754 and Basis Adjustments for and LLC Interestsmedia.straffordpub.com/products/section-754-and-basis-adjustments... · Section 754 and Basis Adjustments for Partnership ... Partnership

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Section 754 and Basis Adjustments for Partnership and LLC Interestsfor Partnership and LLC InterestsNavigating Complexities in Federal Tax Treatment of Distributions and Sales of Interests

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TUESDAY, SEPTEMBER 13, 2011

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1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Janice Eiseman Principal Cummings & Lockwood Stamford ConnJanice Eiseman, Principal, Cummings & Lockwood, Stamford, Conn.

Craig Taylor, Director, Carruthers & Roth, Greensboro, N.C.

Craig Gerson, Principal, National Tax Services, PricewaterhouseCoopers, Washington, D.C.

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S ti d B i Adj t t f Section 754 and Basis Adjustments for Partnership and LLC Interests Seminar

Sept. 13, 2011

Craig Taylor, Carruthers & [email protected]

Janice Eiseman, Cummings & [email protected]

Craig Gerson, PricewaterhouseCoopers [email protected]

Today’s Program

Introduction To Key Concepts[Janice Eiseman]

Slide 7 – Slide 11

Sect. 754 Elections[Craig Taylor]


Sect. 743(b) Adjustments On Transfer Of Partnership Interests[Janice Eiseman]


Sect. 734(b) Adjustments On Distributions From Partnerships[Craig Taylor]


Collected Issues And Nuances Of Partnership Basis Adjustments[Craig Gerson]


INTRODUCTION TO KEY Janice Eiseman, Cummings & Lockwood

INTRODUCTION TO KEY CONCEPTS

PARTNERSHIP BASIS: INSIDE AND OUTSIDE BASIS

O iOverviewA. Subchapter K: In parts of Subchapter K, the subchapter governing the taxation of

hi d hi i d i hi h i di ipartnerships and partners, a partnership is treated as a separate entity, which is distinct from its partners. In other parts of Subchapter K, a partnership is treated as an aggregateof individuals, each of whom owns an undivided interest in partnership assets.

B. Outside basis: “Outside basis” refers to a partner’s tax basis in the partnership interest itself. The partnership is treated as an entity separate from its partners and the partnership interest as an intangible asset that is separate and distinct from partnership assets. This is similar to a shareholder’s tax basis in a share of stock.

C. Inside basis: “Inside basis” refers to the partner’s share of the basis in the assets held by the partnership. Because the partnership is not a separate taxable entity, its income is allocated and taxed to its partners treating them like owners of undivided interests in theallocated and taxed to its partners, treating them like owners of undivided interests in the assets and business of the partnership, i.e., as an aggregate of individuals. This does not have a direct analog in the Subchapter C or Subchapter S world, because corporations are treated as separate entities.

© Cummings & Lockwood LLC 2011

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Overview (Cont )Overview (Cont.)D. Sect. 754 election: Purpose of making a Sect. 754 election is to equalize the “outside basis” and the

“inside basis,” to the extent allowed. A Sect. 754 election activates both Sect. 743(b), which applies to certain transfers of partnership interests, and Sect. 734(b), which applies to certain distributions ofcertain transfers of partnership interests, and Sect. 734(b), which applies to certain distributions of property by the partnership to a partner. 1. If a Sect. 754 election is not made, there is no change to the inside basis of partnership assets; that

is, there is no adjustment to a transferee’s “inside basis” no adjustment to the tax basis of partnership assets because of a distribution of property by the partnership to a partner.• For example, Sect.743(a), which treats the partnership as an entity, provides that the basis of

partnership property is not adjusted as a result of a sale, or exchange, or the death of a partner unless an election has been made under Sect. 754 or unless the partnership has a “substantial built-in loss.” If S t 754 l ti i d th S t 743(b) i ti A S t 743(b) dj t t• If a Sect. 754 election is made, then Sect. 743(b) is operative. A Sect. 743(b) adjustment implements an aggregate approach by adjusting the tax consequences allocable to a transferee partner so as to provide the transferee with an approximation of a cost basis in an undivided interest in the partnership property. The legislative history of the 1954 Code states that the purpose of Sect. 743(b) is to ensure that a transferee’s distributive share of income, p p ( ) ,gain, loss, deduction or credit is the same “as though the partnership had dissolved and been reformed, with the transferee of the interest a member of the partnership.” H.R. Rep. No. 1337, 83rd Cong., 2d Sess. 70 (1954). In other words, the function of a Sect. 743(b) adjustment is to offset gain or loss that accrued prior to the transferee becoming a partner.

2 A i h h i b i dj h f h dj i d i d d S


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2. Assuming that there is a basis adjustment, the amount of the adjustment is determined under Sect. 743(b) in the case of a transfer and Sect. 734(b) in the case of a distribution.


O i (C t )Overview (Cont.)

E. Sect. 755: How the adjustment determined under Sect. 743(b) or Sect. 734(b) is allocated to partnership assets is determined under Sect. 755.

F. Mandatory adjustment under Sect. 743: If there is a transfer of a partnership interest, and immediately after such transfer the adjusted tax basis of all of the partnership assets exceeds the fair market value of the partnership assets by more than $250,000 (“substantial built-in loss”), then the partnership must make a Sect. 743(b) adjustment as if an election under Sect. 754 were in effect. I.R.C. § 743(d). E i f l i i hi ( b f dExceptions for electing investment partnerships (e.g., buyout funds, venture capital funds and fund of funds) and securitization partnerships. I.R.C. §§ 743(e) & (f)


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O i (C t )Overview (Cont.)G. Mandatory adjustment under Sect. 734: If there is a distribution of

t hi t i li id ti f t ’ i t t d th diffpartnership property in liquidation of a partner’s interest, and the difference between the sum of (i) the basis of the distributed property to the partner, which equals the value of his partnership interest in the partnership under Sect. 732(b), and the tax basis of the distributed property to the partnership; and (ii) the loss recognized by the liquidating partner exceeds $250,000, then the tax basis of partnership property must be decreased as if a Sect. 754 election were in effect. I.R.C. § 734(d). There is an exception for securitization partnerships. I R C § 734(e)I.R.C. § 734(e).

H. Summary: Under sections 734(a) and 743(a), the partnership is treated as an entity, i e , no adjustments to basis of partnership property unless mandatoryentity, i.e., no adjustments to basis of partnership property unless mandatory adjustments are required. If a Sect. 754 election is made, then adjustments can be made to the basis of partnership property (the “inside basis”) under sections 734(b) and 743(b). How the amount of the adjustment is allocated among

hi i d i d d S 755


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partnership assets is determined under Sect. 755.

SECT 754 ELECTIONSCraig Taylor, Carruthers & Roth

SECT. 754 ELECTIONS

M ki Th S El iMaking The Sect. 754 Election• Partnership may make the Sect. 754 election at any time – does Partnership may make the Sect. 754 election at any time does not require the occurrence of a triggering event. Election must be signed by a partner.

El ti i fil d ith ti l fil d t hi t (i l di • Election is filed with a timely filed partnership return (including extensions). • Once made, the Sect. 754 election is:

• In effect for the tax year of the partnership return containing the election; and

• In effect for all future tax years of the partnership unless • In effect for all future tax years of the partnership, unless revoked.

• Revocation requires a special application to the IRS and will be d l f h b l h h bgranted only if there are substantial changes to the business or

assets of the partners. Sect. 1.754-1(c). 13

When To Consider The Sect. 754 Election

• Distributions of property other than cash especially where tax • Distributions of property other than cash, especially where tax basis of property is different from fair market value (whether appreciated or depreciated)• Any distributions of cash or property that are disproportionate to partnership interests• Distributions of cash that will cause the recipient to recognize p ggain• Liquidating distributions of cash or property

S l h f i t t i th t hi• Sales or exchanges of interests in the partnership• Death of a partner• Sect. 754 elections are often, but not always, “good” for all , y , gpartners and all partnerships. Each situation should be evaluated carefully.

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Eff Of Th S El iEffects Of The Sect. 754 Election

EXAMPLE 1: Purchase of a partnership interest

A and B form a 50/50 partnership. Each contributes $150,000 in cash. The AB Partnership buys Asset for $300 000 Asset appreciates to $400 000Partnership buys Asset for $300,000. Asset appreciates to $400,000.

C buys a 50% interest in the AB Partnership for $200,000, and the ABC Partnership sells Asset for $400,000 – a gain of $100,000. If no Sect. 754 election is in place:

Partner C’s outside basis: $200,000C’s 50% share of gain: $ 50,000C’s share of cash distributed: ( $200,000)C s share of cash distributed: ( $200,000)

Partner C’s remaining basis: $50,000

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Effects Of The Sect. 754 Election (Cont.)

EXAMPLE 1: Purchase of a partnership interest (Cont.)

• Partner C cannot use the $50,000 in remaining basis until it sells the ( l k l ) h h l d dinterest (unlikely) or the partnership is liquidated.

• If Partner C recognizes a loss, it will be a capital loss. • If Asset is a non-capital asset, the $50,000 income allocated to Partner C

ill b di i b t P t C’ l ill b “ i t h d” will be ordinary income, but Partner C’s loss will be a “mismatched” capital loss. • If Asset is sold in 2011, but ABC Partnership doesn’t liquidate until 2012, Partner C’s loss will be delayed and “mismatched” to the 2011 income Partner C s loss will be delayed and mismatched to the 2011 income.

• If a Sect. 754 election is made for the year of the sale, or is already in place, both of these bad outcomes are avoided.place, both of these bad outcomes are avoided.

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EXAMPLE 2: Non-liquidating distributions to partners -property

Partner D has an outside basis of $40,000 in the DEF Partnership. Partner D receives a distribution of land that has a fair market value (FMV) of $75,000 and an inside basis of $50,000. value (FMV) of $75,000 and an inside basis of $50,000.

• If no Sect. 754 election is in place, Partner D will hold the land with a basis of $40 000 The remaining $10 000 of basis is “lost” with a basis of $40,000. The remaining $10,000 of basis is lost .

• If a Sect. 754 election is in place, the DEF Partnership would increase its basis in its remaining assets by $10 000 under Sect increase its basis in its remaining assets by $10,000 under Sect. 734(b).

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EXAMPLE 3: Non-liquidating distributions to partners – cash and propertyPartner D has an outside basis of $40,000 in the DEF Partnership. Partner

d b f h f $ d d b f l d hD receives a distribution of cash of $50,000 and a distribution of land that has a fair market value (FMV) of $75,000 and an inside basis of $50,000. • Partner D recognizes a gain of $10,000 from the distribution of cash (Sect. 731) d it t id b i i d d t $0 If S t 754 l ti i i 731) and its outside basis is reduced to $0. If no Sect. 754 election is in place, Partner D will hold the land with a basis of $0. $50,000 of basis is “lost.” • If a Sect 754 election is in place the DEF Partnership would increase its • If a Sect. 754 election is in place, the DEF Partnership would increase its basis in its remaining assets by $60,000 under Sect. 734(b) – the sum of $10,000 in gain recognized by Partner D and $50,000 of “lost basis.”

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EXAMPLE 4: Liquidating distributions to partners

Partner D has an outside basis of $40,000 in the DEF Partnership. Partner l d d b f l d h h f k lD receives a liquidating distribution of land that has a fair market value

(FMV) of $75,000 and an inside basis of $25,000.

If S t 754 l ti i i l P t A ill h ld th l d ith • If no Sect. 754 election is in place, Partner A will hold the land with a basis of $40,000, and there will be no impact on Partnership DEF’s other assets.

• If a Sect. 754 election is in place, Partner A will hold the land with a basis of $40,000, but the DEF Partnership would be required to decrease its basis in its remaining assets by $15,000 under Sect. 734(b). basis in its remaining assets by $15,000 under Sect. 734(b).

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SECT 743(B) ADJUSTMENTS ON Janice Eiseman, Cummings & Lockwood

SECT. 743(B) ADJUSTMENTS ON TRANSFER OF PARTNERSHIP INTERESTS


Abilit T M k A S t 754 El tiAbility To Make A Sect. 754 ElectionDue To A Transfer

A. Sect. 743(b): Election may be made when there is a sale orexchange of a partnership interest or upon the death of a partner. If a triggering event has not occurred, no Sect. 754 election can be made, and, therefore there will be no change to the tax basis of partnership assets with regard to the transferee unless the mandatory rule for basis adjustment applies. 1. Sales or exchanges: This includes a carryover basis exchange,

such as under Sect. 351. Transfers by gift do not trigger a Sect. 754 election, because transfers by gift are not sales or exchanges under Sect. 743(b).


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Abilit T M k A S t 754 El tiAbility To Make A Sect. 754 ElectionDue To A Transfer (Cont.)

2. Distribution of partnership interest: Note that Sect. 761(e)(2) provides that for purposes of Sect. 743, any distribution of an interest in a partnership (not otherwise treated as an exchange) shall be treated as an exchange. Thus, if there is a “constructive termination” under Sect. 708(b)(1)(B), i.e. sale or exchange of 50% or more of the total interest in partnership capital and profits within a period of 12 consecutivein partnership capital and profits within a period of 12 consecutive months, then the deemed distribution of an interest in the new partnership by a terminating partnership is treated as an exchange of the interest in the new partnership for interest in the terminating

t hi f f S t 743 Thi ll th t hipartnership, for purposes of Sect.743. This allows the new partnership to make a Sect. 754 election because the exchange requirement of Sect. 743(b) is satisfied.


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What Happens Under Sect 743(b) When AWhat Happens Under Sect. 743(b) When ASect. 754 Election Is Made?

A The actual amount of the Sect 743(b) adjustment: Sect 743(b) states that theA. The actual amount of the Sect. 743(b) adjustment: Sect. 743(b) states that the adjustment to the basis of partnership property to the transferee equals the difference between the (i) transferee’s tax basis in his partnership interest (i.e., the purchase price of the interest or its fair market value at date of death plus his share of partnership liabilities) and (ii) the transferee’s “proportionate share of the adjusted basis ofliabilities), and (ii) the transferee s proportionate share of the adjusted basis of partnership property.” Treasury Reg. §1.743-1 flushes out how to determine the transferee’s “proportionate share of the adjusted basis of partnership property.” To understand the regulations, it is important to always remember what the Sect. 743(b) adjustment is designed to do; namely to prevent the transferee from recognizing gain oradjustment is designed to do; namely, to prevent the transferee from recognizing gain or loss already accounted for in the purchase price of the partnership interest.

1. Treasury Reg. §1.743-1(d) provides that the transferee’s “share of the adjusted b i h hi f hi ” i l h f hbasis to the partnership of partnership property” is equal to the sum of the transferee’s interest as a partner in the partnership’s “previously taxed capital” plus his share of partnership liabilities. The transferee’s share of “previously taxed capital” is defined to be the amount of cash the transferee would receive if the

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partnership were liquidated by selling its assets at fair market value.


What Happens Under Sect 743(b) When AWhat Happens Under Sect. 743(b) When ASect. 754 Election Is Made? (Cont.)

d (i) i i th t f h b th t l (i l di di land (i) increasing the amount of cash by the tax loss (including any remedial allocations under Treasury Reg. §1.704-3(d)) that would be allocated to the transferee to the extent attributable to the transferred interest, or (ii) decreasing the amount by the amount of tax gain (including any remedial allocations under T R §1 704 3(d)) th t ld b ll t d t th t f t th t tTreasury Reg. §1.704-3(d)) that would be allocated to the transferee to the extent attributable to the transferred interest. (Note that non-contingent liabilities do not affect the amount of the adjustment because they are included in the transferee’s tax basis and the computation of the transferee’s share of the adjusted basis of

t hi t )partnership property.)

2. In essence, the tax capital account that the transferee inherits from his transferor determines the transferee’s share of the partnership basis in its assets. By using transferor’s tax capital account as a measure of inside basis, the Treasury regulations generally ensure that a transferee receives a basis adjustment that takes into account both pre-contribution gain or loss and post-contribution changes in value.


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What Happens Under Sect. 743(b) When AWhat Happens Under Sect. 743(b) When ASect. 754 Election Is Made?

3. Example 2 of Treasury Reg. §1.743-1(d)(3) illustrates the computation of the Sect. 743(b) adjustment. See Exhibit A.

4. As this example shows, if the partnership sells the land for $1,300, the gain from the sale equals $900. Transferee will have $700 of the gain allocated to him, and the other two partners will$700 of the gain allocated to him, and the other two partners will each have $100 allocated to them. Because the transferee has a tax basis of $700 in the land, he will recognize no gain.


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What Happens Under Sect 743(b) When AWhat Happens Under Sect. 743(b) When ASect. 754 Election Is Made?

B. Note the following with regard to a Sect. 743(b) adjustment:1. The adjustment applies only to the transferee partner. There is no adjustment

to common basis of partnership property. The adjustment essentially operates outside the partnership. Treas. Reg. § 1.743-1(j)(1)

2 Th dj t t h ff t th t ti f th t hi ’ i2. The adjustment has no effect on the computation of the partnership’s income or loss. Treas. Reg. § 1.743-1(j)(1)

3. The adjustment has no effect on the transferee’s capital account. The transferee steps into the capital account of the transferor Treas Reg § 1 743transferee steps into the capital account of the transferor. Treas. Reg. § 1.743-1(j)(2)

4. The adjustments to the transferee’s distributive share of income or loss must be shown on the Form K 1 issued to the transferee Treas Regbe shown on the Form K-1 issued to the transferee. Treas. Reg. § 1.743-1(j)(2)

5. Where there has been more than one transfer of a partnership interest, a transferee’s basis adjustment is determined without regard to any prior


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transferee s basis adjustment is determined without regard to any prior transferee’s basis adjustment. Treas. Reg. § 1.743-1(f)


S t 755 B i Adj t tSect. 755 Basis AdjustmentsA. Three sets of rules

1 Transfer of partnership interest when assets of partnership do not constitute a trade or business1. Transfer of partnership interest when assets of partnership do not constitute a trade or business. Treas. Reg. § 1.755-1(b)(1)-(b)(4)

2. Transfer of partnership interest involving “substituted basis exchanges” (e.g., Sect. 351 and 721 exchanges). Treas. Reg. §1.755-1(b)(5). Also, Treasury Reg. §1.755-1(b)(5) applies to basis adjustments that result from exchanges in which the transferee’s basis in the partnershipbasis adjustments that result from exchanges in which the transferee s basis in the partnership interest is determined by reference to other property held at any time by the transferee e.g. a constructive termination under Sect. 708(b)(1)(B) in which the terminated partnership is deemed to contribute its assets to a new partnership in exchange for an interest in the new partnership and the terminated partnership is deemed to distribute interests in the new partnership in liquidation of the partner’s interest in the terminated partnership. Sect. 761(e) provides the “exchange,” meaning the distribution of partnership interests in the new partnership is an “exchange” for purposes of Sect. 743(b). Because the distribute-partner of the terminated partnership receives its interest in the new partnership in a liquidating distribution, the distributee takes a substituted basis in the new partnership under Sect 732(b) A Sect 754the distributee takes a substituted basis in the new partnership under Sect.732(b). A Sect. 754 election by the new partnership will bring into play Treasury Reg. §1.755-1(b)(5).

3. Transfer of a partnership interest when the assets of the partnership constitute a trade or business, as described in Reg. §1.1060-1(b)(2) Treas Reg §1 755 1(a)(2) (a)(6)


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Treas. Reg. §1.755-1(a)(2)-(a)(6)


S t 755 B i Adj t t (C t )Sect. 755 Basis Adjustments (Cont.)B. Transfer of partnership interest when assets of partnership do not constitute a

“trade or business”trade or business

1. First, determine the adjusted basis and the fair market value of the partnership assets immediately after the transfer and determine how much income, gain or loss (including remedial allocations under Treasury Reg. §1.704-3(d)) would be allocated to the transferee-partner, if the partnership were to sell all of its assets for cash in a hypothetical sale for an amount equal to their fair market values. If, in fact, the purchase price for the partnership interest equals the fair market value of the assets, then the adjustment to the basis of partnership property with respect to the transferee-partner is done. Treas. Reg. §1.755-1(b)(1)(ii); Example 1, Treas. Reg. 1.755-1(b)(2)(ii)

2. The portion of the transferee-partner’s basis adjustment allocated to ordinary income property is equal to the total income gain or loss (including remedial allocations) that would be allocated to the transferee with respect to the hypothetical sale of ordinary income property. Treas. Reg. §1.755-1(b)(2)


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yp y p p y g § ( )( )


S t 755 B i Adj t t (C t )Sect. 755 Basis Adjustments (Cont.)3. The portion of the transferee-partner’s basis adjustment allocated to capital gain

property is equal to the Sect. 743(b) adjustment reduced by the amount allocated to ordinary income property. If the purchase price of the partnership interest is less than the purchase price based upon fair market value, and there has to be a decrease in capital gain property, the decrease cannot be greater than the “partnership’s basis” in the property or the transferee’s share of any remedial loss under Treasury Reg. §1.704-3(d). Any excess is applied to reduce the basis of ordinary income property. Treas. Reg. §1.755-1(b)(2)

• Note that this approach allocates any overpayment or underpayment for the partnership interest to the basis of capital gain property.

4 Adj t t b d t i di id l t th h th t t l t f4. Adjustments can be made to individual assets even though the total amount of basis adjustment is zero. Treas. Reg. §1.755-1(b)(1)(i)

• Note that in a substituted basis transaction, no adjustment can be made if


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the total amount of the Sect. 743(b) adjustment is zero.


S t 755 B i Adj t t (C t )Sect. 755 Basis Adjustments (Cont.)5. Allocations have to be made within the class of ordinary income property and within y p p y

the class of capital gain property.a. Within the class of ordinary income property, the basis of each property is

generally adjusted by an amount equal to the income, gain or loss (including remedial allocations) that would be allocated to the transferee upon a sale ofremedial allocations) that would be allocated to the transferee upon a sale of the property in the hypothetical transaction.

b. Within the class of capital gain property, the basis of such property is generally adjusted by (1) the amount of income, gain or loss that would be allocated to the transferee in the hypothetical transaction minus (2) a portionallocated to the transferee in the hypothetical transaction, minus (2) a portion (based on the market value of a particular property) compared to the aggregate market value of all capital gain property. Treas. Reg. §1.755-1(b)(3)N t th t th t b dj t t h th t l S t 743(b)c. Note that there must be an adjustment whenever the actual Sect. 743(b) adjustment is either more or less than what it would be if the transferee had paid fair market value for each partnership asset.


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6. See subsequent exhibits B and C for examples of Sect. 755 allocations


Sect 755 Basis Adjustments (Cont )Sect. 755 Basis Adjustments (Cont.)C. Substituted basis exchanges

1. The rules for “substituted basis exchanges” are set forth in Treasury Reg. §1.755-1(b)(5). If the basis adjustment is positive an adjustment can be made only if the hypothetical sale of thebasis adjustment is positive, an adjustment can be made only if the hypothetical sale of the partnership’s assets results in a net gain to the transferee.a. The increase is allocated between classes of assets (ordinary and capital) in proportion to the

net income or gain of each class allocable to the transferee.b Within each class increases are first allocated to properties with unrealized appreciation inb. Within each class, increases are first allocated to properties with unrealized appreciation in

proportion to the transferee’s share of such unrealized appreciation until the transferee’s share of the appreciation is eliminated. Any remaining amount is allocated among assets in the class according to the transferee’s share of the amount realized from the hypothetical sale of each asset in the class.

2. Likewise, if the basis adjustment is negative, an adjustment can only be made if the hypothetical sale results in the allocation of a net loss to the transferee.

a. The decrease is allocated between asset classes in proportion to the net loss allocable to the transferee from the hypothetical sale of all assets in each class.

b i hi h l h d i ll d i i h li d d i i ib. Within each class, the decrease is allocated to properties with unrealized depreciation in proportion to the transferee’s shares of such unrealized depreciation until they are eliminated. Remaining decreases are allocated in proportion to the transferee’s shares of the adjusted bases of all assets in the class until these shares of adjusted bases are reduced to zero, with any remaining downward adjustment suspended until the partnership acquires additional


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y g j p p p qproperty in that class.


Sect 755 Basis Adjustments (Cont )Sect. 755 Basis Adjustments (Cont.)D. Sale of business

1. If the assets of the partnership constitute a trade or business (as described in Treasury Reg. §1.1060-1(b)(2)), the partnership must use the residual method to assign values to the § ( )( )), p p gpartnership’s Sect. 197 intangibles. Treas. Reg. §1.755-1(a)(2)

2. Residual method involves the following steps:a. First, the partnership must determine the value of its assets other than Sect. 197.b. Second, the partnership must determine “partnership gross value” under Treasury Reg.

§1.755-1(a)(4).c. Third, the partnership gross value is then compared to the aggregate value of all partnership

property other than Sect. 197 intangibles. If there is no residual value, then the value of all Sect. 197 intangibles is deemed to be zero. If there is a residual value, then the amount must be allocated to Sect. 197 intangibles in order to assign a value to them under the rules of Treasury S g g yReg. §1.755-1(a)(5).

d. “Partnership gross value” generally is equal to the amount that, if assigned to all partnership property, would result in a liquidating distribution to the partner equal to the transferee’s basis in the transferred partnership interest immediately following the relevant transfer (reduced by the amount if any of such basis that is attributable to partnership liabilities) Treas Regthe amount, if any, of such basis that is attributable to partnership liabilities). Treas. Reg.§1.755-1(a)(4)(i)(A).

e. Treasury Reg. §1.755-1(a)(5)(i) requires that the residual value be allocated first among Sect. 197 intangibles other than goodwill and going concern value, but the value assigned to a Sect. 197 intangible (other than goodwill and going concern value) is limited to its actual fair market

l h d f h l f A i i id l l i h ll d


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value on the date of the relevant transfer. Any remaining residual value is then allocated to goodwill and going concern value.


Exhibit AExhibit AExample 2 of Treasury Reg. Sect. 1.743-1(d)(3)

Tax Fair market value on contribution date Sale of partnership interest for fair market value by A

$ $ $Land $400 $1,000 $1,300Cash $2,000 $2,000 $2,000Total $2,400 $3,000 $3,300

A $400 $1,000 $1,100$ $ $B $1,000 $1,000 $1,100

C $1,000 $1,000 $1,100

Transferee's share of previously taxed capital:

Cash received on sale of assets for fair market value $1,100Less: Gain allocated to transferee $700 (Pre-contribution gain & post-contribution gain)Share of previously taxed capital $400

Section 743(b) adjustment:

Outside basis of price paid for partnership interest $1,100Less: Share of previous taxed capital $400Amount of Section 743(b) adjustment to the basis of the land $700


33

33


Exhibit BExample 2 of Treasury Reg. §1.755-1(b)(3)(iv): T buys A’s partnership interest for $110,000.

Adjusted Basis Capital gain property Basis at time of contribution Value at time of sale Adjustment

A t 1 $25 000 $75 000 $33 604

Fair Market Value

$50 000

Fair Market

Asset 1 $25,000 $75,000 $33,604Asset 2 $100,000 $117,500 $2,646

$192,500 $36,250Ordinary Income property

Asset 3 $40,000 $45,000 $2,500Asset 4 $10,000 $2,500 ($3,750)

$175 000 $47 500 ($1 250)

$40,000$10,000$200 000

$50,000$100,000

$175,000 $47,500 ($1,250)

Total $240,000 $35,000

Book Capital AccountsA $100,000 $120,000B $100 000 $120 000

$200,000

B $100,000 $120,000

Section 743(b) adjustment:T's partnership basis $110,000Less: T's share of adjusted basis ($75,000)in partnership propertyp p p p yAdjustment $35,000Ordinary income adjustment ($1,250)Capital gain adjustment $36,250

Total capital gain AdjustmentAsset 1 $37,500 $33,604 ($37,500 -($10,000*$75,000/$192,500))

$ $ $ $ $ $


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34

Asset 2 $8,750 $2,646 ($8,750-($10,000*$117,500/$192,500))Total capital gain/Adjustment $46,250 $36,250


Exhibit C Calculation of Section 743(b) Adjustment to Trust Exhibit CPage C-1

Example of complicated adjustment for

I. Step-up in basis of Company assets based on fair market value at date of death

Proportionate Share of Tax Gain recognized upon liquidation Code § 743(b) Basis Adjustment & Code § 755 Allocation Basis in Company's Assets

Real Estate $173 500 $17 826 500 $17 826 500

( ) j

adjustment for an interest held by a Grantor Trust upon death of Grantor; value

Real Estate $173,500 $17,826,500 $17,826,500Accrued Dividend 0 $578 0Sysco 0 $37,129 $37,129 Johnson & Johnson 0 $15,242 $15,242 Schering Plough 0 $10,379 $10,379 United Health Care 0 $6,226 $6,226 Cisco 0 $18,306 $18,306 Grantor; value

of membership interest determined for estate tax purposes

Dover 0 $13,729 $13,729 Emerson 0 $11,295 $11,295 Bershire Hathaway A 0 $46,525 $46,525 Berkshire Hathaway B 0 $30,462 $30,462

$173,500 $18,016,371 $18,015,793 (Stock contributed by children of grantor of Trust)II. Trust's previously taxed capital:purposes. II. Trust s previously taxed capital:

Liquidation proceeds based on fair market value: $19,100,813 * Less: Gain recognized on liquidation $18,016,371Previously Taxed Capital $1,084,442

III. Code Section 743(b) Adjustment based on Fair Market Value:Fair Market Value less IRD $19,100,235 ($19,100,813 -$578) (Treas. Reg. Section 1.755-1(b)(4).)

Less: Previously Taxed Capital $1 084 442 Less: Previously Taxed Capital $1,084,442Section 743(b) Adjustment $18,015,793

IV. Code Section 743(b) Adjustment based on Estate Tax Audit:Value of Membership Interest $17,815,000 Less: Income in respect of a Decedent $578Tax basis of Membership Interest $17,814,422


35

35

Less: Trust's previously taxed capital $1,084,442Section 743(b) Adjustment $16,729,980

* $19,100,813 (liquidating proceeds) = $20,609,423 (Fair Market Value of Company at date of death)*92.68% (Trust Percentage Interest)


Exhibit CPage C-2

must be reduced pro rata by $1,285,813 under Treasury Regulation Section 1.755-1(b)(3)(ii).

§ 743(b) adjustment based on FMV $18,015,793Less: § 743(b) adjustment based on Estate $16 729 980

Calculation of Section 743(b) basis adjustments to capital gain assets based on Fair Market Value must

Less: § 743(b) adjustment based on Estate $16,729,980 Tax Valuation Amount to be allocated among assets $1,285,813

Tentative

Fair Market ValueCode Section 743(b)

Adjustment based on FMV Decrease*Section 755 Allocation

Real Estate $18,000,000 $17,826,500 $1,189,922 $16,636,577.87Sysco $188,564 $37,129 $12,465 $24,663.64Johnson & Johnson $276,334 $15,242 $18,268 -$3,025.55Schering Plough $65,400 $10,379 $4,323 $6,055.62United Health Care $60,000 $6,226 $3,966 $2,259.59Cisco $326 250 $18 306 $21 567 -$3 261 34Cisco $326,250 $18,306 $21,567 $3,261.34Dover $98,063 $13,729 $6,483 $7,246.37Emerson $54,750 $11,295 $3,619 $7,675.65Berkshire Hathaway A $227,800 $46,525 $15,059 $31,465.87Berkshire Hathaway B $153,384 $30,462 $10,140 $20,322.28

$19,450,545 $18,015,793 $1,285,813 $16,729,980.00

*Decrease to each asset is calculated as follows:

$1,285,813 x (Fair Market Value of each asset/$19,450,545 (Total Fair Market Value))

Note: Assets with respect to which transferee has no interest in income, gain, losses or deductions are not taken into account in applying adjustment to basis under Code Section 755. Treas. Reg. Section 1.755-1(b)(3)(iii).


36

36

applying adjustment to basis under Code Section 755. Treas. Reg. Section 1.755 1(b)(3)(iii).


Exhibit CExhibit CPage C-3

Calculation of Section 755 Basis Adjustments Based On Code Section 743(b) Adjustment of $16,729,980

(B) (C)(A) (D) Proportionate Share of Adjustment for § 755 Allocation

Tax Basis in Sasco's Assets § 755 Allocation Negative Decrease* ((B)-(C))

Real Estate $173,500.00 $16,636,577.87 ($6,249.83) $16,630,328.04Sysco 0 $24 663 64 ($9 17) $24 654 47

Tentative (B) (C)(A) (D)

Sysco 0 $24,663.64 ($9.17) $24,654.47Johnson & Johnson 0 ($3,025.55) $3,025.55 $0.00Schering Plough 0 $6,055.62 ($2.25) $6,053.37United Health Care 0 $2,259.59 ($0.84) $2,258.75Cisco 0 ($3,261.34) $3,261.34 $0.00Dover 0 $7,246.37 ($2.69) $7,243.68$ , ($ ) $ ,Emerson 0 $7,675.65 ($2.85) $7,672.80Berkshire Hathaway A 0 $31,465.87 ($11.70) $31,454.17Berkshire Hathaway B 0 $20,322.28 ($7.56) $20,314.72

$16,729,980.00 $0.00 $16,729,980.00

Column C: Treas. Reg. §1.755-1(b)(3)(iii)(B)

(Column B Positive Adjustment) x $6,289.89 (Total Value of Negative Adjustments)(Total Column B Positive Adjustments

f $16 909 766 89)


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37

of $16,909,766.89)

SECT 734(B) ADJUSTMENTS Craig Taylor, Carruthers & Roth

SECT. 734(B) ADJUSTMENTS ON DISTRIBUTIONS FROM PARTNERSHIPS

Transactions Causing 734(b) Adjustments

• If a Sect. 754 election is in place, all of the following may give rise to adjustments under Sect. 734(b): to adjustments under Sect. 734(b):

• Any distribution of cash when recipient recognizes gain• Any distribution of property where there is “lost basis”• Liquidating distributions when recipient recognizes loss• Liquidating distributions where there is “acquired basis”

39

M d (b) AdjMandatory 734(b) Adjustments

• Even if a Sect. 754 election is NOT in place, under Sect. 732(d), the following may require mandatory 734(b) adjustments:

• A partner acquires a partnership interest by transfer when A partner acquires a partnership interest by transfer when no Sect. 754 election is in place, AND

• That partner receives a distribution of property within two ORyears; OR

• That partner receives a distribution of property at any time, if at the time of the original transfer the FMV of non-cash partnership property exceeded 110% of its inside basis in the hands of the partnership.

40

Sect. 755 Allocation Of 734(b) Adjustments

To allocate basis adjustments required by Sect. 734(b), refer to Sect. 755 and Regulations Sections 1.755-1(a) and (c):

• First, the partnership must determine the value of each of its assets, using the , p p , grules in Regulations Sect. 1.755-1(a). Note the specific rules for treatment of Sect. 197 intangibles in Regulations Sect. 1.755-1(a)(5)

• Second, in general, basis adjustments arising (i) from distributions of capital , g , j g ( ) pgain property are allocated to capital assets and Sect. 1231(b) property; and (ii) from distributions of ordinary income property to any other property of the partnership (ordinary income property). Properties and potential gain treated as unrealized receivables under Sect. 751(c) are treated as separate assets that are ordinary income property.

• Third, allocate basis adjustments within each class using the rules in Regulations Sect. 1.755-1(c)

41

Sect. 755 Allocation Of 734(b) Adjustments (Cont.)

• Sect. 755 and Regulations Sect. 1.755-1(a) and (c) contain certain special rules, including the following:

• A basis adjustment resulting from the recognition of gain on a cash distribution or from a loss from the distribution of cash unreali ed recei ables or in entor or from a loss from the distribution of cash, unrealized receivables or inventory, must be allocated to the partnership capital gain property. Regulations Sect. 1.755-1(c)(1)(ii)

• Within a class basis increases due to “lost basis“ are allocated first to properties Within a class, basis increases due to lost basis are allocated first to properties with unrealized appreciation up to and in proportion with their respective unrealized appreciation. Any excess is allocated among all properties in the class in proportion to FMV. Regulations Sect. 1.755-1(c)(2)

• Within a class, basis decreases due to “acquired basis” are allocated first to properties with unrealized depreciation up to and in proportion with their respective amounts of unrealized depreciation. Any excess is allocated among all the properties within the class in proportion to their adjusted basis (after taking into account the first allocation). Regulations Sect. 1.755-1(c)(2)

42

Sect. 755 Allocation Of 734(b) Adjustments (Cont.)

• 734(b) basis adjustment special rules (Cont.)

• If a decrease in basis is required and the basis adjustment exceeds the remaining basis in the assets in a class the assets are reduced the remaining basis in the assets in a class, the assets are reduced to zero, but not below zero. The unused basis is carried forward until such time as the partnership acquires new property in the class. This is contrary to the Sect. 755 rules for death, sales or

h h i i l i d b li d exchanges that require excess capital gain decreases to be applied against ordinary income assets. Sect. 755(b)

• When an increase or decrease in the basis of undistributed property cannot be made because the partnership owns no property of the character required to be adjusted, the adjustment is made when the partnership acquires property of a like character to

hi h dj t t b d R l ti S t 1 755 1( )(4)which an adjustment can be made. Regulations Sect. 1.755-1(c)(4)

43

Calculation Of 734(b) Basis Adjustment

EXAMPLE 1: Distribution of cash

Partner D has an outside basis of $25,000 in the DEF Partnership. Partner D receives a distribution of $40 000 This is the balance sheet of DEF Partnership:a distribution of $40,000. This is the balance sheet of DEF Partnership:

Adjusted Basis FMVCash $ 60,000 $ 60,000Inventory $ 27,000 $ 30,000Investments $ 13,000 $ 70,000

$100,000 $160,000

44

Calculation Of 734(b) Basis Adjustment (Cont.)

EXAMPLE 1: Distribution of cash result

Partner D realizes a gain of $15,000 = $40,000 cash distribution less $25,000 basis

Under Sect. 734(b), DEF Partnership is entitled to increase its inside basis in its assets by $15,000.

Under Sect. 755, the basis adjustment is allocated to the same property class as that in which the distributed property is included. Under the special rule of Regulations Sect. 1.755-1(c)(1)(ii), inside basis adjustments due to distributions of cash in excess of basis must be allocated to capital gain property. of basis must be allocated to capital gain property.

Therefore, DEF Partnership must allocate the $15,000 increase in inside basis to the investments.

45


EXAMPLE 2: Liquidating distribution of real estate

Partner A owns a 40% interest in ABC Partnership with an outside basis of $28,000. ABC Partnership liquidates Partner A’s interest by distributing land (Tract 2) with ABC Partnership liquidates Partner A s interest by distributing land (Tract 2) with an adjusted basis of $30,000 and FMV of $40,000. ABC Partnership’s balance sheet is as follows:

Adjusted Basis FMVCash $ 10,000 $ 10,000A/R $ 5,000 $ 5,000Land – Tract 1 $ 5,000 $ 25,000Land Tract 1 $ 5,000 $ 25,000Land – Tract 2 $ 30,000 $ 40,000Land – Tract 3 $ 20,000 $ 20,000

$ 70,000 $100,000

46


EXAMPLE 2 : Liquidating distribution of real estate result

Partner A would have a basis in Tract 2 of $28,000, causing $2,000 in “lost gbasis.”

If a Sect. 754 election is place, ABC Partnership must increase its basis in If a Sect. 754 election is place, ABC Partnership must increase its basis in its assets by $2,000. The property distributed was capital gain property (real estate). Accordingly, the $2,000 upward basis adjustment is allocated to capital gain property – Tracts 1 and 3. Sect. 755(b) p g p p y ( )

Tract 1 is the only asset with unrealized appreciation, so all $2,000 must be allocated to Tract 1. Sect. 755(a)(1) allocated to Tract 1. Sect. 755(a)(1)

47


EXAMPLE 3: Liquidating distribution of real estate

Partner D purchases Partner A’s 40% interest in ABC Partnership for $40,000. Then, ABC Partnership liquidates Partner D’s interest by distributing land (Tract 2) with ABC Partnership liquidates Partner D s interest by distributing land (Tract 2) with an adjusted basis of $30,000 and FMV of $40,000. ABC Partnership’s balance sheet is as follows:

Adjusted Basis FMVCash $ 10,000 $ 10,000A/R $ 5,000 $ 5,000Land – Tract 1 $ 5,000 $ 25,000Land Tract 1 $ 5,000 $ 25,000Land – Tract 2 $ 30,000 $ 40,000Land – Tract 3 $ 25,000 $ 20,000

$ 75,000 $100,000N t FMV f t hi t i t th 110% f b i t ti f t fNote: FMV of partnership assets is greater than 110% of basis at time of transfer.

48


EXAMPLE 3: Liquidating distribution of real estate result q gPartner A would have a basis in Tract 2 of $40,000, causing $10,000 in “acquired basis.”

Because FMV exceeded basis by more than 110% at time of transfer, Sect. 732(d) y ( )requires a Sect. 734(b) adjustment, even if no Sect. 754 election is in place.

ABC Partnership must decrease its basis in its assets by $10,000. The property distributed was capital gain property (real estate). Accordingly, the $10,000 p g p p y ( ) g ydownward basis adjustment is allocated to capital gain property – Tracts 1 and 3. Sect. 755(b)

Tract 3 is the only asset with unrealized depreciation, so the adjustment is firsty p jallocated to Tract 3 to the extent of the unrealized depreciation ($5,000). Regulations Sect. 1.755-1(c)(2)(ii)

The remaining $5,000 decrease is allocated between Tract 1 and Tract 3 in gproportion to their inside basis, taking into account the first allocation to Tract 3. Regulations Sect. 1.755-1(c)(2)(ii) (see next slide)

49


EXAMPLE 3 result (Cont.)

The remaining $5,000 decrease is allocated between Tract 1 and Tract 3 in proportion to their inside basis, taking into account the first allocation to Tract 3. Regulations Sect. 1.755-1(c)(2)(ii)

StartingBasis Percentage Adjustment Final Basis

Tract 1: $ 5,000 $5,000/$25,000 = 20% $5,000*20% = $1,000 $ 4,000Tract 3: $20,000 $20,000/$5,000 = 80% $5,000*80% = $4,000 $16,000

$ $Total $25,000 $20,000

50

COLLECTED ISSUES AND Craig Gerson, PricewaterhouseCoopers

COLLECTED ISSUES AND NUANCES OF PARTNERSHIP BASIS ADJUSTMENTS

Collected Issues Involving Basis AdjustmentsCollected Issues Involving Basis Adjustments

Agenda for this section

• Basis adjustments and partnership technical terminations

• Adjustments to the basis of stock of a corporate partner

• Contingent liabilities and allocations of basis adjustments

PwCSection 754 and Basis Adjustments

52

Basis Adjustments And Technical TerminationsBasis Adjustments And Technical Terminations

Technical terminations generally:Technical terminations generally:

• Partnership technical termination occurs when partners sell or exchange 50% or more of interests in partnership profits and exchange 50% or more of interests in partnership profits and capital within a 12-month period.

• Limited federal income tax consequences

• Partnership elections resetPartnership elections reset

• New partner gets basis adjustment if original partnership has Sect. 754 election or if the new partnership makes an election.

PwC 53Section 754 and Basis Adjustments

Basis Adjustments And TechnicalBasis Adjustments And TechnicalTerminations (Cont.)

Deemed steps:

• Contribution of

C A BSale

50% 50%

Contribution of assets/liabilities to new partnership

• Distribution of new

Old

Assets & LiabilitiesDistribution of new

partnership interests to continuing partners in liquidation of old partnership

New


Basis Adjustments And Technicalas s djust e ts d ec caTerminations (Cont.)

Basis adjustment allocation in taxable transaction

Basis adjustment allocation innon recognition transactionin taxable transaction non-recognition transaction

• Bi-directional adjustments permitted (increasing basis of some assets and

• Single directional adjustments okay(increasing basis of some assets and (decreasing basis of other assets)

• Adjustments permitted when net allocation is zero

• No adjustments permitted when net allocation is zero



Taxable exchange

C A BSale

50% 50%

g

Old

Assets & i bili i

Non-recognition exchangeLiabilities

g g

New



• Arguably, purchasing partners can elect which basis adjustment allocation scheme to apply by choosing whether to elect under allocation scheme to apply by choosing whether to elect under Sect. 754 for the new partnership.

• By purchasing an interest and subsequently transferring the By purchasing an interest and subsequently transferring the interest in a non-recognition transaction (e.g., a Sect. 351 transaction), the partner might avoid a decrease to the basis of assets if the partnership is allocating a positive basis adjustment.



ExampleExample

• C purchases A’s partnership interest and receives a basis adjustment of $100. The partnership has two assets: Asset #1 and Asset #2. On a sale of these assets, the partnership would

ll f f d l fp p

allocate gain of $140 to C from Asset #1 and loss of $40 to C from Assets #2.

All i All i Allocation Allocation on

on sale _distribution_

Asset #1 $140 $100

Asset #2 ($ 40) -


Adjustments To Basis Of StockAdjustments To Basis Of StockOf Corporate Partner

• Prior to 2004, partners could duplicate losses by disposing of partnership interest in a loss transaction and stepping down the partnership basis of partner stock. p p p

• Loss transaction examples:

• Sale of interest for lossSale of interest for loss

• Redemption of interest for cash for loss

• Redemption of interest for property, increasing basis in distributed propertydistributed property


Adjustments To Basis Of Stock OfAdjustments To Basis Of Stock OfCorporate Partner (Cont.)

• After reducing the basis of stock, partnership could distribute stock to corporate partner which could liquidate distributed stock to corporate partner, which could liquidate distributed company while retaining high basis in underlying assets.

• To prevent this result Congress enacted Sect 755(c) in 2004To prevent this result, Congress enacted Sect. 755(c) in 2004.



• Sect. 755(c) limits the ability of partnership to reduce basis of stock in “corporate partner.”

• Corporate partner is defined broadly to include any related • Corporate partner is defined broadly to include any related person under sections 267(b) or 707(b)(1).

• Basis reductions that would be applied against stock basis must instead reduce basis of other partnership assets.

• Partnership recognizes a gain if it does not hold other assets with sufficient basis.

• Partnership with gain under Sect. 755(c) should consider h th b tt lt b hi d d S t (f)whether better results can be achieved under Sect. 732(f).



Example:

• Asset 1 distributed to Sub 2 S b 1 S b 2

PY

• Asset 1 distributed to Sub 2 in redemption of its interest.

• Reduction to CFC stock is

Sub 1 Sub 2

AB = 100

49%

disallowed under Sect. 755(c).

• Partnership has no other assets, so it must recognize a $100 gain CFC Asset 1

LLC

must recognize a $100 gain. CFC Asset 1

AB = $0

FMV = $100

AB = $100

FMV = $100


Basis Adjustments And Contingent LiabilitiesBasis Adjustments And Contingent Liabilities

Contingent liabilities generally:Contingent liabilities generally:

• Partnership “contingent” liabilities are obligations that have not yet given rise to basis or a deduction for tax purposesyet given rise to basis or a deduction for tax purposes.

• Examples:

• Employee benefits

C i l t t l i• Commercial or tort claims

• Environmental remediation


Basis Adjustments And ContingentBasis Adjustments And ContingentLiabilities (Cont.)

Liabilities and Sect 743(b) basis adjustmentsLiabilities and Sect. 743(b) basis adjustments

• Ordinary partnership tax liabilities do not affect partnership basis adjustments under Sect 743(b)basis adjustments under Sect. 743(b)

• Sect. 743(b) adjustment equals:

• Outside basis (inclusive of allocated liabilities),

lless

• Previously taxed capital plus allocated liabilities.

• Sect. 752 liabilities cancel each other out in this equation.



Liabilities and Sect. 743(b) basis adjustments (Cont.)

Th ff f i bli i hi b i • The effect of contingent obligations on partnership basis adjustments under Sect. 743(b) is less clear.

• Contingent obligations are not treated as “liabilities,” for purposes of calculating Sect 743(b) adjustmentpurposes of calculating Sect. 743(b) adjustment.

• However, a contingent obligation may function as a “negative asset,” which would reduce the basis adjustment amount.



Is a contingent obligation a “partnership asset”?

TR (b)( ) id h i li bili i h • TR 1.752-7(b)(3) provides that a contingent liability is one that has not given rise to tax basis or a deduction.

TR ( ) id th t ti (b) d ( ) l t • TR 1.752-7(c) provides that sections 704(b) and 704(c) apply to contingent liabilities.



If the contingent obligation is a partnership asset it affects the If the contingent obligation is a partnership asset, it affects the calculation of the step up:

Example: Assume $100 purchase of partnership interest; purchaser’s share of asset has $120 value, $60 basis, $20 contingent liability.g y

Treated as Asset Not Treated as Asset

Outside Basis $100 $100Outside Basis $100 $100

Less sum of:

Cash on liquidation $80 $80

l i i t ($60) ($60)less gain in assets ($60) ($60)

plus loss in assets $20 -__

($40) ($20)


Sect. 743(b) adjustment $60 $80


• The treatment of the contingent obligation also affects the allocation of the adjustment in the partnership.allocation of the adjustment in the partnership.

• The regulations under Sect. 755 describe allocations of basis adjustments to “partnership property.” adjustments to partnership property.

• A contingent liability functions like a negative built-in loss asset.


Basis Adjustments And Technical TerminationsBasis Adjustments And Technical Terminations

Example

• C receives a basis adjustment of $100 on the purchase of a • C receives a basis adjustment of $100 on the purchase of a partnership interest. The partnership has one asset, Asset #1. On a sale of this asset, the partnership would allocate gain of $140 to C. In addition, the partnership has a contingent liability which, when paid, will generate a $40 deduction to Cwill generate a $40 deduction to C.

Treated as Property Not Treated as Property

Asset #1 $140 $100

Contingent liability ($ 40) -_

Total adjustment $100 $100



Should the contingent liability be treated as partnership “property”?Should the contingent liability be treated as partnership property ?

Yes? No?

• Treating contingent liability as property is most consistent with purpose of basis

• Sect. 755 applies to “property”, and Sect. 743(b) applies to assets; neither applies to with purpose of basis

adjustment and allocation rules.

• TR 1 752-7 treats contingent

pppartnership obligations.

• TR 1.752-7 treats contingent liability as built-in loss property.


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