Final regulations under IRC Sec. 704(c) provide that the Section 704(c) anti-abuse rule takes into account the liabilities of both the partners in a partnership and certain direct and indirect owners of such partners. Final regulations further provide that a Section 704(c) allocation method cannot be used to achieve tax results inconsistent with the intent of subchapter K of the Code. The final regulations affect partnerships and their partners, and are effective June 9, 2010, applicable for tax years beginning after June 9, 2010.
The purpose of the final rules under reg. section 1.704-3 is to permit the IRS to recast transactions involving property contributed to a partnership when the transaction is "inconsistent with the intent of subchapter K," according to the regulation's preamble.
Consult the complete document attached for details.
LexisNexis Tax Advisor -- Federal Topical 2D:8.01
LexisNexis Tax Advisor -- Federal Topical 2D:13.01