# Prop. Treas. Reg. § 1.755-1: Rules for allocation of basis. Proposed regulation, not in force. REG-151416-06, 79 FR 65151, published 2014-11-03 . Interprets 26 U.S.C. § 755. Par. 8. Section 1.755-1 is amended by: a. Adding paragraphs (c)(2)(iii), (iv), (v), and (vi). b. Revising the paragraph heading and the introductory text of paragraph (c)(6). c. Removing the paragraph heading “ Example.” in paragraph (c)(6) and adding “ Example 1.” in its place. d. Adding Examples 2 and 3 to paragraph (c)(6). e. Revising paragraph (e)(2). The additions and revisions read as follows: * * * * * (c) * * * (2) * * * (iii) Coordination with section 1245 and similar provisions. Any increase in basis allocated to capital gain property pursuant to the second sentence in paragraph (c)(2)(i) of this section is not taken into account in determining the recomputed or adjusted basis in the property for purposes of section 1245(a)(1). Notwithstanding the prior sentence, any depreciation or amortization of the increase in basis that is allowed or allowable is taken into account in computing the property's recomputed basis. In the case of property that is subject to section 617(d)(1), 1250(a)(1), 1252(a)(1), or 1254(a)(1), rules similar to the rule in this paragraph (c)(2)(iii) shall apply. (iv) Coordination with section 1231. Any increase in basis allocated to capital gain property pursuant to the second sentence in paragraph (c)(2)(i) of this section is not taken into account in determining section 1231 gain and loss, as defined in section 1231(a)(3). Any basis adjustment to an asset not taken into account pursuant to this paragraph (c)(2)(iv) shall be treated as gain from the sale or exchange of a capital asset with the same holding period as the underlying asset. (v) Coordination with sections 1248 and 995. Any increase in basis allocated to stock in a foreign corporation pursuant to the second sentence in paragraph (c)(2)(i) of this section, or any decrease in basis allocated to stock in a foreign corporation pursuant to the second sentence in paragraph (c)(2)(ii) of this section, is not taken into account in determining the amount of gain recognized on the sale or exchange of such stock for purposes of section 1248(a). In the case of property that is subject to section 995(c), rules similar to the rule set forth in this paragraph (c)(2)(v) shall apply. (vi) Election not to apply the provisions of paragraphs (c)(2)(iii), (iv), and (v). A partnership may elect not to apply paragraphs (c)(2)(iii), (iv), and (v) of this section, and § 1.732-1(c)(2)(iii), (iv), and (v). An election made under this paragraph (c)(2)(vi) shall apply to all property distributions taking place in the partnership taxable year for which the election is made and in all subsequent partnership taxable years (including after a termination of the partnership under section 708(b)(1)(B)). An election under this paragraph (c)(2)(vi) must be made in a written statement filed with the partnership return for the first taxable year in which any of paragraph (c)(2)(iii), (iv), or (v) of this section, or § 1.732-1(c)(2)(iii), (iv), and (v), would have applied if no election was made. An election under this paragraph (c)(2)(vi) is valid only if the required statement is included with a partnership return that is filed not later than the time prescribed by paragraph (e) of this section or § 1.6031(a)-1 (including extensions thereof) for filing the return for such taxable year. This election is a method of accounting under section 446, and once the election is made, it can be revoked only with the consent of the Commissioner. The revocation of the election, or the making of a late election, under this paragraph (c)(2)(vi) is a change in method of accounting to which the provisions of section 446(e) and the regulations under section 446(e) apply. See paragraph (c)(6), Example 3, of this section for the treatment of a section 734(b) adjustment if an election under this paragraph (c)(2)(vi) is made, and certain consequences of the election under section 751(b). The statement required by this paragraph (c)(2)(vi) shall— (A) Set forth the name and address of the partnership making the election; (B) Be signed by any officer, manager, or member of the partnership who is authorized (under local law or the partnership's organizational documents) to make the election and who represents to having such authorization under penalties of perjury; and (C) Contain a declaration that the partnership elects not to apply paragraphs (c)(2)(iii), (iv), and (v) of this section and § 1.732-1(c)(2)(iii), (iv), and (v). * * * * * (6) Examples. The following examples illustrate this paragraph (c): * * * * * Example 2. (i) A, B, and C are equal partners in ABC. Each partner has an outside basis in its partnership interest of $20. ABC owns depreciable equipment X with an adjusted basis of $30 and a fair market value of $150 and depreciable equipment Y with an adjusted basis of $30 and a fair market value of $30. ABC has made an election under section 754. (ii) The depreciable equipment X has $120 of adjustments reflected in its adjusted basis within the meaning of § 1.1245-2(a)(2). Accordingly, the entire $120 of the gain with respect to depreciable equipment X would be treated as gain to which section 1245(a)(1) would apply if the partnership sold the depreciable equipment X for its fair market value. ABC, therefore, has a $120 unrealized receivable within the meaning of § 1.751-1(c)(4)(iii). Assume ABC makes a current distribution of the depreciable equipment Y to A. Because A's basis in his partnership interest is only $20, A's basis in the depreciable equipment Y will be limited to $20 under section 732(a). Under section 734(b), ABC will increase the basis in its capital gain property by $10 and will not adjust the basis of ordinary income property. Assume ABC has not made an election under § 1.755-1(c)(2)(vi). (iii) Allocation between classes. Pursuant to § 1.755-1(a)(1), ABC's $120 unrealized receivable associated with the depreciable equipment X is treated as a separate asset that is ordinary income property. Thus, ABC is treated as having two assets (each actually a component of the single asset, equipment X) after the distribution, one that is capital gain property with a basis of $30 and a fair market value of $30, and one that is ordinary income property with a basis of $0 and a fair market value of $120. (iv) Allocation within class. ABC must allocate the $10 basis increase entirely to the capital gain portion of the depreciable equipment X, as it holds no other capital gain property after it distributes the depreciable equipment Y to A. Therefore, ABC increases the basis of the capital gain property to $40. (v) Treatment of section 734(b) adjustment. Pursuant to paragraph (c)(2)(iii) of this section, if ABC sold its depreciable equipment X for $150 immediately after the distribution to A, ABC would not take into account the $10 section 734(b) adjustment in determining ABC's recomputed or adjusted basis in the depreciable equipment X for purposes of section 1245(a)(1) and, accordingly, would recognize $120 of ordinary income. Also pursuant to paragraph (c)(2)(iv) of this section, the $10 section 734(b) adjustment is not taken into account for purposes of determining section 1231 gain or loss. Thus, pursuant to paragraph (c)(2)(vi) of this section, ABC would recognize a $10 capital loss. (vi) Treatment of additional depreciation and appreciation. (A) Assume, instead, that ABC continues to own the equipment and takes additional depreciation deductions of $16 ($15 with respect to the original remaining $30 basis and $1 with respect to the additional $10 basis resulting from the section 734(b) adjustment). At a time when the equipment has appreciated in value to $170, ABC sells the depreciable equipment X for $170 in a taxable transaction. In that same taxable year, ABC does not sell any other property used in its trade or business. (B) Pursuant to section 1245(a)(1), ABC must recognize ordinary income in an amount by which the lesser of the following two amounts exceeds ABC's adjusted basis in the depreciable equipment X— ( 1 ) ABC's recomputed basis in the depreciable equipment, or ( 2 ) ABC's amount realized; (C) Pursuant to section 1245(a)(2)(A), ABC's recomputed basis is an amount equal to the sum of— ( 1 ) ABC's adjusted basis of the property, plus ( 2 ) The amount of adjustments reflected in the adjusted basis on account of deductions allowed or allowable. (D) Pursuant to (c)(2)(iii) of this section, the $9 remaining section 734(b) adjustments is not taken into account in determining ABC's recomputed or adjusted basis in the property for purposes of section 1245(a)(1). Thus, ABC's adjusted basis in the property is $15 (the remaining original basis). Also pursuant to (c)(2)(iii) of this section, however, any depreciation, or amortization of the section 734(b) adjustment that is allowed or allowable is taken into account in computing the property's recomputed basis. Thus, ABC's amount of adjustments reflected in the adjusted basis is $136 (the original $120 adjustment for depreciation deductions plus the additional $15 adjustment for depreciation deductions plus the additional $1 adjustment for depreciation deductions taken with respect to the section 734(b) adjustment). Accordingly, ABC's recomputed basis is $151 ($15 adjusted basis plus $136 of adjustments), which is lower than ABC's amount realized of $170. ABC, therefore, must recognize ordinary income in an amount by which ABC's recomputed basis of $151 exceeds ABC's adjusted basis in the depreciable equipment X. Pursuant to (c)(2)(iii) of this section, the $9 remaining section 734(b) adjustments is not taken into account in determining the adjusted basis in the property for purposes of section 1245(a)(1). Accordingly, ABC must recognize $136 of ordinary income (the excess of ABC's $151 recomputed basis in the depreciable equipment X over ABC's $15 adjusted basis in the depreciable equipment X). (E) Pursuant to paragraph (c)(2)(iv) of this section, the section 734(b) adjustment is not taken into account in determining ABC's section 1231 gain or loss. Accordingly, pursuant to section 1231(a)(1), ABC recognizes $19 of capital gain (ABC's $170 amount realized on the disposition of the depreciable equipment X over ABC's adjusted basis of $15 in the depreciable equipment X, reduced by the $136 of ordinary income ABC recognized under section 1245(a)(1)). Pursuant to paragraph (c)(2)(vi) of this section, ABC also recognizes a capital loss equal to the remaining $9 section 734(b) adjustment. Example 3. (i) Assume the same facts as Example 2 of this paragraph (c), except ABC has made an election under paragraph (c)(2)(vi) of this section. (ii) Treatment of section 734(b) adjustment. Because ABC has made an election under paragraph (c)(2)(vi) of this section, paragraph (c)(2)(iii) of this section does not apply. Thus, if ABC sold its depreciable equipment X immediately after the distribution to A, ABC would take into account the $10 section 734(b) adjustment in determining ABC's recomputed or adjusted basis in the depreciable equipment X for purposes of section 1245(a)(1) and, accordingly, would recognize $110 of ordinary income (including for purposes of applying section 751). * * * * * (e) * * * (2) Special rules. Paragraphs (a) and (b)(3)(iii) of this section apply to transfers of partnership interests and distributions of property from a partnership that occur on or after June 9, 2003, and paragraphs (c)(2)(iii), (iv), (v), (vi), and (c)(6) of this section and Examples 2 and 3 of paragraph (c) of this section apply to distributions of property from a partnership that occur on or after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register .