The Internal Revenue Service has released a set of proposed regulations to prevent abuses of the partnership basis adjustment rules, disallowing partnership loss transfers to avoid some of the abuses uncovered by the Enron scandal.

Under Section 721(a) of the Tax Code, if a partner contributes property in exchange for a partnership interest, neither the partners nor the partnership is supposed to recognize the gain or loss. Section 722 provides that when a partner contributes property to a partnership, the basis in the partnership interest received would equal the adjusted basis of the contributed property, the IRS noted. Similarly, under Section 723, the partnership’s adjusted basis in the contributed property equals the contributing partner’s adjusted basis in the property.

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