IRC 754: Partnership and Pass-Through Entity Basis Adjustments Mastering Election Rules and Tackling Complex Decisions for Distributions and Sales of Interests

TUESDAY, JANUARY 21, 2014, 1:00-2:50pm Eastern

WHOM TO CONTACT

For Additional Registrations:

-Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10)

For Assistance During the Program:

- On the web, use the chat box at the bottom left of the screen

- On the phone, press *0 (“star” zero)

If you get disconnected during the program, you can simply call or log in using your original instructions and PIN.

IMPORTANT INFORMATION

This program is approved for 2 CPE credit hours. To earn credit you must:

• Participate in the program on your own computer connection and phone line (no sharing) – if you need to register

additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford accepts American

Express, Visa, MasterCard, Discover.

• Respond to verification codes presented throughout the seminar. If you have not printed out the “Official Record of

Attendance”, please print it now. (see “Handouts” tab in “Conference Materials” box on left-hand side of your computer

screen). To earn Continuing Education credits, you must write down the verification codes in the corresponding spaces found

on the Official Record of Attendance form.

• Complete and submit the “Official Record of Attendance for Continuing Education Credits,” which is available on the

program page along with the presentation materials. Instructions on how to return it are included on the form.

• To earn full credit, you must remain on the line for the entire program.

Sound Quality

Call in on the telephone by dialing

1-866-873-1442 and enter your PIN when prompted, and view the presentation slides online.

If you have any difficulties during the call, press *0 for assistance. You may also send us a

chat or e-mail sound@straffordpub.com so we can address the problem.

Viewing Quality

To maximize your screen, press the F11 key on your keyboard. To exit full screen,

press the F11 key again.

If you have not printed or downloaded the conference materials for this program, please

complete the following steps:

• Click on the ^ sign next to “Conference Materials” in the middle of the left-hand column

on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a PDF of the

slides and the Official Record of Attendance for today's program.

• Double-click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

IRC 754: Partnership and Pass-Through Entity Basis Adjustments

Dina Wiesen, Deloitte

dwiesen@deloitte.com

Jan. 21, 2014

Lawrence Staat, Harrison Held

lstaat@HarrisonHeld.com

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

5

BASIS OVERVIEW, SECT. 754, 734, 743 AND TIERD PARTNERSHIPS

Dina Wiesen, Deloitte

Agenda

• Overview/Introduction to Basis Adjustments

• Section 754

• Section 734

– Common issues, allocation, and example

• Section 743

– Common issues, allocation, and example

• Section 754 Tiered Partnerships

7

Section 754

8

– Election to adjust basis of partnership property

– If made, partnership must adjust basis pursuant to sections 734(b) and 743(b)

– Election is made on a timely-filed partnership return. See Reg. § 301.9100-2 for 12 month extension of time to file election

– Once made, election is effective for all future years unless revoked with approval of district director

– Mandatory adjustments without section 754 election in some cases

Section 734(a) – General Rule

The basis of partnership property shall not be adjusted as the result of a distribution of property to a partner unless the election, provided in section 754 (relating to optional adjustment to basis of partnership property), is in effect with respect to such partnership or unless there is a substantial basis reduction with respect to such distribution.

9

Partnership Distributions

• Current Distributions – Any distribution if, after the distribution, the distributee

remains a partner

– Gain or loss recognized by distributee? • Generally, no gain or loss recognized

• Exception: gain recognized if amount of cash distributed exceeds partner’s outside basis

– Basis considerations • Distributee generally takes a carryover basis in the distributed

property, but basis is limited to the distributee’s outside basis

• Distributee partner reduces its outside basis by basis taken in distributed property

10

Partnership Distributions

• Liquidating Distributions – Any distribution if, after the distribution, the distributee is

no longer a partner

– Gain or loss recognized by distributee? • Generally, no gain or loss recognized

• Gain recognized if cash distributed exceeds partner’s outside basis

• Loss recognized if: – Only cash, unrealized receivables, and/or inventory are distributed, and

– Amount of money and inside basis of assets distributed are less than distributee’s outside basis

– Distributee takes a substituted basis in distributed property after its outside basis has been reduced for any cash received

11

Section 743(a) – General Rule

The basis of partnership property shall not be adjusted as the result of a transfer of an interest in a partnership by sale or exchange or on the death of a partner unless the election provided in section 754 (relating to optional adjustment to basis of partnership property) is in effect with respect to such partnership or unless the partnership has a substantial built-in loss immediately after such transfer.

12

Basis Adjustments - Overview

• Section 754 – Election/mandatory

• Section 734(b) – Distribution of property/cash

• Section 743(b) – Transfers of partnership interest

13

Mandatory Basis Adjustments

• Where there is a “substantial basis reduction” or a “substantial built-in loss,” sections 734(b) and 743(b) require basis adjustments – A substantial basis reduction for purposes of section 734(b) is a

downward adjustment of more than $250,000

– A substantial built-in loss for purposes of section 743(b) exists when the partnership’s basis in the assets exceeds the assets’ fair market value by more than $250,000

– Rules under sections 734(b) and 743(b) do not apply to securitization partnerships

– Section 743(b) basis adjustments to partnership assets do not apply to certain electing investment partnerships

14

Section 755 Allocation Rules: Section 734(b) Adjustment • First apply general rule of section 755(b) and divide

partnership assets into two classes: (1) Capital and section 1231(b) assets, and (2) All other assets

• If distributee partner recognizes gain or loss because of the distribution, the section 734(b) adjustment is allocated to the capital and section 1231(b) class of assets

• If distributee partner takes distributed asset with a basis different from partnership’s basis immediately before the distribution, amount of difference is allocated to same class of asset as distributed property

15

X, Y, and Z are equal partners in partnership XYZ Capital Partners LP. On January 1, 2011, XYZ’s balance sheet was as follows (amounts are in thousands): Assets

Book Tax FMV

Cash $300 $300 $300

Securities $1500 $1500 $600

Total $1800 $1800 $900

Section 734(b) Example

Capital Accounts

Book Tax FMV

X $600 $600 $300

Y $600 $600 $300

Z $600 $600 $300

Total $1800 $1800 $900

16

Section 734(b) Example (cont.)

On January 1, 2011, XYZ Capital Partners LP redeems Z for $300,000. XYZ does not have a section 754 election in place.

• The redemption of Z is a liquidating distribution

• Z redeems his partnership interest for $300,000 and has an outside basis of $600,000. Therefore Z recognizes a loss of $(300,000).

• XYZ does not or cannot allocate Z losses in a fill-down allocation

• XYZ must reduce the basis of partnership assets due to the substantial basis reduction under section 734(b)

17

Immediately after Z’s redemption, XYZ Capital Partners LP’s balance sheet is as follows (amounts are in thousands):

Assets

Book Tax FMV

Cash $0 $0 $0

Securities $600 $1500 $600

Securities 734(b) $(300)*

Total $600 $1200 $600

*the basis adjustment would be allocated to the securities according to section 755

Section 734(b) Example (cont.)

Capital Accounts

Book Tax FMV

X $300 $600 $300

Y $300 $600 $300

Total $600 $1200 $600

18

Section 755 Allocation Rules: Section 743(b) Adjustment • Section 743(b) basis adjustment allocated to partnership

assets generally equals gain or loss that would be allocated to the transferee from a hypothetical transaction where immediately after the transfer of the partnership interest all of partnership property is sold in a fully taxable transaction for fair market value

• Basis adjustments arising from the same transfer can be positive and negative

• Special rules for substituted basis transaction under Treas. Reg. §1.755-1(b)(5)

19

X, Y, and Z are equal partners in partnership XYZ Capital Partners LP. On January 1, 2011, XYZ’s balance sheet was as follows (amounts are in thousands): Assets

Book Tax FMV

Cash $300 $300 $300

Securities $1500 $1500 $600

Total $1800 $1800 $900

Section 743(b) Example

Capital Accounts

Book Tax FMV

X $600 $600 $300

Y $600 $600 $300

Z $600 $600 $300

Total $1800 $1800 $900

20

Section 743(b) Example (cont.)

On January 1, 2011, X acquires Z’s one-third interest in Capital Partners LP $300,000. XYZ does not have a section 754 election in place. • The sale from Z to X is a trigger event under section 743(b)

• XYZ’s basis in its assets is $1,800,000 while the FMV is $900,000. Therefore XYZ has a substantial built-in loss immediately after the sale.

• X’s proportionate share of inside basis is $600,000 while the outside basis in the purchased partnership interest is $300,000.

• XYZ must reduce the basis of partnership assets by $300,000 due to the excess inside basis over outside basis of the transferred partnership interest

• The basis adjustment only impacts X

21

Immediately after X’s acquisition, XYZ Capital Partners LP’s balance sheet is as follows (amounts are in thousands):

Assets

Book Tax FMV

Cash $300 $300 $300

Securities $1500 $1500 $600

Securities 743(b) $(300)*

Total $1800 $1500 $900

*the basis adjustment would be allocated to the securities according to section 755

Section 743(b) Example (cont.)

Capital Accounts

Book Tax** FMV

X $1200 $900 $600

Y $600 $600 $300

Total $1800 $1500 $900

** outside basis

22

Section 754: Tiered Partnerships

• Rev. Rul. 87-115 – Upper-tier and lower-tier partnership must have election “in effect” in

order to push section 743(b) adjustment down to lower-tier’s assets

• Rev. Rul. 92-15 – Upper-tier and lower-tier partnership must have election “in effect” in

order to push section 734(b) adjustment down to lower-tier’s assets

• Allocation of step-up among upper-tier partnership’s assets under section 755 – Interest in lower-tier partnership treated as a capital asset for

purposes of section 755, regardless of lower-tier partnership’s asset composition

23

Slide Intentionally Left Blank

SCENARIOS

Lawrence Staat, Harrison Held

Storyline

1. At the beginning of Year 1, H and W each contribute $2,500,000 to a new LLC in exchange for a 50% membership interest. They are co-managers of the LLC. The LLC purchases an apartment building for $5,000,000.

2. In Years 1 – 4, the LLC operates the apartment building and generates cash which the LLC distributes to the H&W except for $100,000 which it retains and invests each year in marketable securities

3. At the beginning of Year 5, H dies and his LLC interest is transferred to a marital trust (MT) for his W and children.

4. The LLC makes the standard 754 election and makes the required calculations under 743(b).

5. In Years 5 – 9, the LLC operates the apartment building and generates cash which the LLC distributes to MT and W except for $100,000 which it retains and invests each year in marketable securities.

6. At the beginning of Year 10, W dies and her LLC interest is transferred to a trust (WT) for her children.

7. At the beginning of Year 11, the LLC distributes the marketable securities non-proratably to the two trusts and retains the apartment building.

26

1. At the beginning of Year 1, H and W each contribute $2,500,000 to a new LLC in exchange for a 50% membership interest. They are co-managers of the LLC. The LLC purchases an apartment building for $5,000,000.

LLC Balance Sheet FMV Basis

Assets

Building $4,000,000 $4,000,000

Land $1,000,000 $1,000,000

Total $5,000,000 $5,000,000

Liabilities $0 $0

Capital

H $2,500,000 $2,500,000

W $2,500,000 $2,500,000

Total $5,000,000 $5,000,000

27

2. In Years 1 – 4, the LLC operates the apartment building and generates cash which the LLC distributes to the H&W except for $100,000 which it retains and invests each in marketable securities The LLC depreciates the building over 27.5 years at $150,000 per year. Depreciation Allowance LLC H W

Building $4,000,000

Years 27.5

Dep (year) $145,455

Rounded $150,000 $75,000 $75,000

28

29

3. At the beginning of Year 5, H dies and his LLC interest is transferred to a marital trust (MT) for W and his children.

LLC Balance Sheet FMV Basis Gain (Loss) MT’s Share 50%

Assets

Building $6,000,000 $3,400,000 $2,600,000 $1,300,000

Land $1,500,000 $1,000,000 $500,000 $250,000

Marketable Security A $120,000 $100,000 $20,000 $10,000

Marketable Security B $150,000 $100,000 $50,000 $25,000

Marketable Security C $90,000 $100,000 ($10,000) ($5,000)

Marketable Security D $60,000 $100,000 ($40,000) ($20,000)

$7,920,000 $4,800,000 $3,120,000 $1,560,000

Liabilities $0 $0

Capital

MT $3,960,000 $2,400,000 $1,560,000 $1,560,000

W $3,960,000 $2,400,000 $1,560,000 Total $7,920,000 $4,800,000 $3,120,000

Slide Intentionally Left Blank

3(a). Notice the Following:

1. If the LLC sells all of its assets, the LLC will realize a gain of $3,120,000 and MT’s share will be $1,560,000.

2. If the LLC continues to operate the apartment building, the LLC will continue to depreciate the building at a rate of $150,000 per year, and MT’s share will be $75,000.

3. MT’s basis in its LLC interest (MT’s outside basis) is stepped up to its FMV at H’s date of death. Though the FMV of the LLC’s assets if $7,920,000, and MT’s share is $3,960,000, the FMV of MT’s interest in the LLC is only $3,366,000 due to discounts for lack of control (DLOC) and lack of marketability (DLOM), totaling $594,000, calculated as follows.

FMV of MT’s Interest (MT’s Outside Basis (Post-Death))

MT’s share of FMV LLC assets $3,960,000

DLOC/DLOM 15% ($594,000)

Outside basis (742) $3,366,000

31

3(b). If a 754 Election is Made, MT Will Benefit as

Follows:

1. If the LLC sells all of its assets, the LLC will still realize a gain of $3,120,000, but MT’s gain will be reduced $966,000 from $1,560,000 to $594,000.

2. If the LLC continues to operate the apartment building, the LLC will continue to depreciate the building at a rate of $150,000 per year, but MT’s depreciation amount will be increased by $30,000, from $75,000 to $105,000.

32

4. LLC makes the 754 election and makes the required calculations under 743(b).

(a). First the LLC calculates the amount of the 743 adjustment to be made to MT’s share of the LLC’s basis in its assets (inside basis).

743 Adjustment Amount (1.743-1(b))

MT’s outside basis (742) $3,366,000

MT’s inside basis (1.743-1(s)1) $2,400,000

743 Adjustment Amount (positive) $966,000

(b). Next, the LLC allocates MT’s 743 adjustment amount between two classes of assets (ordinary income assets and capital gain assets) based on the amount of gain/loss in each class and then among the assets in each class by calculating the 755 allocation amount for each asset. In this example, there are no ordinary income assets, so all of MT’s 743 adjustment amount is allocated among capital gain assets. No adjustment is made to W’s basis.

33

4(b)(1). 1.755-1(b)(3)(ii) Allocation of 743 Adjustment Amount Among Capital Assets

34

1 2 3 4 5 6 7 8 9 10 11

(7+9) 12

(8+10) 13

(11+12)

Share of Gain/Loss 755 Allocation Amount Share of Adjusted Basis Inside Basis

Assets Value at H's DoD (d)

Adjusted Basis at H's DoD (d)

Gain/Loss at H's DoD MT 50% W 50% MT W MT 50% W 50% MT W X-Total

Building $6,000,000 $3,400,000 $2,600,000 $1,300,000 $1,300,000 $850,000 $0 $1,700,000 $1,700,000 $2,550,000 $1,700,000 $4,250,000

Land $1,500,000 $1,000,000 $500,000 $250,000 $250,000 $137,500 $0 $500,000 $500,000 $637,500 $500,000 $1,137,500

Marketable security A $120,000 $100,000 $20,000 $10,000 $10,000 $1,000 $0 $50,000 $50,000 $51,000 $50,000 $101,000

Marketable security B $150,000 $100,000 $50,000 $25,000 $25,000 $13,750 $0 $50,000 $50,000 $63,700 $50,000 $113,750

Marketable security C $90,000 $100,000 ($10,000) ($5,000) ($5,000) ($11,750) $0 $50,000 $50,000 $38,250 $50,000 $88,250

Marketable security D $60,000 $100,000 ($40,000) ($20,000) ($20,000) ($24,500) $0 $50,000 $50,000 $25,500 $50,000 $75,500

Total capital assets $7,920,000 $4,800,000 $3,120,000 $1,560,000 $1,560,000 $966,000 $0 $2,400,000 $2,400,000 $3,366,000 $2,400,000 $5,766,000

4(b)(2). Calculation of the 755 Allocation Amount for MT’s Basis in Building 1.755-1(b)(3)(ii). Effect on MT’s Gain

35

1 2 3 4 5 6 7

Basis Gain(Loss) Effect of 755 Allocation Amount on Building Gain (1.743-1(j)(3)(i)

MT's share of LLC's gain on building $1,300,000 $1,300,000 MT's share of gain on all assets $1,560,000

MT's 743 Adjustment Amount (positive) ($966,000) MT's share of gain on all assets after 743 adjustment $594,000 $594,000 Numerator: FMV Building $6,000,000 Denominator: FMV all assets $7,920,000 FMV building as % of FMV all assets 75.7576% 75.7576%

MT's share of gain after 743 adjustment, allocated to building $450,000 ($450,000) 755 allocation amount for MT's basis in building $850,000 $850,000 ($850,000) MT's share of LLC basis in builidng $1,700,000 MT's inside basis in building $2,550,000 ($2,550,000) MT's share of FMV of building $3,000,000

MT's gain on building $450,000 $450,000

4 (c). Next the LLC calculates the additional depreciation allowance for the 755 allocation amount for the building

Depreciation

755 allocation amount for MT’s basis in building $850,000

Years 27.5

Additional depreciation allowance $30,909

Rounded $30,000

36

5. In Years 5-9, the LLC operates the apartment building and generates cash flow which the LLC distributes to the HT & W except for $100,000 which it retains and invests each year in marketable securities.

Depreciation Allowance LLC MT W

Building $150,000 $75,000 $75,000

Building and additional depreciation $30,000

from 743 adjustment

Total $150,000 $105,000 $75,000

37

6. At the beginning of Year 10, W dies and her LLC interest is transferred to a trust (WT) for children.

LLC Balance Sheet Basis FMV Gain/(Loss)

Building $2,650,000 $7,000,000 $4,350,000

Land $1,000,000 $1,750,000 $750,000

Marketable security A $100,000 $150,000 $50,000

Marketable security B $100,000 $200,000 $100,000

Marketable security C $100,000 $120,000 $20,000

Marketable security D $100,000 $80,000 ($20,000)

Marketable security E $200,000 $150,000 ($50,000)

Marketable security F $200,000 $220,000 $20,000

$4,450,000 $9,670,000 $5,220,000

Liabilities $0 $0

Capital

HT $2,225,000 $4,835,000

WT $2,225,000 $4,835,000

Total $4,450,000 $9,670,000

38

6 (a). The 754 election is in effect and requires the LLC to make 743(b) basis adjustments. The LLC is required to adjust WT’s inside basis to equal WT’s new stepped –up outside basis (FMV of W’s LLC interest at W’s date of death). It also requires the LLC to do the same for MT’s inside basis because MT also has a new stepped-up outside basis as the result of being includible in W’s gross estate for estate tax purposes. The new outside basis of both WT and MT is $4,109,790, calculated as follows:

FMV of MT’s and WT’s interests (MT’s and WT’s Outside Basis (Post-Death)

FMV of LLC assets $9,670,000

HT’s ownership 50%

HT’s share of FMV LLC assets $4,835,000

DLOC/DLOM 15% ($725,250)

Outside basis (742) $4,109,750

39

6 (b). The 743 adjustment amount for both WT and MT is $1,884,750, calculated as follows: 743 Adjustment Amount 1.743-1(b) Outside basis (742) $4,109,750 Inside basis $2,225,000 743 adjustment amount $1,884,750 (positive)

40

6 (c). The 755 allocation of the 743 adjustment amount is shown below (col. 7 and 8)

41

1 2 3 4 5 6 7 8 9 10 11

(7+9) 12

(8+10) 13

(11+13)

Share of Gain/Loss 755 Allocation Amount Share of Adjusted Basis Inside Basis

Assets FMV (d) Adjusted Basis (d) Gain/Loss MT 50% WT 50% MT WT MT 50% WT 50% MT WT X-Total

Marketable Securities

Marketable security A $150,000 $100,000 $50,000 $25,000 $25,000 $13,750 $13,750 $50,000 $50,000 $63,750 $63,750 $127,500

Marketable security B $200,000 $100,000 $100,000 $50,000 $50,000 $35,000 $35,000 $50,000 $50,000 $85,000 $85,000 $170,000

Marketable security C $120,000 $100,000 $20,000 $10,000 $10,000 $1,000 $1,000 $50,000 $50,000 $51,000 $51,000 $102,000

Marketable security D $80,000 $100,000 ($20,000) ($10,000) ($10,000) ($16,000) ($16,000) $50,000 $50,000 $34,000 $34,000 $68,000

Marketable security E $150,000 $200,000 ($50,000) ($25,000) ($25,000) ($35,250) ($35,250) $100,000 $100,000 $63,750 $63,750 $127,500

Marketable security F $220,000 $200,000 $20,000 $10,000 $10,000 ($6,500) ($6,500) $100,000 $100,000 $93,500 $93,500 $187,000

Total securities $920,000 $800,000 $120,000 $60,000 $60,000 ($9,000) ($9,000) $400,000 $400,000 $391,000 $391,000 $782,000

Real Estate FMV (d) Adjusted Basis (d) Gain/Loss MT 50% WT 50% MT WT MT 50% WT 50% MT WT X-Total

Building $7,000,000 $2,650,000 $4,350,000 $2,175,000 $2,175,000 $1,650,000 $1,650,000 $1,325,000 $1,325,000 $2,975,000 $2,975,000 $5,950,000

Land $1,750,000 $1,000,000 $750,000 $375,000 $375,000 $243,750 $243,750 $500,000 $500,000 $743,750 $743,750 $1,487,500

Total Real Estate $8,750,000 $3,650,000 $5,100,000 $2,550,000 $2,550,000 $1,893,750 $1,893,750 $1,825,000 $1,825,000 $3,718,750 $3,718,750 $7,437,500

Total capital assets $9,670,000 $4,450,00$ $5,220,000 $2,610,000

$2,610,000 $1,884,750 $1,884,750 $2,2250,000 $2,2250,000 $4,.109, 750 $4,109,750 $8,219,500

Slide Intentionally Left Blank

7. At the beginning of Year 11, the LLC distributes the marketable securities non-portably to the two trusts and retains the apartment building.

LLC Balance Sheet Before Distribution Basis FMV Gain/(Loss)

Building $2,500,000 $7,000,000 $4,500,000

Land $1,000,000 $1,750,000 $750,000

Marketable security A $100,000 $180,000 $80,000

Marketable security B $100,000 $220,000 $120,000

Marketable security C $100,000 $130,000 $30,000

Marketable security D $100,000 $80,000 ($20,000)

Marketable security E $200,000 $130,000 ($70,000)

Marketable security F $200,000 $220,000 $20,000

$4,300,000 $9,710,000 $5,410,000

Liabilities $0 $0

Capital

HT $2,150,000 $4,855,000

WT $2,150,000 $4,855,000

Total $4,300,000 $9,710,000

43

7(a). The LLC distributes the marketable securities A,D, and F to MT (col. 3 next slide) and B,C and E to WT (col. 4 next slide) Since the distribution to MT does not liquidate MT’s LLC interest, the basis of each security in the hands of MT after the distribution is the LLC’s basis(col. 3 in 6(c) on a prior slide). Plus MT’s 755 allocation amount for the security (col. 7 in 6(c) on a prior slide). 732(a)(1),1-732-2(b), and 1.743-1(g)(1). MT’s 755 allocation amount for each security distributed to WT (col. 7 in 6(c.) on a prior slide) must be reallocated to MT’s share of the LLC’s basis in the retained property (building and land). 1.755-1(c.) and 1.743-1(g)(2)(ii). The reallocation process requires segregating and totaling the unrealized appreciation and depreciation of the retained properties. See 7(d) on the next slide for explanation of the process.

44

7(a). (Cont.)

45

1 2 3 4 5 6 7 8 9

Distributed Assets

FMV on Date of Distribution

Unrealized Appreciation (Depreciation) of Retained

Property

Unrealized

(Depreciation)

Unrealized

(Appreciation)

Assets LLC (d) MT WT LLC MT WT MT WT

Distributed

Marketable security A $180,000 $180,000

Marketable security B $220,000 $220,000

Marketable security C $130,000 $130,000

Marketable security D $80,000 $80,000

Marketable security E $130,000 $130,000

Marketable security F $220,000 $220,000

Total securities $960,000 $480,000 $480,000 $0 $0 $0 $0 $0

Retained (Real Estate)

Building $4,500,000 $2,250,000 $2,250,000

Land $750,000 $375,000 $375,000

Total Real Estate $0 $0 $0 $5,250,000 $0 $0 $2,625,000 $2,625,000

Total capital assets $960,000 $480,000 $480,000 $5,250,000 $0 $0 $2,625,000 $2,625,000

46

1 2 11 12 13 14 15 16 17 18

MT’s Basis in Securities Distributed to MT and Inside Basis in LLC

Remaining Property After Distributions

MT Adj Allocation of MT Adjustment in Reling Prop

Assets LLC Basis

Reling

Property Step 1 Result 1 Step 2 Result 2 MT Adj MT Basis

Distributed

Marketable security A $100,000 $13,750 $113,750

Marketable security B $35,000

Marketable security C $1,000

Marketable security D $100,000 ($16,000) $84,000

Marketable security E ($36,250)

Marketable security F $200,000 ($6,500) $193,500

Total securities $400,000 ($250) $0 $0 $0 $0 ($8,750) $391,250

Retained (Real

Estate)

MT’’s Share

of LLC Basis

Building $1,325,000 $1,325,000 ($182) $1,324,818 $1,650,000 $2,974,818

Land $500,000 $500,000 ($68) $499,932 $243,750 $743,682

Total Real Estate $1,825,000 $0 $0 $1,825,000 ($250) $1,824,750 $1,893,750 $3,718,500

Total capital assets $2,250,000 ($250) $0 $1,825,000 ($250) $1,824,750 $1,885,000 $4,109,750

7(b). MT’s 755 allocation amount for each security distributed to WT (col 12 below) is reallocated to MT’s share of the

LLC’s basis in the retained property (building and land) as shown below in col 15. Col 18 shows the post-distribution

bases of MT’s securities and MT’s inside basis for the retained property.

LLC’s Basis in Property After 1.742-1(g) Adjustment (d)

47

1 2 19 20 21 22 23 24 25 26

WT’s Basis in Securities Distributed to WT and Inside Basis in LLC

Remaining Property After Distributions

WT Adj Allocation of WT Adjustment in Reling Prop

Assets LLC Basis

Reling

Property Step 1 Result 1 Step 2 Result 2 WT Adj WT Basis

Distributed

Marketable security A $13,750

Marketable security B $100,000 $35,000 $135,000

Marketable security C $100,000 $1,000 $101,000

Marketable security D ($16,000)

Marketable security E $200,000 ($36,250) $163,750

Marketable security F ($6,500)

Total securities $400,000 ($8,750) $0 $0 $0 $0 ($250) $399,750

Retained (Real

Estate)

MT’’s Share

of LLC Basis

Building $1,325,000 $1,325,000 ($6,353) $1,318,647 $1,650,000 $2,974,818

Land $500,000 $500,000 ($2,397) $497,603 $243,750 $743,682

Total Real Estate $1,825,000 $0 $0 $1,825,000 ($8,750) $1,816,250 $1,893,750 $3,710,000

Total capital assets $2,250,000 ($8,750) $0 $1,825,000 ($8,750) $1,816,250 $1,893,500 $4,109,750

7(c). LLC must make same calculation for WT

LLC’s Basis in Property After 1.742-1(g) Adjustment (d)

7(d). 1.743-1(g) Basis Adjustment on Distributions of Adjusted Property to Another Partner

Since the LLC made non-prorata distributions of property to the members , MT’s

inside basis in LLC’s remaining property must be adjusted to include MT’s 743

basis adjustments for the property not distributed to MT. 1.743-1(g)(2)(ii). The total

of these adjustments must be allocated first among properties with unrealized

appreciation in proportion to (but only to the extent of) their unrealized

appreciation (Step 1) and then among all remaining properties in proportion to

their fair market value (Step 2) 1.755-1(c)(2)(ii). A decrease must be allocated first

among properties with unrealized depreciation or proportions to (but only to the

extent of) their unrealized depreciation(Step 1) and then among all remaining

properties in proportion to their adjusted bases after the first allocation (Step 2).

1.755-1(c)(2)(ii)

48