Basis Shifting is a Rip-off Act

Summary

Rewrites rules for when partners recognize gain or loss on distributions from partnerships. It narrows recognition to specific property categories (money, unrealized receivables, and inventory), restates limited loss recognition rules for liquidating distributions, and adds a new rule that requires a partner to recognize gain equal to certain partnership basis increases when property is distributed and partnership basis adjustments under section 732 apply. The distributed property's basis is increased by the amount of recognized gain, and the character of that gain generally follows rules used to allocate gain under existing tax provisions.

• Rewrites the statutory rules for when partners recognize gain or loss on partnership distributions, consolidating prior provisions.
• Limits recognition of gain/loss to distributions involving money, unrealized receivables, and inventory (per section 732 basis rules).
• Adds a rule requiring partners to recognize gain equal to partnership basis increases when distributions trigger section 732 adjustments.
• Increases the distributed property's basis in the partner's hands by the amount of gain recognized on the distribution.
• Directs that the character of recognized gain generally follows section 755 allocations; if those allocations are suspended, the gain is ordinary income.
• Maintains narrow loss recognition rules only for liquidating distributions that omit noncash categories other than specified items.
• Shifts tax timing by forcing recognition in situations where prior partnership basis adjustments might otherwise be used to defer partner-level income.
• Creates additional tracking and compliance obligations for partnerships, partners, and tax advisors to allocate basis increases and determine gain character.