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If, after the transfer,(1) over 80% of the partnership assets (other than cash and nonconvertible debt obligations) consist of readily marketable stocks or securities held for investment; and(2) the transfer results in diversification of the partners’ interests, all realized gain (but not loss) on all contributed assets is recognized.How is gain or loss from a disguised sale under the two-year rule determined?Recognized gain or loss =[a – c] x [b ÷ a], where,a = FMV of the property contributed;b = FMV of other property received within two years of new ownership;c = Basis of property contributed.[Note that: “[a – c]” (above) = realized gain; and,“[b ÷ a]” (above) = % of the transactiondeemed a disguised sale.Exception: losses from disguised sales are not recognized if the distribution is to a partner owning 50% or more.
How do you determine a partner’s outside basis increase from contributions involving a disguised sale under the two-year rule?Increase in a partner’s outside basis in a partnership interest =(c) x [(a – b) ÷ a], wherea, b, and c are defined immediately above.What is excess net debt relief?Excess net debt relief = (a) – (b) – (c), where,(a) = debt relief from encumbered property contribution;(b) = debt assumption (i.e., share of partnership debt from encumbered property contribution);(c) = basis of all property contributed.What is a partner’s outside basis in a newly acquired partnership interest?The following formula applies to both tax-free and taxable exchanges: A partner’s initial outside basis in a partnership interest is generally determined as follows:+ Basis in contributed property;+ Any share of partnership debt assumption;– Debt relief;+ Any recognized gain from excess net debt relief.Taxable Year of Partner and Partnership¶19,275 PARTNER’S YEAR OF INCLUSIONThe partners must report their distributive share of income and losses of their partnership in the partner’s taxable year in which or with which the partnership year ends. Code Sec. 706(a); Reg. §1.706-1(a). This rule, unless restricted, provides an opportunity for a perpetual deferral of substantial amounts of income.EXAMPLE 19.40 Betty and John Jones each own a 50 percent interest in the BJ Partnership, which has a fiscal year ending September 30. During fiscal year 2013-2014 the partnership has taxable income of $120,000, which it earned ratably during the 12-month period. Thus, $30,000 was earned in 2013, and $90,000 was earned in 2014. Betty and John will report $60,000 of this partnership income on their (calendar-year) 2014 individual tax returns, although economically they each, through the partnership, earned $45,000 of it during calendar-year 2014. Notice that the taxation of the $30,000 earned by the partnership in 2013 is deferred until 2014 because the partners and the partnership have different year-ends.