Study Outline For:

Partnership Taxation

Module 5C

Sales and Click to view Lecture  Section:
Exchanges
Section C. Section 743(b) Adjustment Rules
Please browse the following Statutes that pertain to this portion of the module:
 
 
IRC Section 743
 
 
Adjustments for Sales or Exchanges
If a partner makes or has previously made an election under Section 754, the basis of property is adjusted under Section 743(b). This is done to reflect the difference between the partner's outside basis and the inside basis of the assets attributable to the partner's interest. Events that trigger the basis adjustments under Section 743(b) may be either the:
  • sale or exchange of a partnership interest', or
  • death of a partner.

The result of the adjustment is, for purposes of depreciation, depletion, gain or loss, that the transferee partner has a special basis for his or her share of the partnership assets. Basis adjustments can include increases and decreases.

Increases to basis: The transferee partner's basis for his/her share of partnership assets is increased by the excess of his/her basis in the partnership interest over such partner's share of the adjusted basis of partnership property.

Decreases to basis: The transferee partner's basis for his/her share of partnership assets is decreased by the excess of his/her share of the adjusted basis for all partnership property over such partner's basis in his/her partnership interest. The basis adjustment is personal to the partner whose change in basis necessitated the adjustment. That partner will be the only partner to be affected by the increased or decreased depreciation, gain, or loss. Reg. Sec. 1.743-1(b)(1)

On a subsequent sale by a partner who has had a section 743(b) adjustment made on his/her behalf, the new Section 743(b) adjustment for the purchasing or transferee partner is computed without regard to the earlier Section 743 adjustment made by the transferor partner. Reg. Sec. 1.743-1(b)(2)(iv) The allocation of Section 743(b) adjustments is determined in accordance with the rules of Section 755 discussed in the next subsection.

Study Questions  Make your selection by clicking the appropriate response letter.
1.
RST, an equal three-person partnership, has cash of $9,000 and securities of $45,000 (FMV) with an adjusted basis of $30,000 to the partnership. Assume that R sells his interest to U for $18,000. If the new partnership subsequently sells the securities at the FMV of $48,000, what will U have to pay tax on, if a Section 754 election is in effect?
 
$0
$1,000
$6,000
 
$16,000
2.

C is an equal partner in the ABC partnership. The partnership has made the election under Section 754. C sells her interest to E for $99,000 when her basis was $88,000. At year-end the assets of the partnership are as follows:

 
Basis
Market
Cash
$ 22,500
$ 22,500
Accts. Receivable
45,000
45,000
Inventory
90,000
94,000
Other Assets
90,000
180,000
Total
$247,500
$342,000

What is the basis of E's interest in the partnership?
 
$99,000
$114,000
$ 82,500
 
$ 85,000
3.

C is an equal partner in the ABC partnership. The partnership has made no election under Section 754. C sells her interest to E for $99,000 when her basis was $88,000. At year-end the assets of the partnership are as follows:

 
Basis
Market
Cash
$ 22,500
$ 22,500
Accts. Receivable
$ 45,000
$ 45,000
Inventory
$ 90,000
$ 94,000
Other Assets
$ 90,000
$180,000
Total
$247,500
$342,000

Assuming C's outside basis equals the partnership's inside basis, what is E's basis in the partnership assets at the date of purchase?

 
0
$ 88,000
$ 82,500
 
$ 114,000
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