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It is not uncommon for members of a consolidated group to own all of the interests in a partnership. If one of the partners later becomes the partnership's sole owner, unanticipated tax consequences may result under Rev. Rul. 99-6.
Matching and Acceleration Rules
Under the consolidated return intercompany transaction rules of Regs. Sec. 1.1502-13, when one member of a consolidated group (S) sells an asset to another member (B) for an amount in excess of S's adjusted basis in the property, taxation of S's intercompany gain ordinarily is deferred under complex matching and acceleration rules intended to treat S and B as if they were divisions of a single entity for certain purposes (including the timing of income inclusion). Under the matching rule of Regs. Sec. 1.1502-13(c), S's intercompany gain will be taken into account based on B's subsequent treatment (such as depreciation or disposition gain) of the transferred property. Under the acceleration rule of Regs. Sec. 1.1502-13(d), S's intercompany gain must be taken into account when it becomes impossible to treat S and B as divisions of a single entity, such as when either member leaves the consolidated group.
If the asset that S sells to B is a partnership interest and the partnership remains in existence (i.e., another partner owns an interest in the partnership, so that the partnership does not terminate under Sec. 708(b)(1)(A)), S's gain on the sale of the partnership interest is deferred under Regs. Sec. 1.1502-13 and B's basis in its partnership interest acquired from S is its cost under Sec. 1012. If the partnership subsequently liquidates, distributing its assets to B and the other partners, B's basis in the distributed assets will be determined by reference to its basis in the partnership interest under Sec. 732. As a result, under the Regs. Sec. 1.150213(j)(1) "successor asset" rule,...