After the webinar, Chuck, Michael and Scott answered multiple questions from attendees posed both during and after the live session. The questions were insightful, and the answers expand on the important information shared during the April 29th webinar.

Question: Would a mandatory downward basis adjustment under §743(d) create a §754 election, if one is not in place, or would the partnership still have the choice to make the §754 election in subsequent tax years?

Answer: The adjustment takes place on the sale of a partnership interest or the death of a partner when partnership assets have a tax basis that is more than $250,000 in excess of the fair market value of partnership assets. However, it is a one-time event, and the partnership is free to decide whether to make a §754 election in subsequent years, if there is a “transfer” of an interest that qualifies for a §754 election.

 

Question: A partner dies and there is a more than $250,000 step-down in basis of the partnership interest in the hands of the successor in interest (and the partnership does not have a §754 election in effect). Is there a mandatory downward basis adjustment?

Answer: Not necessarily. If the basis in partnership assets does not exceed their value by more than $250,000, there is no mandatory downward basis adjustment. This “disconnect” can occur by reason of the partnership interest being stepped down as a result of valuation discounts (such as a discount for lack of control and/or lack of marketability).

 

Question: When a partner is redeemed at a loss of $250,000 or less when a §754 election is not in effect, what happens to the partner’s tax capital account that is not eliminated because there is no mandatory downward basis adjustment under §734(d)?

Answer: There is no clear IRS guidance; however, many tax professionals would create a liability/equity account entitled “Transferred Capital,” or something of the sort. What generally is not done is to transfer the capital to the accounts of the continuing partners, because any transfer would create the illusion that they have more tax basis than they actually have.

 

Question: Would the Revenue Ruling 84-53 unified basis rule (i.e., a taxpayer has a single basis for his/her partnership interest when the there are multiple acquisitions of the partnership interest) apply to an interest held by a partner individually and another interest held in a grantor trust for which the partner is the grantor?

Answer: Yes, because notwithstanding that the grantor trust separately owns the partnership interest for economic purposes, the grantor trust is considered the partner’s alter ego and the partner is considered to own the trust’s partnership interest for federal income tax purposes. As a result, Rev. Rul. 84-53 would require the basis of both partnership interests to be combined.

 

Question: In the case of a divorce, if one spouse is awarded property for which real property depreciation was taken by the other spouse, would the ultimate owner of the property be subject to the 25% unrecaptured section 1250 gain rate with respect to the depreciation taken by the now non-owner spouse?

Answer: While we are not aware of any specific authority addressing the question, our view is yes, i.e., there would be a step-in-the-shoes rule.

 

Question: Can real estate ever be treated as a hot asset in a situation where the taxpayer is not a dealer in real estate?

Answer: Yes, where the real estate (1) is being used in a trade or business, and, consequently, is not a capital asset under §1221, and (2) has not yet been held for a period in excess of one year, so it is not yet a §1231 asset until it has been held by the taxpayer in excess of one year, it would be considered to be an inventory item under §751(d).”

 

If you were unable to attend the webinar, or you want to review the presentation, here is a link to the program. If you have additional questions, don’t hesitate to contact us.

Consider joining us this year at either our Fundamentals of Flow-Through® or Tax Planning Forum® programs. Get a head start on extension season and sharpen your flow-taxation skills by attending either spring Fundamentals programs, offered May 19-21 or June 23-25.