Surgent's Basis Shifting: Final Regulations

Overview

The Internal Revenue Service has targeted complex partnerships it believes are not in compliance with the tax law for audit. One of the abuses the IRS has attacked is transfers of interests in partnerships which result in an increase in the basis of a partner who is subject to a high marginal income tax rate. This perceived abuse results in lower income tax and/or a higher basis in partnership property for the higher marginal income tax partner.

The final regulations basically characterize certain partnership-related basis adjustments as transactions of interest on the part of the IRS. In a practical sense, this means that property transfers in a partnership with related party partners may run the risk of IRS scrutiny if audited. It is common for certain types of partnerships, such as real estate limited partnerships, to have related-partner partnerships. The IRS may decide to scrutinize partnerships with related party transfers.

Since these final regulations presume an understanding of the rules for partnership distributions and Section 754 elections, the program begins with coverage of those two topics, with time devoted to adjustments under both Section 743(b) and Section 734(b). It would be hard to understand the IRS’s claim of abuse without a working knowledge of these transactions.

Highlights

• What is a transaction of interest?
• Reporting transactions of interest on Form 8886
• Why make a Section 754 election?
• Adjustments under Sections 743(b), 734(b), and 732
• Applicable threshold amounts for reporting
• What is a basis shift?
• Who is a material advisor and why is that status important?
• Section 755 rules for allocating the Section 743(b) and Section 734(b) basis adjustments
• Transfers of a partnership interest on death
• What is a substantially similar transaction?
• Who is a “tax-indifferent” party in a partnership?

Prerequisites

A basic understanding of partnership taxation

Designed For

Tax practitioners who will be advising clients who have an interest in a partnership that is impacted by the new final regulations on basis transfers from one related-party partner to another

Objectives

• Understand the final regulations addressing basis shifting from one related party partner in a partnership to another

Preparation

None