26 U.S.C. § 755 — Rules for allocation of basis

(a) General rule. Except as subsection (b) provides, an increase or decrease in partnership^* property’s adjusted basis under section 734(b), concerning an optional adjustment for undistributed partnership property, or section 743(b), concerning an optional adjustment when a partnership interest is transferred, must be allocated—

(1) in a way that reduces the difference between the partnership properties’ fair market values and adjusted bases; or

(2) in any other way allowed by the Secretary’s regulations.

(b) Special rule. When applying subsection (a), an increase or decrease in the adjusted basis of partnership property resulting from a distribution of, or a transfer of an interest attributable to, property consisting of—

(1) capital assets and property described in section 1231(b); or

(2) any other partnership property,

that increase or decrease must be allocated to partnership property of the same kind. However, the basis of that property may not be reduced below zero. If a distribution adjustment for property described in paragraph (1) or (2) cannot be made because no such property exists or its adjusted basis is too small, the adjustment must be applied to subsequently acquired property of the same kind under the Secretary’s regulations.

(c) No allocation of basis decrease to stock^* of corporate partner^*. When allocating under subsection (a) a decrease in partnership property’s adjusted basis under section 734(b)—

(1) no part may be allocated to stock in a corporation^* that is a partnership partner, or to stock in any person related to that corporation within the meaning of sections 267(b) and 707(b)(1); and

(2) any amount that cannot be allocated to stock because of paragraph (1) must be allocated under subsection (a) to other partnership property.

The partnership must recognize gain to the extent the amount that paragraph (2) requires it to allocate to other partnership property is greater than the total adjusted basis of that other property immediately before the required allocation.