Category: Partnerships Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com I refer to our discussion regarding a 50%-or-greater partner that is bought out by another party, thus terminating the partnership under Section 708(b)(1)(B). Under the old 708 regulations, there was a deemed distribution of property to the partners followed by a re-contribution of that property to a new partnership either for winding up or dissolution. That deemed distribution of property caused a step-up (or down) in the basis of the partnership's assets based on the purchase price paid to the buyout partner. See Section 731. An election under Section 754 was needed only to control how the step-up was allocated among the various partnership assets. Also, a Section 732(d) election could be made at the partner level if the partnership missed the 754 election or did not want to make one for some reason. Under the new 708 rules, there is no deemed distribution of partnership property. Without it, Section 731 is inapplicable and a Section 754 election in the old partnership (the terminated one) is mandatory in order to enjoy any step-up in basis resulting from the buy out. The new 708 rules are effective for terminations after May 7, 1997. I think you told me the termination happened March 31, 1997. If so, the transaction is covered by the old rules. In that case, a 754 election is not mandatory in order to enjoy the step-up, but it may be desirable. The step-up must be allocated among partnership assets. If there is no 754 election, the step-up is allocated relative to the inside basis of partnership assets. With a 754 election, the step-up is allocated relative to the difference between fair market value and inside basis. This can make a big difference to the resulting basis inside the partnership. Sometimes the 754 election helps, sometimes not. I will call you early this morning and we can walk through the process of making the decision. In order to do this, we need to have a feel for the fair market value of each broad class of assets plus we need to know the inside basis of each class. Attached is a computation I did for another client showing the effect of making the election versus not. In this case, it so happened that it was not terribly clear whether the election would help or not. Often it is very clear cutthe election is either a terrific idea or a terrible idea. In these cases, the election can often provide the opportunity to allocate significantly more of the step-up to depreciable assets such as buildings and away from non-depreciable ones such as land. Clearly, the election can also have the opposite effectallocation of the step-up towards non-depreciable property and away from other depreciable categories. |
