[Code of Federal Regulations]
[Title 26, Volume 1]
[Revised as of April 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.58-2]

[Page 521-523]
 
                       TITLE 26--INTERNAL REVENUE
 
     CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 1.58-2  General rules for conduit entities; partnerships and partners.

    (a) General rules for conduit entities. Sections 1.58-3 through 
1.58-6 provide rules under which items of tax preference of an estate, 
trust, electing small business corporation, common trust fund, regulated 
investment company, or real estate investment trust (referred to in this 
paragraph as the ``conduit entity'') are treated as items of tax 
preference of the beneficiaries, shareholders, participants, etc. 
(referred to in this paragraph as the ``distributees''). Where an item 
of tax preference of a conduit entity is so apportioned to a 
distributee, the item of tax preference retains its character in the 
hands of the distributee and is adjusted to reflect:
    (1) The separate items of income and deduction of the distributee 
and (2) the tax status of the distributee as an individual, corporation, 
etc. For example, if a trust has $100,000 of capital gains for the 
taxable year, all of which are distributed to A, an individual, the item 
of tax preference apportioned to A under section 57(a)(9) (and 
Sec. 1.57-1(i)(1)) is $50,000. If, however, A had a net capital loss for 
the taxable year of $60,000 without regard to the distribution from the 
trust, the trust tax preference would be adjusted in the hands of A to 
reflect the separate items of income and deduction passed through to the 
distributee, or, in this case, to reflect the net section 1201 gain to A 
of $40,000. Thus, A's capital gains items of tax preference would be 
$20,000. By application of this rule, A, in effect, treats capital gains 
distributed to him from the trust the same as his other capital gains in 
computing his capital gains item of tax preference. If A had been a 
corporation, the trust tax preference would be adjusted both to reflect 
the capital loss and to reflect A's tax status by recomputing the 
capital gains item of tax preference (after adjustment for the capital 
loss) under section 57(a)(9)(B) and Sec. 1.57-1(i)(2). Similarly, if 
depreciation on section 1245 property

[[Page 522]]

subject to a net lease (as defined in section 57(a)(3) and Sec. 1.57-
1(c)) is apportioned from a conduit entity to a corporation (other than 
a personal holding company or electing small business corporation), the 
amount so apportioned to the corporation is not treated as an item of 
tax preference to such corporation since such item is not an item of tax 
preference in the case of a corporation (other than a personal holding 
company or an electing small business corporation).
    (b) Partnerships and partners. (1) Section 701 provides that a 
partnership as such is not subject to the income tax imposed by chapter 
1. Thus, a partnership as such is not subject to the minimum tax for tax 
preferences. Section 702 provides that, in determining his income tax, 
each partner is to take into account separately his distributive share 
of certain items of income, deductions, etc. of the partnership and 
other items of income, gain, loss, deduction, or credit of the 
partnership to the extent provided by regulations prescribed by the 
Secretary or his delegate. Accordingly, each partner, in computing his 
items of tax preference, must take into account separately those items 
of income and deduction of the partnership which enter into the 
computation of the items of tax preference in accordance with 
subparagraph (2) of this paragraph.
    (2) Pursuant to section 702, each partner must, solely for purposes 
of the minimum tax for tax preferences (to the extent not otherwise 
required to be taken into account separately under section 702 and the 
regulations thereunder), take into account separately in the manner 
provided in subchapter K and the regulations thereunder those items of 
income and deduction of the partnership which enter into the computation 
of the items of tax preference specified in section 57 and the 
regulations thereunder. A partner must, for this purpose, take into 
account separately his distributive share of:
    (i) Investment interest expense (as defined in section 57(b)(2)(D) 
determined at the partnership level;
    (ii) Investment income (as defined in section 57(b)(2)(B) determined 
at the partnership level;
    (iii) Investment expenses (as defined in section 57(b)(2)(C)) 
determined at the partnership level;
    (iv) With respect to each section 1250 property (as defined in 
section 1250(c)), the amount of the deduction allowable for the taxable 
year for exhaustion, wear and tear, obsolescence, or amortization and 
the deduction which would have been allowable for the taxable year had 
the property been depreciated under the straight line method each 
taxable year of its useful life (determined without regard to section 
167(k)) for which the partnership has held the property;
    (v) With respect to each item of section 1245 property (as defined 
in section 1245(a)(3)) which is subject to a net lease, the amount of 
the deduction allowable for exhaustion, wear and tear, obsolescence, or 
amortization and the deduction which would have been allowable for the 
taxable year had the property been depreciated under the straight line 
method for each taxable year of its useful life for which the 
partnership has held the property;
    (vi) With respect to each certified pollution control facility for 
which an election is in effect under section 169, the amount of the 
deduction allowable for the taxable year under such section and the 
deduction which would have been allowable under section 167 had no 
election been in effect under section 169;
    (vii) With respect to each unit of railroad rolling stock for which 
an election is in effect under section 184, the amount of the deduction 
allowable for the taxable year under such section and the deduction 
which would have been allowable under section 167 had no election been 
in effect under section 184;
    (viii) In the case of a partnership which is a financial institution 
to which section 585 or 593 applies, the amount of the deduction 
allowable for the taxable year for a reasonable addition to a reserve 
for bad debts and the amount of the deduction that would have been 
allowable for the taxable year had the institution maintained its bad 
debt reserve for all taxable years on the basis of actual experience; 
and
    (ix) With respect to each mineral property, the deduction for 
depletion

[[Page 523]]

allowable under section 611 for the taxable year and the adjusted basis 
of the property at the end of the taxable year (determined without 
regard to the depreciation deduction for the taxable year).

If, pursuant to section 743 (relating to optional adjustment to basis), 
the basis of partnership property is adjusted with respect to a 
transferee partner due to an election being in effect under section 754 
(relating to manner of electing optional adjustment), items representing 
amortization, depreciation, depletion, gain or loss, and the adjusted 
basis of property subject to depletion, described above, shall be 
adjusted to reflect the basis adjustment under section 743.
    (3) The minimum tax is effective for taxable years ending after 
December 31, 1969. Thus, subparagraph (2) of this paragraph is 
inapplicable in the case of items of income or deduction paid or accrued 
in a partnership's taxable year ending on or before December 31, 1969.

[T.D. 7564, 43 FR 40481, Sept. 12, 1978]