Joint Report on IRC Section 1031
Open Issues Involving Partnerships
February 8, 2001
Contents | Introduction | I | II | III | IV | V
Discussion of Partnership Section 1031 Open Issues: Questions and
Answers
Q-4: When a partnership engages in a Section 1031 deferred exchange
that is not completed until after the end of the partnership ’s tax year, is any
temporary reduction or a “gap” in the amount of partnership liabilities required
to be treated as a “distribution of money to the partners” under Section 752(b),
if upon completion of the deferred exchange the amount of liabilities encumbering the
replacement property is equal to or greater than the debt encumbering the relinquished
property?
A-4: No, the temporary reduction in the amount of debt does not result
in a constructive distribution of money under Section 752(b) even if the deferred exchange
straddles two tax periods.
Where each party to the exchange either assumes a liability of the other
party or acquires property subject to a liability, the so-called " liability netting
rule" provides that consideration given in the form of an assumption of a liability
or a receipt of property subject to a liability (or, for that matter, cash or other
property) is offset against consideration received in the form of an assumption of a
liability or a transfer of property subject to a liability. Under this rule, a taxpayer
who receives boot (i.e., a taxpayer whose liability is assumed or who transfers property
subject to liability) by surrendering property can offset the boot by any boot given,
including cash, but a taxpayer who receives cash consideration (to equalize net values)
cannot offset the cash boot received by boot given in the form of providing mortgage
relief by assuming or receiving mortgaged property subject to existing debt. Treas. Reg.
§ 1.1031(d)-2, examples (1) and (2). The tax consequences of the liability netting rule
are the same for simultaneous and deferred exchanges. Treas. Reg. § 1.1031(k)-1(j)(3),
Example 5.
Under Treas. Reg. §1.752-1(f), only the net decrease in a partner’s
share of liabilities is treated as a distribution from the partnership when a partner
incurs both an increase and a decrease in liabilities as a result of a "single
transaction." A deferred exchange should be treated as a "single
transaction" for purposes of Section 752(b), with the result that a temporary
"gap" in the amount a partner’s share of liabilities attributable to the
relinquished property and the replacement property should not result in a constructive
distribution of money under Section 752(b).
Contents | Introduction
| I | II | III | IV | V |