Example of nonliquidating distribution

This document contains proposed regulations relating to the application of section 1045 of the Internal Revenue Code (Code) to partnerships and their partners.These regulations provide rules regarding the deferral of gain on a partnership’s sale of qualified small business stock and deferral of gain on a partner’s sale of qualified small business stock distributed by a partnership.

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For example, relinquished QSB stock can be partially replaced by the partnership and partially replaced by the partner if section 1045 elections are made by both the partnership and the partner.If a partner makes a section 1045 election, the partner recognizes its distributive share of the gain from the sale of the relinquished QSB stock only to the extent of the greater of: (1) the gain that is treated as ordinary income, or (2) the excess of the partner’s share of the amount realized by the partnership on the sale of the QSB stock over the cost of any replacement QSB stock purchased by the partner during the 60-day statutory period.For these reasons, the proposed regulations provide that the term Under the proposed regulations, only an eligible partner may defer gain recognized by a partnership on the sale of QSB stock.Consistent with section 1202(g) and (h), the proposed regulations define an eligible partner as a non-corporate partner who held an interest in the partnership at all times that the partnership held the QSB stock or a non-corporate partner who acquired an interest in a partnership from an existing eligible partner by gift or death.The likely respondents are individuals, businesses or other for-profit institutions, and small businesses or organizations.

The estimated burden for the collection of information in §1.1045-1(b)(4)(ii) is as follows: Estimated total annual reporting burden: 1,000 hours. 98-48 was published, the IRS and Treasury Department have received inquiries regarding the application of section 1045 to partnerships and their partners.The proposed regulations affect partnerships that invest in qualified small business stock and their partners.This document also provides notice of a public hearing on the proposed regulations.The legislative history accompanying the 1998 Act provides that the benefit of deferred recognition of gain with respect to the sale of QSB stock by a partnership will flow through to a partner who is not a corporation if the partner held the partnership interest at all times the partnership held the QSB stock. The committee reports underlying the enactment of section 1202 explain that, under section 1202(h), [q]ualified small business stock ... In light of this, Congress’s failure to provide for section 1202(a) treatment for acquisitions and dispositions of partnership interests appears to have been intentional.may be distributed by a partnership to one or more of its partners, as long as (1) all eligibility requirements with respect to qualified small business stock are met, and (2) the partner held its interest in the partnership on the date the partnership acquired the stock and at all times thereafter and before the disposition of the stock. Such a decision by Congress would be consistent with the approach taken by section 1202(g).6005(f)(2)), July 22, 1998, (the 1998 Act) added section 1045(b)(5). However, section 1202(h) provides that, in the case of certain transfers of QSB stock, the transferee is treated as having acquired such stock in the same manner as the transferor and as having held such stock during any continuous period immediately preceding the transfer during which it was held by the transferor. Thus, for example, if qualified small business stock is transferred to a partnership and the partnership disposes of the stock, any gain from the disposition will not be eligible for the exclusion. This plain language interpretation is further supported by the structure of sections 10.