The Internal Revenue Code Provided Adjustments

1726 WordsMar 17, 20177 Pages
Drafters of the Internal Revenue Code provided adjustments to the basis of partnership property as a consequence to the sale or exchange of a partnership interest, including transfer of such an interest on the death of a partner provided the partnership made an election or the partnership has a substantial built-in loss. Absent a basis adjustment, the incoming/transferee partner will be taxed on the same gain when realized by the partnership if the interest transferred had appreciated. The selling/transferor partner will recognize gain the sale regardless of consequences to the remaining partners and partnership. Likewise if the partnership interest depreciated, the transferor partner would recognize a loss on the sale, and the…show more content…
II. Section 743(b) Mechanics Section 743(b) provides for a special adjustment to the basis of partnership assets to take into account the amount that the buyer actually paid for his interest in each of those assets. The special basis adjustment is intended to reduce the buyer’s outside basis and inside basis disparity. This adjustment is deemed “special” because it is unique to the transferee partner, without affecting the partnership’s basis in the assets. Equality between inside basis and outside basis in Subchapter K is central to its configuration. Partnerships are intended to provide taxpayers with an entity carrying a single layer of tax. The inside-outside basis equality ensures that result. Absent nonrecognition provisions, when a third party purchases, or receives by bequest, a partnership interest, the transferee’s receives cost basis or fair market value basis. That cost includes the partnership liabilities attributable to the acquired interest. Section 743(a) disrupts Subchapter K’s goal of basis uniformity by leaving the basis in partnership assets unaffected by transfer of a partnership interest. The undisturbed basis most likely leaves the transferee partner with basis different from the seller and from that interest’s share of the partnership’s inside basis. As an entity, the purchaser obtains fair-market-value basis in the purchased interest, but not in his share of the partnership’s assets. Consequently, if the
Open Document