Partnership interest transfers
(iv) Partnership interest transfers defined. For purposes of paragraphs (c)(3) and (4) of this section, a transfer of a partnership interest includes any issuance of a partnership interest by a partnership; any sale of a partnership interest; any increase or decrease in a partner's proportionate share of any partnership asset as a result of a contribution of property or services to a partnership, a distribution, or a redemption; or any other transfer of a proportionate share of any partnership asset (other than a transfer of a partnership asset that is not a partnership interest by the partnership to a person not acting in a partner capacity), whether by a partner or the partnership (including as a result of a deemed or actual sale or a capital shift). (4) Increased basis from a distribution. If a distribution of property from a partnership to a partner results in an increase in the tax basis of either the distributed property or other partnership property, such as under section 732(b) or 734(b), the increase in tax basis attributable to a foreign related party is treated as if it was newly purchased property acquired by the taxpayer (to the extent of its proportionate share) from the foreign related party that is placed in service when the distribution occurs. See 1.734-1(e). This increased basis treated as newly purchased property is treated as acquired with a base erosion payment, unless an exception in 1.59A-3(b) applies. For this purpose, in the case of a distribution to a foreign related party, the increased basis in the remaining partnership property that is treated as newly purchased property is entirely attributable to the foreign related party. In the case of a distribution to a taxpayer, the increased basis in the distributed property that is treated as newly purchased property is attributable to each foreign related party in proportion to the foreign related party's proportionate share of the asset immediately before the distribution. If the distribution is to a person other than a taxpayer or a foreign related party, there is no base erosion payment caused by the distribution under this paragraph (c)(4). See paragraphs (g)(2)(vii), (viii), and (ix) of this section (Example 7, Example 8, and Example 9) for examples illustrating the application of this paragraph (c)(4). (5) Operating rules applicable to base erosion payments(i) Single payment characterized as separate transactions. If a single transaction is partially characterized in one manner and partially characterized in another manner, each part of the transaction is separately analyzed. For example, if a contribution of property to a partnership is partially treated as a contribution and partially treated as a disguised sale, the contribution and sale are separately analyzed under paragraph (c) of this section. (ii) Ordering rule with respect to transfers of a partnership interest. If a partnership interest is transferred (within the meaning of paragraph (c)(3)(iv) of this section), paragraph (c)(3) of this section first applies to determine the assets deemed transferred by the transferor(s) to the transferee(s) and liabilities deemed assumed by the parties. Then, to the extent applicable (such as where a partnership makes a contribution in exchange for an interest in another partnership or when a partnership receives an interest in another partnership as a contribution to it), paragraph (c)(2) of this section applies for purposes of determining the proportionate share of the property received by the partners in a partnership. See paragraph (g)(2)(vi) of this section (Example 6) for an illustration of this rule. (iii) Consideration for base erosion payment or property resulting in base erosion tax benefits. When a partnership pays or receives property, services, or other consideration, each partner is deemed to pay or receive the property, services, or other consideration paid or received by the partnership for purposes of determining if there is a base erosion payment, except as otherwise provided in paragraph (c) of this section. See paragraphs (g)(2)(v) and (vi) of this section (Example 5 and Example 6) for illustrations of this rule. (iv) Non-cash consideration. When both parties to a transaction use non-cash consideration, each party must separately apply paragraph (c) of this section to determine its base erosion payment with respect to each property. For example, if two partnerships, each with a domestic corporation and a foreign corporation as partners, all of whom are related, exchange depreciable property, each transfer of property would be separately analyzed to determine whether it is a base erosion payment. (v) Allocations of income in lieu of deductions. If a partnership adopts the curative method of making section 704(c) allocations under 1.704-3(c), an allocation of income to the partner to whom any built-in gain or built-in loss would be allocable under section 704(c) (the 704(c) partner), in an amount necessary to offset the effect of the ceiling rule (as defined in 1.704-3(b)(1)), in lieu of a deduction allocation to a partner other than the 704(c) partner (a non-704(c) partner), is treated as a deduction to the non-704(c) partner for purposes of section 59A in an amount equal to the income allocation. See paragraph (g)(2)(x) of this section (Example 10) for an example illustrating the application of this paragraph (c)(5)(v).