Section 1.59A-7 - Application of base erosion and anti-abuse tax to partnerships(a)Scope. This section provides rules regarding how partnerships and their partners are treated for purposes of making certain determinations under section 59A, including whether there is a base erosion payment or base erosion tax benefit. All references to partnerships in this section include domestic and foreign partnerships. This section applies to payments to a partnership and payments from a partnership as well as transfers of partnership interests (as defined in paragraph (c)(3)(iv) of this section). The aggregate principle described in this section does not override the treatment of partnership items under any Code section other than section 59A. The aggregate principles provided in this section apply without regard to any tax avoidance purpose relating to a particular partnership. See § 1.701-2(e) . Paragraph (b) of this section describes how the aggregate approach to partnerships applies for purposes of certain section 59A determinations. Paragraph (c) of this section provides rules for determining whether there is a base erosion payment with respect to a payment to or from a partnership. Paragraph (d) of this section provides rules for determining the base erosion tax benefits of a partner. Paragraph (e) of this section provides additional rules relating to the application of section 59A to partnerships. Paragraph (f) of this section provides a rule for determining whether a person is a foreign related party. Paragraph (g) of this section provides examples that illustrate the application of the rules of this section.(b)Application of section 59A to partnerships. The purpose of this section is to provide a set of operating rules for the application of section 59A to partnerships and partners in a manner consistent with the purposes of section 59A. Except for purposes of determining a partner's base erosion tax benefits under paragraph (d)(1) of this section and whether a taxpayer is a registered securities dealer under paragraph (e)(3) of this section, section 59A determinations are made at the partner level in the manner described in this section. The provisions of section 59A must be interpreted in a manner consistent with this approach. If a transaction is not specifically described in this section, whether the transaction gives rise to a base erosion payment or base erosion tax benefit is determined in accordance with the principles of this section and the purposes of section 59A.(c)Base erosion payment. For purposes of determining whether a taxpayer has made a base erosion payment as described in § 1.59A-3(b) , the taxpayer must treat a payment to or from a partnership as made to or from each partner and the assets and liabilities of the partnership as assets and liabilities of each partner. This paragraph (c) provides specific rules for determining whether a partner has made or received a payment, including as a result of a partnership interest transfer (as defined in paragraph (c)(3)(iv) of this section).(1)Payments made by or to a partnership. For purposes of determining whether a payment or accrual by a partnership is a base erosion payment described in § 1.59A-3(b)(1)(i) , any amount paid or accrued by the partnership (including any guaranteed payment described in section 707(c)) is treated as paid or accrued by each partner based on the partner's distributive share of the item of deduction with respect to that amount. For purposes of determining whether a payment or accrual to a partnership is a base erosion payment described in § 1.59A-3(b)(1)(i) or (iii) , any amount paid or accrued to the partnership (including any guaranteed payment described in section 707(c)) is treated as paid or accrued to each partner based on the partner's distributive share of the item of income with respect to that amount. See paragraph (e)(1) of this section to determine the partner's distributive share.(2)Transfers of certain property. When a partnership transfers property, each partner is treated as transferring its proportionate share of the property transferred for purposes of determining whether there is a base erosion payment described in § 1.59A-3(b)(1)(ii) or (iv) . When a partnership acquires property, each partner is treated as acquiring its proportionate share of the property acquired for purposes of determining whether there is a base erosion payment described in § 1.59A-3(b)(1)(ii) or (iv) . For purposes of this paragraph (c)(2), a transfer of property does not include a transfer of a partnership interest (as defined in paragraph (c)(3)(iv) of this section). See paragraph (c)(3) of this section for rules applicable to transfers of partnership interests. See paragraphs (g)(2)(v) and (vi) of this section (Example 5 and Example 6) for examples illustrating the application of this paragraph (c)(2).(3)Transfers of a partnership interest - (i)In general. A transfer of a partnership interest (as defined in paragraph (c)(3)(iv) of this section) is generally treated as a transfer by each partner in the partnership of its proportionate share of the partnership's assets to the extent of any change in its proportionate share of any partnership asset, as well as any assumption of associated liabilities by the partner. Paragraphs (c)(3)(ii) and (iii) of this section provide rules for applying the general rule to transfers of a partnership interest by a partner and issuances of a partnership interest by the partnership for contributed property, respectively. See paragraph (g)(2)(vii) of this section (Example 7) for an example illustrating the application of this paragraph (c)(3)(i).(ii)Transfers of a partnership interest by a partner. A transfer of a partnership interest (as defined in paragraph (c)(3)(iv) of this section) by a partner is treated as a transfer by the transferor to the recipient of the transferor's proportionate share of each of the partnership assets and an assumption by the recipient of the transferor's proportionate share of the partnership liabilities. If the partner's entire partnership interest is not transferred, only the proportionate share of each of the partnership assets and liabilities associated with the transferred partnership interest is treated as transferred and assumed. See paragraphs (g)(2)(iii), (iv), and (vi) of this section (Example 3, Example 4, and Example 6) for examples illustrating the application of this paragraph (c)(3)(ii).(iii)Certain issuances of a partnership interest by a partnership. If a partnership issues an interest in the partnership in exchange for a contribution of property to the partnership, the contributing partner is treated as exchanging a portion of the contributed property and assuming any liabilities associated with the transferred partnership interest for a portion of the partners' pre-contribution interests in the partnership's assets and the partners' assumption of any liabilities transferred to the partnership. For purposes of this paragraph (c)(3)(iii), a reference to the "partnership's assets" includes the assets contributed by the contributing partner and any other assets that are contributed to the partnership at the same time. Each partner whose proportionate share in a partnership asset (including the assets contributed to the partnership as part of the transaction) is reduced as a result of the transaction is treated as transferring the asset to the extent of the reduction, and each person who receives a proportionate share or an increased proportionate share in an asset as a result of the transaction is treated as receiving an asset to the extent of the increase, proportionately from the partners' reduced interests. For example, if a person contributes property to a partnership in which each of two existing partners has a 50 percent pro-rata interest in the partnership in exchange for a one-third pro-rata partnership interest, each of the pre-contribution partners is treated as transferring a one-third interest in their share of existing partnership assets to the contributing partner, and the contributing partner is treated as transferring a one-third interest in the contributed assets to each of the original partners. See paragraphs (g)(2)(i) and (ii) of this section (Example 1 and Example 2) for additional examples illustrating the application of this paragraph (c)(3)(iii).(iv)Partnership interest transfers defined. For purposes of paragraphs (c)(3) and (4) of this section, a transfer of a partnership interest includes any issuance of a partnership interest by a partnership; any sale of a partnership interest; any increase or decrease in a partner's proportionate share of any partnership asset as a result of a contribution of property or services to a partnership, a distribution, or a redemption; or any other transfer of a proportionate share of any partnership asset (other than a transfer of a partnership asset that is not a partnership interest by the partnership to a person not acting in a partner capacity), whether by a partner or the partnership (including as a result of a deemed or actual sale or a capital shift).(4)Increased basis from a distribution. If a distribution of property from a partnership to a partner results in an increase in the tax basis of either the distributed property or other partnership property, such as under section 732(b) or 734(b), the increase in tax basis attributable to a foreign related party is treated as if it was newly purchased property acquired by the taxpayer (to the extent of its proportionate share) from the foreign related party that is placed in service when the distribution occurs. See § 1.734-1(e) . This increased basis treated as newly purchased property is treated as acquired with a base erosion payment, unless an exception in § 1.59A-3(b) applies. For this purpose, in the case of a distribution to a foreign related party, the increased basis in the remaining partnership property that is treated as newly purchased property is entirely attributable to the foreign related party. In the case of a distribution to a taxpayer, the increased basis in the distributed property that is treated as newly purchased property is attributable to each foreign related party in proportion to the foreign related party's proportionate share of the asset immediately before the distribution. If the distribution is to a person other than a taxpayer or a foreign related party, there is no base erosion payment caused by the distribution under this paragraph (c)(4). See paragraphs (g)(2)(vii), (viii), and (ix) of this section (Example 7, Example 8, and Example 9) for examples illustrating the application of this paragraph (c)(4).(5)Operating rules applicable to base erosion payments -(i)Single payment characterized as separate transactions. If a single transaction is partially characterized in one manner and partially characterized in another manner, each part of the transaction is separately analyzed. For example, if a contribution of property to a partnership is partially treated as a contribution and partially treated as a disguised sale, the contribution and sale are separately analyzed under paragraph (c) of this section.(ii)Ordering rule with respect to transfers of a partnership interest. If a partnership interest is transferred (within the meaning of paragraph (c)(3)(iv) of this section), paragraph (c)(3) of this section first applies to determine the assets deemed transferred by the transferor(s) to the transferee(s) and liabilities deemed assumed by the parties. Then, to the extent applicable (such as where a partnership makes a contribution in exchange for an interest in another partnership or when a partnership receives an interest in another partnership as a contribution to it), paragraph (c)(2) of this section applies for purposes of determining the proportionate share of the property received by the partners in a partnership. See paragraph (g)(2)(vi) of this section (Example 6) for an illustration of this rule.(iii)Consideration for base erosion payment or property resulting in base erosion tax benefits. When a partnership pays or receives property, services, or other consideration, each partner is deemed to pay or receive the property, services, or other consideration paid or received by the partnership for purposes of determining if there is a base erosion payment, except as otherwise provided in paragraph (c) of this section. See paragraphs (g)(2)(v) and (vi) of this section (Example 5 and Example 6) for illustrations of this rule.(iv)Non-cash consideration. When both parties to a transaction use non-cash consideration, each party must separately apply paragraph (c) of this section to determine its base erosion payment with respect to each property. For example, if two partnerships, each with a domestic corporation and a foreign corporation as partners, all of whom are related, exchange depreciable property, each transfer of property would be separately analyzed to determine whether it is a base erosion payment.(v)Allocations of income in lieu of deductions. If a partnership adopts the curative method of making section 704(c) allocations under § 1.704-3(c) , an allocation of income to the partner to whom any built-in gain or built-in loss would be allocable under section 704(c) (the 704(c) partner), in an amount necessary to offset the effect of the ceiling rule (as defined in § 1.704-3(b)(1) ), in lieu of a deduction allocation to a partner other than the 704(c) partner (a non-704(c) partner), is treated as a deduction to the non-704(c) partner for purposes of section 59A in an amount equal to the income allocation. See paragraph (g)(2)(x) of this section (Example 10) for an example illustrating the application of this paragraph (c)(5)(v).(d)Base erosion tax benefit for partners - (1)In general. A partner's distributive share of any deduction or reduction in gross receipts attributable to a base erosion payment (including as a result of sections 704(b) and (c), 707(a) and (c), 732(b) and (d), 734(b) and (d), 737, 743(b) and (d), and 751(b)) is the partner's base erosion tax benefit, subject to the exceptions in § 1.59A-3(c)(2) . See paragraph (e)(1) of this section to determine the partner's distributive share for purposes of section 59A. A partner's base erosion tax benefit may be more than the partner's base erosion payment. For example, if a partnership makes a payment to a foreign related party of its domestic partner to acquire a depreciable asset, and the partnership specially allocates more depreciation deductions to a partner than its proportionate share of the asset, the partner's base erosion tax benefit includes the specially allocated depreciation deduction even if the total allocated deduction exceeds the partner's share of the base erosion payment made to acquire the asset. Base erosion tax benefits are determined separately for each asset, payment, or accrual, as applicable, and are not netted with other items. A taxpayer determines its base erosion tax benefits for non-partnership items pursuant to § 1.59A-3(c) .(2)Exception for base erosion tax benefits of certain small partners - (i)In general. For purposes of determining a partner's amount of base erosion tax benefits attributable to a base erosion payment made by a partnership, a partner does not take into account its distributive share of any base erosion tax benefits from the partnership for the taxable year if- (A) The partner's interest in the partnership represents less than ten percent of the capital and profits of the partnership at all times during the taxable year;(B) The partner is allocated less than ten percent of each partnership item of income, gain, loss, deduction, and credit for the taxable year; and(C) The partner's interest in the partnership has a fair market value of less than $25 million on the last day of the partner's taxable year, determined using a reasonable method.(ii)Attribution. For purposes of paragraph (d)(2)(i) of this section, a partner's interest in a partnership or partnership item is determined by adding the interests of the partner and any related party of the partner (as determined under section 59A), taking into account any interest owned directly, indirectly, or through constructive ownership (applying the section 318 rules as modified by section 59A (except section 318(a)(3)(A) through (C) will also apply so as to consider a United States person as owning stock that is owned by a person who is not a United States person), but excluding any interest to the extent already taken into account).(e)Other rules for applying section 59A to partnerships - (1)Partner's distributive share. For purposes of section 59A, each partner's distributive share of an item of income or deduction of the partnership is determined under sections 704(b) and (c) and takes into account amounts determined under other provisions of the Code, including but not limited to sections 707(a) and (c), 732(b) and (d), 734(b) and (d), 737, 743(b) and (d), and 751(b). See§ 1.704-1(b)(1)(iii) regarding the application of section 482. These amounts are calculated separately for each payment or accrual on a property-by-property basis, including for purposes of section 704(c), and are not netted. For purposes of section 59A, a partner's distributive share of a reduction to determine gross income is equal to a proportionate amount of the partnership's reduction to determine gross income corresponding to the partner's share of the partnership gross receipts (as determined under paragraph (e)(2)(i) of this section) related to that reduction.(2)Gross receipts - (i)In general. For purposes of section 59A, each partner in the partnership includes a share of partnership gross receipts in proportion to the partner's distributive share (as determined under sections 704(b) and (c)) of items of gross income that were taken into account by the partnership under section 703 or 704(c) (such as remedial or curative items under § 1.704-3(c) or (d) ).(ii)Foreign corporation. See § 1.59A-2(d)(3) for gross receipts of foreign corporations.(3)Registered securities dealers. If a partnership, or a branch of the partnership, is a registered securities dealer, each partner is treated as a registered securities dealer unless the partner's interest in the registered securities dealer would satisfy the criteria for the exception in paragraph (d)(2) of this section. For purposes of applying the de minimis exception in § 1.59A-2(e)(2)(iii) , a partner takes into account its distributive share of the relevant partnership items.(4)Application of sections 163(j) and 59A(c)(3) to partners. See § 1.59A-3(c)(4) .(5)Tiered partnerships. In the case of one or more partnerships owning an interest in another partnership (or partnerships), the rules of this section apply successively to each partnership and its partners in the chain of ownership. Paragraphs (d)(2) and (f) of this section and the small partner exception in paragraph (e)(3) of this section apply only to a partner that is not itself a partnership.(f)Foreign related party. With respect to any person that owns an interest in a partnership, the related party determination in section 59A(g) applies at the partner level.(g)Examples. The following examples illustrate the application of this section.(1)Facts. The following facts are assumed for purposes of the examples. (i) DC is a domestic corporation that is an applicable taxpayer for purposes section 59A.(ii) FC is a foreign corporation that is a foreign related party with respect to DC.(iii) UC is a domestic corporation that is not related to DC and FC.(iv) Neither FC nor any partnership in the examples is (or is treated as) engaged in a U.S. trade or business or has a permanent establishment in the United States.(v) All payments apply to a taxable year beginning after December 31, 2017.(vi) Unless otherwise stated, all allocations are pro-rata and satisfy the requirements of section 704(b) and all the partners have equal interests in the partnership.(vii) Unless otherwise stated, depreciable property acquired and placed in service by the partnership has a remaining recovery period of five years and is depreciated under the alternative depreciation system of section 168(g) using the straight line method. Solely for purposes of simplifying the calculations in these examples, assume the applicable convention rules in section 168(d) do not apply.(viii) No exception under § 1.59A-3(b) or (c) applies to any amount paid or accrued.(2)Examples - (i)Example 1: Contributions to a partnership on partnership formation - (A)Facts. DC and FC form partnership PRS, with each contributing depreciable property that has a fair market value and tax basis of $100x, Property A and Property B, respectively. Therefore, the property contributed by FC, Property B, will generate $20x of annual section 704(b) and tax depreciation deductions for five years. The depreciation deductions will be allocated $10x to each of DC and FC each year. Before the transactions, for purposes of section 59A, DC is treated as owning a 100 percent interest in Property A and a zero percent interest in Property B, and FC is treated as owning a 100 percent interest in Property B and a zero percent interest in Property A. After the formation of PRS, for purposes of section 59A, DC and FC are each treated as owning a 50 percent proportionate share of each of Property A and Property B.(B)Analysis. The treatment of contributions of property in exchange for an interest in a partnership is described in paragraph (c)(3)(iii) of this section. Under paragraph (c)(3)(iii) of this section, DC is treated as exchanging a 50 percent interest in Property A for a 50 percent proportionate share of Property B. Under § 1.59A-3(b)(1)(ii) , the payment to acquire depreciable property, Property B, from FC is a base erosion payment. The base erosion tax benefit is the amount of depreciation allocated to DC with respect to Property B ($10x per year) and is not netted with any other partnership item pursuant to paragraph (d)(1) of this section.(ii)Example 2: Section 704(c) and remedial allocations - (A)Facts. The facts are the same as in paragraph (g)(2)(i)(A) of this section (the facts in Example 1), except that Property B has a tax basis of $40x and PRS adopts the remedial method under § 1.704-3(d) .(B)Analysis. The analysis and results are the same as in paragraph (g)(2)(i)(B) of this section (the analysis in Example 1), except that annual tax depreciation is $8x ($40x/5) and annual remedial tax deduction allocation to DC is $2x (with $2x of remedial income to FC) for five years. Both the tax depreciation and the remedial tax allocation to DC are base erosion tax benefits to DC under paragraph (d)(1) of this section.(iii)Example 3: Sale of a partnership interest without a section 754 election - (A)Facts. UC and FC are equal partners in partnership PRS, the only asset of which is Property A, a depreciable property with a fair market value of $200x and a tax basis of $120x. PRS does not have any section 704(c) assets. DC purchases 50 percent of FC's interest in PRS for $50x. Prior to the sale, for section 59A purposes, FC is treated as owning a 50 percent proportionate share of Property A and DC is treated as owning no interest in Property A. Following the sale, for section 59A purposes, DC is treated as owning a 25 percent proportionate share of Property A, all of which is treated as acquired from FC. The partnership does not have an election under section 754 in effect. Property A will generate $24x of annual tax and section 704(b) depreciation deductions for five years. The depreciation deductions will be allocated $12x to UC and $6x to both FC and DC each year.(B)Analysis. The sale of a partnership interest by a partner is analyzed under paragraph (c)(3)(ii) of this section. Under section (c)(3)(ii) of this section, FC is treated as selling to DC 25 percent of Property A. Under § 1.59A-3(b)(1)(ii) , the payment to acquire depreciable property is a base erosion payment. Under paragraph (d)(1) of this section, the base erosion tax benefit is the amount of depreciation allocated to DC with respect to the base erosion payment, which would be the depreciation deductions allocated to DC with respect to Property A. DC's annual $6x depreciation deduction is its base erosion tax benefit with respect to the base erosion payment.(iv)Example 4: Sale of a partnership interest with section 754 election - (A)Facts. The facts are the same as in paragraph (g)(2)(iii)(A) of this section (the facts in Example 3), except that the partnership has an election under section 754 in effect. As a result of the sale, there is a $20x positive adjustment to the tax basis in Property A with respect to DC under section 743(b) (DC's $50x basis in the PRS interest less DC's $30x share of PRS's tax basis in Property A). The section 743(b) step-up in tax basis is recovered over a depreciable recovery period of five years. Therefore, DC will be allocated a total of $10x in annual depreciation deductions for five years, comprised of $6x with respect to DC's proportionate share of PRS's common tax basis in Property A ($30x over 5 years) and $4x with respect to the section 743(b) adjustment ($20x over 5 years).(B)Analysis. The analysis is the same as in paragraph (g)(2)(iii)(B) of this section (the analysis in Example 3); however, because section 743(b) increases the basis in Property A for DC by $20x, DC is allocated additional depreciation deductions of $4x per year as a result of the section 743(b) adjustment and has an annual base erosion tax benefit of $10x ($6x plus $4x) for five years under paragraph (d)(1) of this section.(v)Example 5: Purchase of depreciable property from a partnership - (A)Facts. The facts are the same as in paragraph (d)(2)(iii)(A) of this section (the facts in Example 3), except that instead of DC purchasing an interest in the partnership, DC purchases Property A from the partnership for $200x.(B)Analysis. DC must analyze whether the purchase of the depreciable property from the partnership is a base erosion payment under paragraph (c)(2) of this section. Under paragraph (c)(2) of this section, DC is treated as acquiring FC's proportionate share of Property A from FC. Because DC paid the partnership for the partnership's interest in Property A, under paragraph (c)(5)(iii) of this section, DC is treated as paying FC for FC's proportionate share of Property A. Under § 1.59A-3(b)(1)(ii) , the payment to FC to acquire depreciable property is a base erosion payment. DC's base erosion tax benefit is the amount of depreciation allocated to DC with respect to the base erosion payment, which in this case is the amount of depreciation deductions with respect to the property acquired with a base erosion payment, or the depreciation deductions from FC's (but not UC's) proportionate share of the asset. See § 1.59A-7(d)(1) .(vi)Example 6: Sale of a partnership interest to a second partnership - (A)Facts. FC, UC1, and UC2 are equal partners in partnership PRS1. DC and UC3 are equal partners in partnership PRS2. UC1, UC2, and UC3 are not related to DC or FC. PRS1's sole asset is Property A, which is depreciable property with a fair market value and tax basis of $300x. FC sells its entire interest in PRS1 to PRS2 for $100. For section 59A purposes, FC's proportionate share of Property A prior to the sale is one-third. Following the sale, for section 59A purposes, PRS2's proportionate share of Property A is one-third and DC's proportionate share of Property A (through PRS2) is one-sixth (50 percent of one-third).(B)Analysis. Under paragraph (c)(5)(ii) of this section (the ordering rule), FC's transfer of its interest in PRS1 is first analyzed under paragraph (c)(3) of this section to determine how the transfer of the partnership interest is treated. Then, paragraph (c)(2) of this section applies to analyze how the acquisition of property by PRS2 is treated. Under paragraph (c)(3)(ii) of this section, FC is deemed to transfer its proportionate share of PRS1's assets, which is one-third of Property A. Then, under paragraph (c)(2) of this section, DC is treated as acquiring its proportionate share of PRS2's proportionate share of Property A from FC, which is one-sixth (50 percent of one-third). Under paragraph (c)(5)(iii) of this section, DC is treated as paying for the property it is treated as acquiring from FC. Therefore, DC's deemed payment to FC to acquire depreciable property is a base erosion payment under § 1.59A-3(b)(1)(ii) . DC's base erosion tax benefit is equal to DC's distributive share of depreciation deductions that PRS2 allocates to DC attributable to Property A. See § 1.59A-7(d)(1) .(vii)Example 7: Distribution of cash by a partnership to a foreign related party - (A)Facts. DC, FC, and UC are equal partners in a partnership, PRS, the assets of which consist of cash of $90x and a depreciable asset (Property A) with a fair market value of $180x and a tax basis of $60x. Each partner's interest in PRS has a fair market value of $90x ($270x/3) and a tax basis of $50x. Assume that all non-depreciable assets are capital assets, all depreciable assets are nonresidential real property under section 168, and that no depreciation has been claimed prior to the transaction below. PRS has an election under section 754 in effect. PRS distributes the $90x of cash to FC in complete liquidation of its interest, resulting in gain to FC of $40x ($90x minus its tax basis in PRS of $50x) under section 731(a)(1) and an increase to the tax basis of Property A under section 734(b) of $40x. Prior to the distribution, for section 59A purposes, each partner had a one-third proportionate share of Property A. After the distribution, for section 59A purposes, the remaining partners each have a 50 percent proportionate share of Property A. Each partner's pro-rata allocation of depreciation deductions with respect to Property A is in proportion to each partner's proportionate share of Property A both before and after the distribution. Half of the depreciation deductions attributable to the $40x section 734(b) step-up will be allocated to DC. In addition, DC's proportionate share of Property A increased from one-third to one-half and therefore DC will be allocated depreciation deductions with respect to half of the original basis of $60x (or $30x) instead of one-third of $60x (or $20x).(B)Analysis. Distributions of property that cause an increase in the tax basis of property that continues to be held by the partnership are analyzed under paragraph (c)(4) of this section. The $40x increase in the tax basis of Property A as a result of the distribution of cash to FC is treated as newly purchased property acquired from FC under paragraph (c)(4) of this section and therefore acquired with a base erosion payment under § 1.59A-3(b)(1)(ii) to DC to the extent of DC's proportionate share. DC's base erosion tax benefit is the amount of DC's depreciation deductions attributable to that base erosion payment, which is DC's distributive share of the depreciation deductions with respect to the $40x increase in the tax basis of Property A. See § 1.59A-7(d)(1) . In addition, FC transferred a partnership interest to DC (as defined in paragraph (c)(3)(iv) of this section), which is analyzed under paragraph (c)(3)(i) of this section. Under paragraph (c)(3)(i) of this section, DC is deemed to acquire a one-sixth interest in Property A from FC (the increase in DC's proportionate share from one-third to one-half). DC's base erosion tax benefit from this additional one-sixth interest in Property A is the amount of DC's depreciation deductions attributable to this interest.(viii)Example 8: Distribution of property by a partnership to a taxpayer - (A)Facts. The facts are the same as paragraph (g)(2)(vii)(A) of this section (the facts of Example 7), except that PRS's depreciable property consists of two assets, Property A having a fair market value of $90x and a tax basis of $60x and Property B having a fair market value of $90x and a tax basis of zero. Instead of distributing cash to FC, PRS distributes Property B to DC in liquidation of its interest, resulting in an increase in the basis of the distributed Property B to DC of $50x (from zero to $50x) under section 732(b) because DC's tax basis in the PRS interest was $50x. For section 59A purposes, prior to the distribution, each partner had a one-third proportionate share of Property B and after the distribution, the property is wholly owned by DC.(B)Analysis. Distributions of property that cause an increase in the tax basis of property that is distributed to a taxpayer are analyzed under paragraph (c)(4) of this section. Under paragraph (c)(4) of this section, the $50x increase in tax basis is treated as newly purchased property that was acquired with a base erosion payment to the extent that the increase in tax basis is attributable to FC. Under paragraph (c)(4) of this section, the portion of the increase that is attributable to FC is the proportionate share of the Property B immediately before the distribution that was treated as owned by FC. Immediately before the distribution, FC had a one-third proportionate share of Property B. Accordingly, one-third of the $50x increase in the tax basis of Property B is treated as if it was newly purchased property acquired by DC from FC with a base erosion payment under § 1.59A-3(b)(1)(ii) . DC's base erosion tax benefit is the amount of DC's depreciation deductions with respect to the base erosion payment, which in this case is the depreciation deductions with respect to the one-third interest in the increased basis treated as newly purchased property deemed acquired from FC. See § 1.59A-3(c)(1) . In addition, PRS transferred Property B to DC, which is analyzed under paragraph (c)(2) of this section. Prior to the distribution, DC, FC, and UC each owned one-third of Property B. After the distribution, DC entirely owned Property B. Therefore, under paragraph (c)(2) of this section, DC is treated as acquiring one-third of Property B from FC. DC's depreciation deductions with respect to the one-third of Property B acquired from FC (without regard to the basis increase) is also a base erosion tax benefit.(ix)Example 9: Distribution of property by a partnership in liquidation of a foreign related party's interest -(A)Facts. The facts are the same as paragraph (g)(2)(viii)(A) (the facts of Example 8), except that Property B is not distributed to DC and, instead, Property A is distributed to FC in liquidation of its interest, resulting in a tax basis in Property A of $50x in FC's hands under section 732(b) and a section 734(b) step-up in Property B of $10x (because Property A's tax basis was reduced from $60x to $50x), allocable to DC and UC. For section 59A purposes, prior to the distribution, each partner had a one-third proportionate share of Property B and after the distribution, DC and UC each have a one-half proportionate share of Property B.(B)Analysis. Distributions of property that cause an increase in the tax basis of property that continues to be held by the partnership are analyzed under paragraph (c)(4) of this section. Under paragraph (c)(4) of this section, because the distribution of Property A to FC from PRS caused an increase in the tax basis of Property B, the entire $10x increase in tax basis is treated as newly purchased property that was acquired with a base erosion payment under § 1.59A-3(b)(1)(ii) . DC's base erosion tax benefit is the amount of DC's depreciation deductions attributable to the base erosion payment, which is DC's distributive share of the depreciation deductions with respect to the $10x increase in the tax basis of Property B. See § 1.59A-7(d)(1) . In addition, under paragraph (c)(3)(i) of this section, DC is deemed to acquire a one-sixth interest in Property B from FC (the increase in DC's proportionate share from one-third to one-half). While this increase is a base erosion payment under § 1.59A-3(b)(1)(ii) , there is no base erosion tax benefit from this additional one-sixth interest in Property B because the tax basis in Property B (without regard to the basis) is zero and therefore the increase in DC's proportionate share does not result in any additional depreciation deductions.(x)Example 10: Section 704(c) and curative allocations -(A)Facts. The facts are the same as in paragraph (d)(2)(ii)(A) of this section (the facts in Example 2), except that DC's property is not depreciable, PRS uses the traditional method with curative allocations under § 1.704-3(c) , and the curative allocations are to be made from operating income. Also assume that the partnership has $20x of gross operating income in each year and a curative allocation of the operating income satisfies the "substantially the same effect" requirement of § 1.704-3(c)(3)(iii)(A) .(B)Analysis. The analysis and results are the same as in paragraph (d)(2)(i)(B) of this section (the analysis in Example 1), except that actual depreciation is $8x ($40x/5) per year and the ceiling rule shortfall under § 1.704-3(b)(1) of $2x per year is corrected with a curative allocation of income from DC to FC of $2x per year. Solely for U.S. federal income tax purposes, each year FC is allocated $12x of total operating income and DC is allocated $8x of operating income. Both the actual depreciation deduction to DC and the curative allocation of income from DC are base erosion tax benefits to DC under paragraphs (c)(5)(v) and (d)(1) of this section.T.D. 9885, 84 FR 67017 , Dec. 6, 2019, as amended by T.D. 9910, 85 FR 64367 , Oct. 9, 2020 T.D. 9885, 84 FR 67017 , 12/6/2019; 85 FR 64367 , 12/8/2020