Page 393 - TaxAdviser_2022

TAX CLINIC

Sec. 1245 gain. The $1,000 gain would of any Sec. 1245 gain upon an ultimate correct principles of Sec. 751, depending
be allocated equally ($500) to A and B, disposition of the property. The effect on on the type of transaction.
but the Sec. 1245 gain of $500 would be C’s purchase of the partnership interest In addition to the Sec. 751 aspects,
allocated entirely to A. in the above example may be best sum- application of the depreciation recapture
Sec. 1245 gain can also arise when marized in the preamble to regulations rules to partnerships can be, as is often
a partnership interest is sold. Sec. 741 proposed in 2014 but not finalized, the case with partnerships, more onerous
provides that the gain on a sale or ex- REG-151416-06: than for other taxpayers. Special alloca-
change of a partnership interest would tions by the partnership of depreciation
be capital, except to the extent provided The intent of the regulations under or gain are also addressed in Regs. Sec.
in Sec. 751. Sec. 751(a) applies to the §1.1245-1(e)(3) is, in part, to ensure 1.1245-1(e)(2). In today’s partnership
sale or exchange of a partnership inter- that a transferee partner does not environment of targeted allocations and
est and treats amounts realized from recognize ordinary income with profits/carried interests, these rules are
certain partnership property, unrealized respect to section 1245 property to significant. Specifically, Examples 1 and
receivables, and inventory items as from the extent a section 743 adjustment 2 of Regs. Sec. 1.1245-1(e)(2)(iii) walk
other than a capital asset (i.e., ordinary has displaced that ordinary income. through situations of nonratable alloca-
gain). Included in the definition of un- For example, if a partner sells in a tions and their impact on allocations
realized receivables are Secs. 1245 and fully taxable exchange its interest of recapture.
1250 property. A selling partner’s gain or in a partnership that has elected
loss subject to Sec. 751(a) is the amount under section 754, and the selling Many nuances
that would have been allocated to the partner recognizes ordinary income The situations discussed above are by no
partner “if the partnership had sold all of under section 751(a) with respect to means all the potential circumstances that
its property in a fully taxable transaction partnership section 1245 property, require additional analysis to determine
for cash in an amount equal to the fair then the rules under sections 1245 the proper amount and allocation of Secs.
market value of such property” (Regs. and 743 are intended to ensure that 1245 and 1250 recapture, but they do
Sec. 1.751-1(a)(2)). the transferee partner recognizes no reflect some of the nuances that can be
ordinary income on an immediately encountered and need to be addressed.
Example 4: Assume that Partnership subsequent disposition of the sec- Consideration of these matters should
AB, owned equally by A and B, held tion 1245 property in a fully taxable be given on the front end when deciding
one asset that was Sec. 1245 prop- transaction. However, the regula- how property will be depreciated or how
erty that it purchased for $500 and tions under §1.1245-1(e)(3) have not a transaction should be structured, and
had an adjusted basis of $0 but an been amended to take into account upon a sale or disposition of property, it is
FMV of $1,000. Further assume B, changes to subchapter K, including important to ensure that any allocations
who has a $0 basis in its partnership the regulations under section 751, are made correctly. Taxpayers and their
interest, sells the interest to C for resulting in issues and uncertainties. advisers need to understand the deprecia-
$500 (FMV of B’s interest). B would The IRS and the Treasury Depart- tion recapture rules to fully evaluate the
recognize a gain of $500 (amount ment are studying these issues and tax consequences of various transactions.
realized over adjusted basis) under request comments in this area. From Robert Venables, CPA, J.D.,
Sec. 1001(a). If Partnership AB had LL.M., Fairlawn, Ohio
sold the property for its FMV, B To the extent that C is entitled to
would have been allocated half of depreciation from the property, whether
the gain ($500), of which $250 (the related to its allocation of tax deprecia- Estates, Trusts & Gifts
lesser of B’s share of depreciation on tion on the property or its special basis
the property or amount realized in adjustment under Sec. 743, Secs. 1245 Estate planning update:
excess of adjusted basis) would have and 1250 would apply. Sec. 751(a) has Summary of recent proposed
been subject to Sec. 1245. Therefore, a corollary provision applicable to sales regulations
$250 of B’s gain would be ordinary of partnership interests similar to the This item summarizes the impact of two
income. one under subsection (b) that applies to sets of proposed regulations issued by
certain distributions. While the intent Treasury in early 2022. One set addresses
In the above example, Partnership of subsection (b) is generally the same as a limitation on the special rule regard-
AB will need to wade through Regs. Sec. that of subsection (a), taxpayers should ing a difference in the basic exclusion
1.1245-1(e) to determine the allocation make sure that they are applying the amount, and the other addresses updates

10 August 2022 The Tax Adviser