Category: Real Estate; Deductions & Credits;
Partnerships & LLCs Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Individual taxpayer (TP) is a California resident and a partner in a family partnership (FP). TP's interest in FP is a community asset. In 1991, FP contributed two parcels of real estate to two separate development partnerships (DP1 and DP2). The aggregate value of the parcels at the time of contribution was $1.2 million and the tax basis was $200,000. The parties intended to develop the real estate. During 1991 and 1992 TP's partner (Developer) in the two development partnerships embezzled funds from both partnerships. The partner is now being prosecuted by local authorities. The parties ultimately decided not to develop the properties and in 1993 Developer assigned his interest in DP1 and DP2 to FP. DP1 and DP2 were simultaneously dissolved. No partnership returns have been filed since 1991. TP's wife died in 1993. As a result of her death, the basis of TP's interest in FP is stepped up to its fair market value at the date of death (or alternate valuation date, if so elected). TP wants a step-up in the basis of his proportionate share of the real estate held by DP1 and DP2. The issues are as follows. 1. When should DP1 and DP2 claim the theft loss resulting from Developer's embezzlement? 2. What is needed in order to get a stepped-up basis in TP's
proportionate share of the real estate held by DP1 and DP2? Issue 2 In this situation, there are three partnerships involved, two lower-tier partnerships (DP1 and DP2) and an upper-tier partnership, FP. Since the basis of FP was transferred by reason of death, the issue is whether a §754 election at FP is effective at DP1 and DP2. Revenue Rulings 92-15, IRB 1992-12, and 87-115, 1987-2 CB 163, provide that a §754 election must be made at both the lower-tier and the upper-tier partnerships in order to affect the basis of the lower-tier property as a result of a transfer of an upper-tier interest. In addition, the §754 regulations provide that the election must be made on a timely filed partnership return. The election must be made in the return covering the year in which the transfer occurred, i.e., 1993. Since partnership returns for DP1 and DP2 were not timely filed for 1993, it is not possible to make a normal §754 election to affect the basis of property held by DP1 and DP2. As we discussed, there is a procedure which allows consideration of late elections. Since DP1 and DP2 were dissolved in 1993, inability to make an effective election under §754 may not be an issue. If FP makes a valid §754 election in its timely-filed 1993 return, FP's basis in TP's share of its interests in DP1 and DP2 would be stepped up. On liquidation, the basis under §732(b) of TP's share of property distributed to FP in liquidation of DP1 and DP2 would be the basis of TP's share of FP's partnership interest. Since the basis of TP's share of FP's interest in DP1 and DP2 has been stepped up to fair market value by virtue of FP's §754 election, a step-up in basis of the real estate occurs without an effective §754 election by DP1 and DP2. |
