Returned stock remains property contributed by the partner

Plain-English summary

A partner contributed three identified lots of public-company stock to a partnership. The partnership later planned to return part of one lot to that same partner after certificate numbers had changed. The shares in the relevant certificate had the same tax basis and holding period, and the certificate trail identified them with the contributed lot. The IRS ruled that the returned shares would be treated as property previously contributed by that partner for sections 704(c)(1)(B), 731(c)(3)(A)(i), and 737(d)(1).

Ruling snapshot

• Question: Will shares returned to a partner be treated as the same property that the partner previously contributed to the partnership?
• Outcome: Approved
• Key authorities: IRC §§ 704(c)(1)(B), 731(c)(3)(A)(i), 737(d)(1); Treas. Reg. § 1.1012-1(c)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201537003 Third Party Communication: None
Release Date: 9/11/2015 Date of Communication: Not Applicable
Index Number: 704.01-00, 704.01-04,
737.00-00, 731.00-00 Person To Contact:
----------------------------,
----------------------- ID No. ------------------
---------------------------------------------------- Telephone Number:
-------------------------------- ----------------------
------------------------ Refer Reply To:
------------------------------------------------------------ CC:PSI:B01
-------------------------------------- PLR-103328-15
------------------------------------- Date:
------------------------------------ May 13, 2015

LEGEND:

Partner A = -----------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------------------

Partner B = -------------------------------------

Partner C = -----------------------------------------------------------------------------------------

Partner D = -----------------------------

P = -----------------------------------

X = ----------------------------

State = -------------------

Date 1 = --------------------------

Date 2 = ------------------------
PLR-103328-15 2

a = --------------

b = ------------

c = --------------

d = ----------

e = ------------

f = ---------------

A1 = ---------

B1 = ----------

C1 = ----------

A2 = ----------

B2 = ----------

C2 = ----------

B3 = ----------

Dear ---------------------:

  This responds to a letter dated December 16, 2014, and subsequent

correspondence, submitted on Partner A’s behalf by Partner A’s authorized
representatives, requesting rulings under §§ 704, 731, and 737 of the Internal Revenue
Code.

Facts

   According to the information submitted, P is a limited liability company formed

under the laws of State that is treated as a partnership for federal tax purposes. The
partners of P are Partner A, Partner B, Partner C, and Partner D.

    On Date 1, Partner A contributed to P the following three lots of common stock of

X: a shares represented by Certificate Number A1, b shares represented by Certificate
Number B1, and c shares represented by Certificate Number C1. After the contribution
to P, new Certificate Numbers were issued such that the a shares represented by
Certificate Number A1 became instead represented by Certificate Number A2, the b
PLR-103328-15 3

shares represented by Certificate Number B1 became instead represented by
Certificate Number B2, and the c shares represented by Certificate Number C1 became
instead represented by Certificate Number C2.

  On Date 2, P distributed to Partner A the c shares represented by Certificate

Number C2, and d of the b shares represented by Certificate Number B2. The
remaining e shares represented by Certificate Number B2 became instead represented
by Certificate Number B3.

    P no longer has a business use for most of the shares of X contributed by

Partner A, and therefore plans to distribute back to Partner A f of the a shares
represented by Certificate Number A2. All of the shares represented by Certificate
Number A2 have the same income tax basis and holding period. After the planned
distribution all four partners will continue to be partners in P.

    Partner A requests a ruling that the distribution of the f shares will be considered

a distribution of property which was previously contributed by Partner A for purposes of
§§ 704(c)(1)(B), 731(c)(3)(A)(i), and 737(d)(1) of the Code.

Law and Analysis

   Section 704(c)(1)(B) requires a contributing partner to recognize gain if property

contributed to a partnership is distributed by the partnership (other than to the
contributing partner) within 7 years of being contributed to the partnership.

  Section 731(a)(1) provides that when a partnership makes a distribution to a

partner, gain shall not be recognized to the distributee partner except to the extent that
any money distributed exceeds the adjusted basis of such partner's interest in the
partnership immediately before the distribution.

   Section 731(c)(1) provides that for purposes of § 731(a)(1) the term “money”

includes marketable securities. Section 731(c)(3) provides that § 731(c)(1) does not
apply to a distribution of marketable securities from a partnership to a partner if the
security was contributed to the partnership by that partner, except to the extent that the
value of the distributed security is attributable to marketable securities or money
contributed (directly or indirectly) to the entity to which the distributed security relates.

   Section 737(a) provides that a partner that contributed property to a partnership

may recognize gain if the partnership distributes property to him within 7 years of the
contribution. Section 737(d)(1) provides that any portion of a distribution that consists of
property that had been contributed by the distributee partner to the partnership is not
taken into account under § 737(a)(1).

  Section 1.1012-1(c) of the Income Tax Regulations contains a special rule for

determining basis where the particular shares sold or transferred cannot be identified. It
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provides that, if shares of stock are sold or transferred by a taxpayer who acquired lots
of stock on different dates or at different prices, and the lot from which the stock was
sold or transferred cannot be adequately identified, the stock sold or transferred shall be
charged against the earliest of the lots acquired in order to determine the cost or other
basis of such stock and in order to determine the holding period of such stock for
purposes of subchapter P of chapter 1 of the Code.

   Section 1.1012-1(c)(2) provides that an adequate identification is made if it is

shown that certificates representing shares of stock from a lot which was purchased or
acquired on a certain date or for a certain price were delivered to the taxpayer's
transferee.

Conclusion

    Based upon the information submitted and the representations made, we

conclude that the distribution from P to Partner A of f of the a shares represented by
Certificate Number A2 will be considered a distribution of property which was previously
contributed by Partner A for purposes of §§ 704(c)(1)(B), 731(c)(3)(A)(i), and 737(d)(1)
of the Code.

    Except as specifically ruled upon above, we express no opinion on the federal

tax consequences of the transactions described above under any other provisions of the
Code and regulations or about the tax treatment of any conditions existing at the time
of, or effects resulting from, any transaction that is not specifically covered by the above
rulings.

   This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)

of the Code provides that it may not be used or cited as precedent.

     In accordance with the power of attorney on file with this office, a copy of this

letter is being sent to your authorized representative.

                                Sincerely,

                                David R. Haglund
                                David R. Haglund
                                Chief, Branch 1
                                Office of Associate Chief Counsel
                                (Passthroughs & Special Industries)

Enclosures (2):
Copy of this letter
Copy for § 6110 purposes