The Internal Revenue Service has held in Revenue Ruling 2004‐43 as follows:
1. In an assets‐over merger of partnerships both Section 704(c)(1)(B) and Section 737(b) net precontribution gain take into account newly created Section 704(c) layers for property contributed by a terminating partnership. However, the premerger Section 704(c) layers attributable to the terminating partnership do not restart their seven‐year clock.
2. In an assets‐over merger neither Section 704(c)(1)(B) nor Section 737(b) net precontribution gain takes into account newly created reverse Section 704(c) layers resulting from a revaluation of property in the continuing partnership.
The first holding arguably is inconsistent with the regulations, although it reflects good tax policy. The second holding, on the other hand, is consistent with the regulations but reflects questionable policy. This article analyzes the ruling and recommends changes to the regulations that would provide clear support for the ruling's first holding and overrule the second holding.
