# Prop. Treas. Reg. § 1.961-8: Application of positive derived basis to covered shareholders' distributive shares of gain or loss. Proposed regulation, not in force. REG-105479-18, 89 FR 95362, published 2024-12-02 . Interprets 26 U.S.C. § 961. Par. 28. Sections 1.961-3 through 1.961-14 are added to read as follows: (a) Scope. This section describes the consequences of a partnership's positive derived basis. Paragraph (b) of this section applies positive derived basis to covered shareholders' distributive shares of gain or loss recognized by a partnership on a sale, exchange, or other disposition of derivative ownership units. Paragraph (c) of this section describes related basis adjustments to certain partnership interests directly owned by a covered shareholder. Paragraph (d) of this section describes related basis adjustments to certain lower-tier partnership interests directly owned by an upper-tier partnership. See § 1.961-12(c)(4) ( Example 4 ) for an example illustrating the application of this section. (b) Sale, exchange, or other disposition of derivative ownership units with positive derived basis —(1) In general. In a sale, exchange, or other disposition by a partnership ( transferring partnership ) of one or more derivative ownership units ( transferred units ), each partner's distributive share of gain or loss recognized by the transferring partnership on the sale, exchange, or other disposition is first determined without regard to derived basis (taking into a partner's section 743(b) basis adjustment). Then, positive derived basis is applied to each covered shareholder's distributive share of such gain or loss in accordance with paragraph (b)(2) of this section. Such application of positive derived basis to a covered shareholder's distributive share is treated as an application of positive derived basis by the transferring partnership, unless the covered shareholder owns the transferred units through multiple partnerships, in which case only partnerships in which the covered shareholder directly owns an interest are treated as applying the positive derived basis. (2) Application of positive derived basis— (i) In general. A covered shareholder's distributive share of gain or loss with respect to transferred units (determined without regard to derived basis, and expressed as a negative amount in the case of a distributive share of loss) is adjusted by subtracting the transferring partnership's positive derived basis with respect to the covered shareholder of the transferred units, subject to the limitations in paragraphs (b)(2)(ii) and (iii) of this section, as applicable. (ii) Limitation in nonrecognition transactions. In a nonrecognition transaction, the amount of positive derived basis that is taken into account in applying paragraph (b)(2)(i) of this section with respect to the covered shareholder is limited to the excess of the amount of positive derived basis that would be taken into account by the covered shareholder but for this paragraph (b)(2)(ii) over the covered shareholder's share of the gain realized but not recognized by the transferring partnership with respect to the transferred units. The covered shareholder's share of such realized-but-not-recognized gain is determined by multiplying the amount of that gain of the transferring partnership by a fraction, the numerator of which is the covered shareholder's distributive share of gain recognized by the transferring partnership with respect to the transferred units (determined without regard to derived basis), and the denominator of which is the amount of gain recognized by the transferring partnership with respect to the transferred units (determined without regard to derived basis). (iii) Limitation on loss. Positive derived basis can create or increase a distributive share of loss only if loss is, or would be if there were a loss, recognized by the transferring partnership on the sale, exchange, or other disposition of the transferred units and a current deduction in respect of the loss is, or would be, allowable. (iv) Translation rule. If applicable, positive derived basis is translated into functional currency at the spot rate on the day on which the sale, exchange, or other disposition occurs. (c) Basis adjustment to top-tier partnership interest. In the case of a partnership interest that is directly owned by a covered shareholder and through which the covered shareholder owns the transferred units described in paragraph (b) of this section, adjusted basis of such interest is adjusted under section 705 after taking into account the partnership's application of positive derived basis to the covered shareholder's distributive share of gain or loss with respect to the transferred units (determined under paragraph (b)(2) of this section). (d) Basis adjustments to lower-tier partnership interests. In the case of a partnership interest ( lower-tier partnership interest ) that is directly owned by another partnership ( upper-tier partnership ) and through which a covered shareholder owns the transferred units described in paragraph (b) of this section, the upper-tier partnership's basis in such lower-tier partnership interest is adjusted as described in this paragraph (d). Common basis in the lower-tier partnership interest is adjusted under section 705 without regard to the application of positive derived basis to the covered shareholder's distributive share of gain or loss with respect to the transferred units (determined under paragraph (b)(2) of this section). Concurrently with and taking into account the adjustment under section 705, derived basis with respect to the covered shareholder of the lower-tier partnership interest is reduced by the amount of positive derived basis applied to the covered shareholder's distributive share of gain or loss with respect to the transferred units (determined under paragraph (b)(2) of this section) or gain is recognized in accordance with the principles of § 1.961-4 (applied by treating such amount of applied positive derived basis as the amount of the adjustment to basis described in § 1.961-4(c)(2)(i)). If there is more than one lower-tier partnership, adjustments to derived basis under this paragraph (d) are made starting with the partnership at the lowest tier.