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  1. @Kristina,

    I finally had a chance to take a look at your question in detail and I am fairly certain that you are referring to losses incurred in an indirect disposition after the termination of a QEF election for a CFC/Partnership/S-Corp.

    Answering the question correctly would require a hefty amount of research. I can, however, say that we usually do not claim any losses on Sec 1291 sales for our clients.

    Hope this helps!


  2. @Kristina,

    I’m going to ask Debra or Elena in the office to take a look at this. They are truly Section 1291 fiends. They know that stuff backwards and forwards. 🙂

    I’ll ask one of them post a reply to your question.


  3. What about a loss on an indirect disposition of Section 1291 fund. Seems the non-recognition of the loss is based on a proposed Reg that should have no authority. I keep finding different opinions.

  4. My interpretation is that §1291(b)(2)(B) is intended to relate to the excess distribution calculation for dividends only, rather than the actual disposition and would therefore follow suit with reporting the sale on Form 8621 and treating the gain as ordinary income.

  5. In the interests of transparency, Craig and I are emailing each other back and forth on this point. My interpretation of Section 1291 is that it forces the result of treating disposition gain as an excess distribution, therefore ordinary income. Craig says, yeah it tells you to treat this as excess distribution but then you have to go look at Section 1291(b) to see what it says about the excess distribution. Specifically Craig says:

    I agree that 1291(a)(2) says that gain on disposition is an excess distribution. But 1291(b) explains in greater detail what an excess distribution is. 1291(b)(2)(B) says that there is no excess distribution in the year that the holding period begins. So if we sell a stock in the year that we purchase it, there is no excess distribution and 1291(a)(2) would not apply at all.

    If he is right, then there is no excess distribution. That means you look to the regular rules of the Internal Revenue Code, which would make this a short term capital gain, NOT ordinary income.

    Anyone else out there with an opinion or a clue? Please post a comment. 🙂

    In the meantime I’m going to go back to the Code and read it again.

  6. Check out §1291(b)(2)(B) – “The total excess distributions with respect to any stock shall be zero for the taxable year in which the taxpayer’s holding period in such stock begins.”

    There is no excess distribution in the first year, therefore these rules do not apply and the gain is capital.

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