the adjusted basis of an item of partnership property pursuant to §§ 1.743-1(b)(2) and 1.755-1(b)(5), the decrease first reduces the positive section 743(b) adjustment, if any, that the transferee succeeds to. The following example illustrates the provisions of this paragraph (f)(2): Example —(i) A and B are partners in LTP, a partnership. A owns a 60 percent interest, and B owns a 40 percent interest, in LTP. B owns the LTP interest with an adjusted basis of $50 and a fair market value of $70. LTP owns two assets: Capital Asset 1 with an adjusted basis of $25 and a fair market value of $100, and Capital Asset 2 with an adjusted basis of $100 and a fair market value of $75. B sells its interest in LTP to UTP. Both LTP and UTP have a section 754 election in effect. Pursuant to § 1.755-1(b)(3), UTP's $20 section 743(b) adjustment is allocated $30 to Capital Asset 1 and ($10) to Capital Asset 2. (ii) UTP distributes its LTP interest to C, a partner in UTP, when the adjusted bases and fair market values of the LTP interest and LTP's assets have not changed. C's adjusted basis in its UTP interest at the time of the distribution is $40. Pursuant to paragraph (f)(2) of this section, C succeeds to UTP's section 743(b) adjustment. Also pursuant to paragraph (f)(2) of this section, the section 743(b) adjustment is taken into account in determining C's share of the adjusted basis of LTP property. Thus, C also has a $30 negative section 743(b) adjustment that must be allocated pursuant to § 1.755-1(b)(5). That is, C's interest in the partnership's previously taxed capital is $70 (C would be entitled to $70 cash on liquidation and there is no increase or decrease for tax gain or tax loss from the hypothetical transaction, taking into account UTP's section 743(b) adjustment to which C succeeds). Pursuant to § 1.755-1(b)(5)(iii)(B), the $30 negative section 743(b) adjustment must be allocated within the capital class first to properties with unrealized depreciation in proportion to C's share of the respective amounts of unrealized depreciation before the decrease. Taking into account UTP's section 743(b) adjustment to which C succeeds, C has no share of LTP's unrealized depreciation. Pursuant to § 1.755-1(b)(5)(iii)(B), any remaining decrease must be allocated among Capital Asset 1 and Capital Asset 2 in proportion to C's share of their adjusted bases. Taking into account UTP's section 743(b) adjustment to which C succeeds, C's share of the adjusted basis in Capital Asset 1 is $40 ($10 share of LTP's basis and $30 of UTP's section 743(b) adjustment to which C succeeded) and in Capital Asset 2 is $30 ($40 share of LTP's basis and ($10) of UTP's section 743(b) adjustment). Thus, 40/70 of the $30 adjustment, $17.14, is allocated to Capital Asset 1 and 30/70 of the $30 adjustment, $12.86, is allocated to Capital Asset 2. The decrease allocated to Capital Asset 1 first reduces UTP's section 743(b) adjustment to which C succeeds. Thus, C has a net section 743(b) adjustment in Capital Asset 1 of $12.86 ($30 minus $17.14) and in Capital Asset 2 of ($22.86) (($10) plus ($12.86)). If Capital Asset 1 is subject to the allowance for depreciation or amortization, C's net $12.86 positive basis adjustment is recovered pursuant to paragraph (j)(4)(i)(B). (iii) If C later transfers its LTP interest to D in a transaction that is not a substituted basis transaction within the meaning of § 1.755-1(b)(5), under paragraph (f)(1) of this section, D does not succeed to any of C's section 743(b) adjustment. * * * * * (j) * * * (3) * * * (ii) * * * Example 1. A and B form equal partnership PRS. A and B each contribute $100 cash, and PRS purchases nondepreciable property for $200. Later, at a time when the property value has decreased to $100, C contributes $50 cash for a 1/3 interest in PRS. Under § 1.704-1(b)(2)(iv)( f )( 5 ), PRS revalues its property in connection with the admission of C, allocating the $100 unrealized loss in the property equally between A and B under the partnership agreement, which provides for the use of the traditional method under § 1.704-3(b). A subsequently sells its interest in PRS to T for $50. PRS has an election in effect under section 754. T receives a negative $50 basis adjustment under section 743(b) that, under section 755, is allocated to the nondepreciable property. PRS later sells the property for $120. PRS recognizes a book gain of $20 (allocated equally between T, B, and C), and a tax loss of $80. T will receive an allocation of $40 of tax loss under the principles of section 704(c). However, because T has a negative $50 basis adjustment in the nondepreciable property, T recognizes a $10 gain from the partnership's sale of the property. * * * * * Example 3. A and B form equal partnership PRS. A and B each contribute $75 cash. PRS purchases nondepreciable property for $150. Later, at a time when the property value has decreased to $100, C contributes $50 cash for a 1/3 interest in PRS. Under § 1.704-1(b)(2)(iv)( f )( 5 ), PRS revalues its property in connection with the admission of C. The $50 unrealized loss in the property is allocated equally to A and B under the partnership agreement, which provides for the use of the remedial allocation method described in § 1.704-3(d). A subsequently sells its interest in PRS to T for $50. PRS has an election in effect under section 754. T receives a negative $25 basis adjustment under section 743(b) that, under section 755, is allocated to the nondepreciable property. PRS later sells the property for $112. PRS recognizes a book gain of $12 (allocated equally between T, B, and C), and a tax loss of $38 (allocated equally between T and B). To match its share of book gain, C will be allocated $4 of remedial gain, and T and B will each be allocated an offsetting $2 remedial loss. T was allocated a total of $21 of tax loss with respect to the property. However, because T has a negative $25 basis adjustment in the nondepreciable property, T recognizes a $4 gain from the partnership's sale of the property. * * * * * (k) * * * (1) * * * (iii) Rules for substantial built-in loss transactions. A partnership required to adjust the basis of partnership property following the transfer of an interest in a partnership by sale or exchange or on the death of a partner as the result of the partnership having a substantial built-in loss (as defined in paragraph (a)(2)(i) of this section) immediately after such transfer is subject to, and required to comply with, this paragraph (k)(1), and may rely on, and must comply with, paragraphs (k)(3), (k)(4), and (k)(5) of this section solely with respect to the transfer to which the substantial built-in loss relates as if an election under section 754 were in effect at the time of the transfer. See paragraph (k)(2) of this section for additional rules for transferees and paragraph (n) of this section for special reporting rules relating to electing investment partnerships. (2) * * * (iv) Special rules for transferees subject to the substantial built-in loss provisions. The transferee of an interest in a partnership that is required to reduce the bases of partnership property in accordance with the rules in paragraph (a)(2) of this section must comply with this paragraph (k)(2) as if an election under section 754 were in effect at the time of the transfer. (l) Basis adjustments with respect to tiered partnerships —(1) General rule. If an interest in an upper-tier partnership that holds an interest in a lower-tier partnership is transferred by sale or exchange or upon the death of a partner, and the upper-tier partnership and the lower-tier partnership both have elections in effect under section 754, then for purposes of section 743(b) and section 754, an interest in the lower-tier partnership will be deemed similarly transferred in an amount equal to the portion of the upper-tier partnership's interest in the lower-tier partnership that is attributable to the interest in the upper-tier partnership being transferred. Additionally, if an interest in an upper-tier partnership that holds (directly or indirectly through one or more partnerships) an interest in a lower-tier partnership is transferred by sale or exchange or on the death of a partner, and the upper-tier partnership has a substantial built-in loss (within the meaning of paragraph (a)(2)(i) of this section) with respect to the transfer, each lower-tier partnership is treated, solely with respect to the transfer, as if it had made a section 754 election for the taxable year of the transfer. For additional examples of the application of the principles of this paragraph (l), see Revenue Ruling 87-115, 1987-2 CB 163. See § 601.601(d)(2)(ii)(b). (2) Example. The following example illustrates the principles of this paragraph (l). Example. A and B are equal partners in UTP, a partnership. UTP has no liabilities and owns a 25 percent interest in LTP, a partnership. UTP's interest in LTP has a fair market value of $100,000 and an adjusted basis of $500,000. LTP has no liabilities and owns Land, which has a fair market value of $400,000 and an adjusted basis of $2 million. In Year 3, when UTP and LTP do not have section 754 elections in effect, B sells 50 percent of its interest in UTP to C for its fair market value of $25,000. Because the adjusted basis of UTP's interest in LTP ($500,000) exceeds the fair market value of UTP's interest in LTP ($100,000) by more than $250,000 immediately after the transfer, UTP has a substantial built-in loss with respect to the transfer. Thus, pursuant to paragraph (l) of this section, UTP must adjust the basis of its interest in LTP, and LTP must adjust the basis of Land, as if it had made a section 754 election for Year 3. (m) Anti-abuse rule for substantial built-in loss transactions. Provisions relating to substantial built-in loss transactions in paragraph (a) and paragraphs (k), (l), (n), and (o) of this section must be applied in a manner consistent with the purposes of these paragraphs and the substance of the transaction. Accordingly, if a principal purpose of a transaction is to achieve a tax result that is inconsistent with the purpose of one or more of these paragraphs, the Commissioner may recast the transaction for Federal income tax purposes, as appropriate, to achieve tax results that are consistent with the purpose of these paragraphs. Whether a tax result is inconsistent with the purposes of the provisions is determined based on all the facts and circumstances. For example, under the provisions of this paragraph (m)— (1) Property held by related partnerships may be aggregated if the properties were transferred to the related partnerships with a principal purpose of avoiding the application of the substantial built-in loss provisions in section 743 and the regulations; and (2) A contribution of property to a partnership may be disregarded if the transfer of the property was made with a principal purpose of avoiding the application of the substantial built-in loss provisions in section 743 and the regulations thereunder. (n) Electing investment partnerships —(1) No adjustment of partnership basis. For purposes of this section, an electing investment partnership (as defined in paragraph (n)(6) of this section) shall not be treated as having a substantial built-in loss (within the meaning of paragraph (a)(2)(i) of this section) with respect to any transfer occurring while the election in paragraph (n)(6)(i) of this section is in effect. (2) Loss deferral for transferee partner. In the case of a transfer of an interest in an electing investment partnership, the transferee partner's distributive share of losses (without regard to gains) from the sale or exchange of partnership property shall not be allowed except to the extent that it is established that such losses exceed the loss (if any) recognized by the transferor partner (or by any prior transferor to the extent not fully offset by a prior disallowance under this paragraph (n)(2)) on the transfer of the partnership interest. If an electing investment partnership allocates losses with a different character from the sale or exchange of property to the transferee (such as ordinary or section 1231 losses and capital losses) and the losses allocated to that partner are limited by this paragraph (n)(2), then a proportionate amount of the losses disallowed under this paragraph (n)(2) shall consist of each loss of a separate character that is allocated to the transferee partner. (3) No reduction in partnership basis. Losses disallowed under paragraph (n)(2) of this section shall not decrease the transferee partner's basis in the partnership interest. (4) Effect of termination of partnership. This paragraph (n) shall be applied without regard to any termination of a partnership under section 708(b)(1)(B). (5) Certain basis reductions treated as losses. In the case of a transferee partner whose basis in property distributed by the partnership is reduced under section 732(a)(2), the amount of the loss recognized by the transferor on the transfer of the partnership interest that is taken into account under paragraph (n)(2) of this section shall be reduced by the amount of such basis reduction. (6) Electing investment partnership. For purposes of this section, the term electing investment partnership means any partnership if— (i) The partnership makes an election under paragraph (n)(10) of this section to have this paragraph (n) apply; (ii) The partnership would be an investment company under section 3(a)(1)(A) of the Investment Company Act of 1940 but for an exemption under paragraph (1) or (7) of section 3(c) of such Act; (iii) The partnership has never been engaged in a trade or business (see paragraph (n)(7) of this section for additional rules regarding this paragraph (n)(6)(iii)); (iv) Substantially all of the assets of the partnership are held for investment; (v) At least 95 percent of the assets contributed to the partnership consist of money; (vi) No assets contributed to the partnership had an adjusted basis in excess of fair market value at the time of contribution; (vii) All partnership interests of the partnership are issued by the partnership pursuant to a private offering before the date that is 24 months after the date of the first capital contribution to the partnership; (viii) The partnership agreement of the partnership has substantive restrictions on each partner's ability to cause a redemption of the partner's interest (see paragraphs (n)(8) and (n)(9) of this section for additional rules regarding this paragraph (n)(6)(viii)); and (ix) The partnership agreement of the partnership provides for a term that is not in excess of 15 years (see paragraph (n)(9) of this section for additional rules regarding this paragraph (n)(6)(ix)). (7) Trade or business. For purposes of paragraph (n)(6)(iii) of this section, whether a partnership is engaged in a trade or business is based on the all the facts and circumstances. Notwithstanding the prior sentence— (i) A partnership will not be treated as engaged in a trade or business if, based on all the facts and circumstances, the partnership is not engaged in a trade or business under the rules in § 1.731-2(e)(3). (ii) In the case of a tiered partnership arrangement, a partnership (upper-tier partnership) will not be treated as engaged in a trade or business of a partnership in which it owns an interest (lower-tier partnership) if the upper-tier partnership can establish that, at all times during the period in which the upper-tier partnership owns an interest in the lower-tier partnership, the adjusted basis of its interest in the lower-tier partnership is less than 25 percent of the total capital that is required to be contributed to the upper-tier partnership by its partners during the entire term of the upper-tier partnership. Otherwise, the upper-tier partnership will be treated as engaged in the trade or business of the lower-tier partnership. (8) Substantive restrictions. For purposes of paragraph (n)(6)(viii) of this section, substantive restrictions include cases in which a redemption is permitted under a partnership agreement only if the redemption is necessary to avoid a violation of state, federal, or local laws (such as ERISA or the Bank Holding Company Act) or the imposition of a federal excise tax on, or a change in the federal tax-exempt status of, a tax-exempt partner. (9) Special rules for partnerships in existence on June 4, 2004. In the case of a partnership in existence on June 4, 2004, paragraph (n)(6)(viii) of this section will not apply to the partnership and paragraph (n)(6)(ix) of this section is applied by substituting “20 years” for “15 years.” (10) Election —(i) Eligibility. A partnership is eligible to make the election described in paragraph (n)(6)(i) of this section if the partnership meets the definition of an electing investment partnership in paragraph (n)(6) of this section and does not have an election under section 754 in effect. (ii) Manner of making election. A partnership must make the election by attaching a written statement to an original return for the taxable year for which the election is effective. The original return must be filed not later than the time prescribed by § 1.6031(a)-1(e) of the Procedure and Administration Regulations (including extensions) for filing the return for the taxable year for which the election is effective. If the partnership is not otherwise required to file a partnership return, the election shall be made in accordance with the rules in § 1.6031(a)-1(b)(5) of the Procedure and Administration Regulations. The statement must— (A) Set forth the name, address, and tax identification number of the partnership making the election; (B) Contain a representation that the partnership is eligible to make the election; and (C) Contain a declaration that the partnership elects to be treated as an electing investment partnership. (iii) Effect and duration of election. Once the election is made, the election is effective for all transfers during the partnership's taxable year for which the election is effective and all succeeding taxable years, except as provided in paragraphs (n)(10)(iv) and (n)(10)(v) of this section. (iv) Termination of election —(A) In general. The election terminates if the partnership fails to meet the definition of an electing investment partnership. The electing investment partnership's election also terminates if the partnership files an election under section 754. (B) Effect of termination. If the election terminates, the partnership will be subject to the substantial built-in loss provisions in this section with respect to the first transfer of a partnership interest that occurs after the partnership ceases to meet the definition of an electing investment partnership (or the first transfer that occurs after the effective date of the section 754 election) and to each subsequent transfer. In addition, any losses that are subsequently allocated to a partner to whom a partnership interest was transferred while the election was in effect shall remain subject to the rules in paragraph (n)(2) of this section. (v) Revocation of election —(A) In general. The election, once made, shall be irrevocable except with the consent of the Commissioner. The application for consent to revoke the election must be submitted to the Internal Revenue Service in the form of a letter ruling request. (B) Effect of revocation. If the election is properly revoked, the partnership will be subject to the substantial built-in loss provisions in this section with respect to the first transfer of a partnership interest that occurs after the effective date of the revocation and to each subsequent transfer. In addition, any losses that are subsequently allocated to a partner to whom a partnership interest was transferred while the election was in effect shall remain subject to the rules in paragraph (n)(2) of this section. (11) Transferor partner required to provide information to transferee partner and partnership —(i) In general. Except as provided in paragraph (n)(11)(ii) of this section, if an electing investment partnership interest is transferred in a sale or exchange or upon the death of a partner, the transferor (or, in the case of a partner who dies, the partner's executor, personal representative, or other successor in interest) must notify the transferee and the partnership in writing. If the transferor is a nominee (within the meaning of § 1.6031(c)-1T), then the nominee, and not the beneficial owner of the transferred interest, must supply the information to the transferee and the partnership. The notice must be provided within 30 days after the date on which the transferor partner (or the executor, personal representative, or other successor in interest) receives a Schedule K-1 from the partnership for the partnership's taxable year in which the transfer occurred. The notice must be signed under penalties of perjury, must be retained by the transferee and the partnership as long as the contents thereof may be material in the administration of any internal revenue law, and must include— (A) The name, address, and tax identification number of the transferor; (B) The name, address, and tax identification number of the transferee (if ascertainable); (C) The name of the electing investment partnership; (D) The date of the transfer (and, in the case of the death of a partner, the date of the death of the partner); (E) The amount of loss, if any, recognized by the transferor on the transfer of the interest, together with the computation of the loss; (F) The amount of losses, if any, recognized by any prior transferors to the extent the losses were subject to disallowance under paragraph (n)(2) of this section in the hands of a prior transferee and have not been offset by prior loss disallowances under paragraph (n)(2) of this section; and (G) Any other information necessary for the transferee to compute the amount of loss disallowed under paragraph (n)(2) of this section. (ii) Exception. The rules of paragraph (n)(11)(i) of this section do not apply if the transferor recognizes a gain on the transfer and no prior transferor recognized a loss on any transfer. (iii) Effect of failure to notify transferee partner. If the transferor partner, its legal representative in the case of a transfer by death, or the nominee (if the transferor is a nominee) fails to provide the transferee partner with the statement, the transferee partner must treat all losses allocated from the electing investment partnership as disallowed under paragraph (n)(2) of this section unless the transferee partner obtains, from the partnership or otherwise, the information necessary to determine the proper amount of losses disallowed under paragraph (n)(2) of this section. If the transferee does not have the information necessary to determine the proper amount of losses disallowed under paragraph (n)(2) of this section, but does have information sufficient to determine the maximum amount of losses that could be disallowed, then the transferee may treat the amount of losses disallowed under paragraph (n)(2) of this section as being equal to that maximum amount. For example, if the transferee is able to ascertain the adjusted basis that a prior transferor had in its partnership interest, but is not able to ascertain the amount realized by that transferor, the transferee may assume, for purposes of calculating the amount of losses disallowed under paragraph (n)(2) of this section, that the sales price when the prior transferor sold its interest was zero. If, following the filing of a return pursuant to the previous sentence, the transferor partner or the partnership provides the required information to the transferee partner, the transferee partner should make appropriate adjustments in an amended return for the year of the loss allocation from the partnership in accordance with section 6511 or other applicable rules. (iv) Additional rules. See paragraph (n)(12)(i) of this section for additional reporting requirements when the electing investment partnership is not required to file a partnership return. (12) Electing investment partnership required to provide information to partners —(i) Distributive shares of partnership items. An electing investment partnership is required to separately state on Schedule K and K-1 of the partnership's return (Form 1065) all allocations of losses to all of its partners under § 1.702-1(a)(8)(ii), including losses that, in the absence of section 743(e), could be netted against gains at the partnership level. If a partnership's election to be treated as an electing investment partnership is terminated or revoked under paragraphs (n)(10)(iv) or (n)(10)(v) of this section, the partnership must continue to state such gains and losses separately in future returns relating to any period during which the partnership has one or more transferee partners that are subject to section paragraph (n)(2) of this section. If an electing investment partnership is not required to file a partnership return, the transferee of a partnership interest may be required to provide the Commissioner similar information regarding the partner's distributive share of gross gains and losses of the partnership under § 1.6031(a)-1(b)(4). (ii) Annual statement. An electing investment partnership must provide an annual statement to all of its partners. The statement must be attached to every statement provided to a partner or nominee under section 6031(b) that is issued with respect to any taxable year for which an election to be treated as an electing investment partnership is in effect (whether or not the election is in effect for the entire taxable year). The statement must include the following— (A) A statement that the partnership has elected to be treated as an electing investment partnership; (B) A statement that, unless the transferor partner recognizes a gain on the transfer and no prior transferor recognized a loss on any transfer, if a partner transfers an interest in the partnership to another person, the transferor partner must, within 30 days after receiving a Schedule K-1 from the partnership for the taxable year that includes the date of the transfer, provide the transferee with certain information, including the amount, if any, of loss that the transferor recognized on the transfer of the partnership interest, and the amount of losses, if any, recognized by prior transferors with respect to the same interest; and (C) A statement that if an interest in the partnership is transferred to a transferee partner, the transferee is required to reduce its distributive share of losses from the partnership, determined without regard to gains from the partnership, to the extent of any losses recognized by the transferor partner when that partner transferred the partnership interest to the transferee (and to the extent of other losses recognized on prior transfers of the same partnership interest that have not been offset by prior loss disallowances). The statement must also notify the transferee that it is required to reduce its share of losses as reported to the transferee by the partnership each year by the amount of any loss recognized by the transferor partner (or any prior transferor to the extent not already offset by prior loss disallowances) until the transferee has reduced its share of partnership losses by the total amount of losses required to be disallowed. Finally, the statement must state that if the transferor partner (or its nominee), or its legal representative in the case of a transfer by death, fails to provide the transferee with the required statement, the transferee must treat all losses allocated from the partnership as disallowed unless the transferee obtains, from the partnership or otherwise, the information necessary to determine the proper amount of losses disallowed. (o) Securitization partnerships —(1) General rule. A securitization partnership (as defined in paragraph (o)(2) of this section) shall not be treated as having a substantial built-in loss with respect to any transfer. (2) Definition of securitization partnership. A securitization partnership means any partnership the sole business activity of which is to issue securities that provide for a fixed principal (or similar) amount and that are primarily serviced by the cash flows of a discrete pool (either fixed or revolving) of receivables or other financial assets that by their terms convert into cash in a finite period, but only if the sponsor of the pool reasonably believes that the receivables and other financial assets comprising the pool are not acquired for the purpose of being disposed of. (p) Effective/applicability date. * * * Paragraph (f)(2) of this section and the provisions relating to substantial built-in losses in paragraph (a) and paragraphs (k), (l), (m), (n), and (o) of this section are effective for transfers of partnership interests occurring on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register .