Section 7. TRADES OR BUSINESSES

OF LOWER-TIER PARTNERSHIPS

As noted above, a partnership that is engaged in a trade or business, or that has previously engaged in a trade or business, is not eligible to elect to be treated as an

out regard to gains, an EIP is required to separately state on Schedule K and K–1 of the partnership’s return (Form 1065) all allocations of losses to all of its partners under § 1.702–1(a)(8)(ii), including losses that, in the absence of § 743(e), could be netted against gains at the partnership level. If a partnership has filed a return with respect to a taxable year that includes October 22, 2004, in which gain and losses were not separately stated, the EIP must, prior to the expiration of the period for making an EIP election for that year, file an amended return in which gains and losses are separately stated. If a partnership’s election to be treated as an EIP is terminated, the partnership must continue to state such gains and losses separately in future returns relating to any period during which the partnership has one or more transferee partners that are subject to § 743(e)(2). If an EIP is not required to file a partnership return, the transferee of a partnership interest in the EIP may be required to provide to the Service similar information regarding the partner’s distributive share of gross gains and losses of the EIP under § 1.6031(a)–1(b)(4).

C. Partnership Required to Provide Annual Statements to Partners

Until further guidance is provided, an EIP must provide the following statement to all of its partners. The statement shall be attached to every statement provided to a partner or nominee under § 6031(b) that is issued with respect to any taxable year for which an election to be treated as an EIP is in effect (whether or not the election is in effect for the entire taxable year). If an EIP has provided statements under § 6031(b) with respect to a taxable year that includes October 22, 2004, and elects to be treated as an EIP for that year, but did not include the statements required by this section 5.C., then the EIP must provide amended statements under § 6031(b), prior to the expiration of the period for making an EIP election for that year, which do include the required statements.

Notice of Election. This partnership has elected to be treated as an electing investment partnership under section 743(e) of the Internal Revenue Code.

Information for Transferors. If you transfer an interest in this part-

nership to another person, Notice 2005–32, 2005–16 I.R.B. 895, pro- vides that you must, within 30 days after receiving a Schedule K–1 from this partnership for the taxable year that includes the date of the transfer, provide the transferee with certain information, including the amount, if any, of loss that you recognized on the transfer of the partnership inter- est, and the amount of losses, if any, recognized by prior transferors with respect to the same interest. See No- tice 2005–32 for more information.

Information for Transferees. If an interest in this partnership is trans- ferred to you, section 743(e)(2) re- quires that you reduce your dis- tributive share of losses from this partnership, determined without re- gard to gains from this partnership, to the extent of any losses recognized by the transferor partner when that partner transferred the partnership interest to you (and to the extent of other losses recognized on prior transfers of the same partnership interest that have not been offset by prior loss disallowances). Each year, you must reduce your share of losses as reported to you by this part- nership by the amount of any loss recognized by the transferor partner (or any prior transferor to the extent not already offset by prior loss dis- allowances) until you have reduced your share of partnership losses by the total amount of losses required to be disallowed. If the transferor partner, or its legal representative in the case of a transfer by death, fails to provide you with the required statement, you must treat all losses allocated from the EIP as disallowed under § 743(e)(2) unless you obtain, from the EIP or otherwise, the in- formation necessary to determine the proper amount of losses disal- lowed under § 743(e)(2). See Notice 2005–32 for more information.

D. Effects of Failure to Notify Transferee Partner

If the transferor partner, or its legal representative in the case of a transfer by death, fails to provide the transferee part

April 18, 2005 897 2005–16 I.R.B.

and $200,000 of long-term capital loss. Assume that under § 706, A ’s distributive share of these items are properly determined to be 334/365 of each of these amounts, or $274,521 of long-term capital gain and $183,014 of long-term capital loss, and that C ’s distributive shares of these items are properly determined to be 31/365 of each of these amounts, or $25,479 of long-term capital gain and $16,986 of long-term capital loss.

(iv) PRS must provide a statement to all of its partners in accordance with Section 5.C of this notice. The statement must be attached to each partner’s Schedule K–1 for PRS ’s taxable year ending December 31, 2004. Assume that A receives A ’s Schedule K–1 on March 12, 2005. Within 30 days after receiving this Schedule K–1, A must provide statements to C and EIP as described in Section 5.A of this notice.

(v) The adjusted basis in A ’s partnership interest on November 30, 2004, $3,091,507, equals A ’s adjusted basis on December 31, 2003, $3,000,000, plus A ’s distributive share of partnership gain in 2004, $274,521, less A ’s distributive share of partnership loss in 2004, $183,014. The amount of loss recognized by A on the sale of A ’s partnership interest is $91,507, which equals the adjusted basis in A ’s partnership interest on the date of the sale, $3,091,507, less the amount realized by A, $3,000,000. Thus, the first $91,507 of gross loss allocated to C is disallowed under § 743(e)(2). The entire amount of C ’s long-term capital loss in 2004, $16,986, is disallowed under § 743(e)(2). The first $74,521 of any gross loss allocated to C in future years will also be disallowed under § 743(e)(2), regardless of whether PRS is an EIP in those future years.

(vi) C ’s adjusted basis as of December 31, 2004, is $3,025,479, the sum of C ’s purchase price paid for A ’s interest, $3,000,000, plus the distributive share of gain allocated to C, $25,479. Under § 743(e)(3), the $16,986 loss allocated to C, but disallowed under § 743(e)(2), does not reduce the basis of C ’s partnership interest.