beehler footnotes

Beehler footnotes

¹TD 8847 (12/15/99).

²Unless otherwise noted, Sec. 751(b) does not apply to any of the examples in this article; Sec. 736(a) does not apply in any example in which a partner’s interest is liquidated.

³For this reason, Sec. 754 allows the election of basis adjustments under Secs. 734 and 743. The total adjustment is determined under Sec. 734(b) or 743(b) (and the regulations thereunder); allocation of the adjustment occurs under Sec. 755 (and the regulations thereunder).

⁴There is debate among commentators as to whether gain and income items increase outside basis before distributions (other than draws) reduce it. Compare McKee, Nelson and Whitmire, Federal Taxation of Partnerships and Partners (WGL, 3d ed., 1997 and 2000 Cum. Supp., No. 1, Vol. 1), 6.02[5], 10.05[2][a] and 10.03[2] to Willis, Pennell and Postlewaite, Partnership Taxation (WGL, 6th ed., 1997), 13.02[i][6]; see also Rev. Rul. 94-4, 1994-1 CB 195. In this article, it is assumed that gain and income items increase outside basis before distributions reduce it.

⁵The final regulations give examples only for liquidating distributions, because both the increase and decrease procedures apply to them.

⁶Under pre-TRA ’97 law, D would have taken a $3,000 basis in Inventory A and a $6,000 basis in Inventory B.

⁷Sec. 732(a)(2). For both liquidating and nonliquidating distributions, a partner recognizes capital gain if the cash distributed exceeds his predistribution outside basis.

⁸The last two sentences of Sec. 751(c), flush language, contain a complete description of items included as unrealized receivables.

⁹A similar bifurcation of assets is delineated in Regs. Sec. 1.751-1(c)(4)(iii), (v) and -1(c)(5).

¹⁰Actually, Capital asset 1 has $25,000 of unrealized depreciation in A’s hands ($50,000 adjusted basis 2 $25,000 FMV).

¹¹A computer model was developed for the decrease procedure. Inputs were systematically varied to determine the effect of various factors, including the land’s original basis, the relative amounts of increase/decrease in the equipment’s and land’s FMV and the relative values of the equipment and land distributed; the partner’s outside basis was held constant. For the facts presented, the results were always consistent with the theory that more basis is allocated to the equipment under the decrease procedure when it is distributed with appreciated land.

¹²The scenario presented assumes a liquidating distribution to a partner in which the FMV of the assets distributed (i.e., equipment and land) equals the partnership interest’s FMV. For other scenarios (e.g., nonliquidating distributions in which the FMV equality assumption would not apply), the results would not necessarily support the same conclusions. A tax professional should perform an independent analysis of alternatives to reach the appropriate conclusions.

¹³A computer model was developed for the increase procedure. Because the procedure applies only to liquidating distributions, it was assumed that the FMV of the assets distributed equaled the partnership interest’s FMV. Inputs were systematically varied to determine the effect of various factors, including the land’s original basis and the equipment’s and land’s relative FMVs; the partner’s outside basis was held constant. The results were always consistent with the theory that it is better to distribute appreciated land to increase the basis allocated to the equipment. The same results occur when the distributed assets’ relative FMVs were changed. The basis allocated to the equipment decreased when the land’s relative FMV was increased vis--vis the equipment’s FMV; however, the theory that it is better to distribute appreciated land with the equipment still held.

¹⁴Regs. Sec. 1.743-1(g)(3) and (5), Example (v). However, in both article Example 15 and the regulation example, the Sec. 743(b) adjustment is allocated under Sec. 755 to capital gain property (as defined in the Sec. 755 regulations); capital gain property is distributed to the transferee partner in the latter’s complete liquidation. If, instead, the transferee partner had received only cash in complete liquidation, the adjustments would be lost to the transferee/distributee; these adjustments become part of the common basis of remaining partnership property; see Regs. Secs. 1.743-1(g)(1)(ii) and 1.734-2(b).