Page 73 - TaxAdviser_2022

TAX CLINIC

statement relating to such transferee’s election under Sec. 754 were in effect at are often undertaken with basis adjust-
share of income, credits, deductions, the time of the relevant transfer. Cor- ment benefits in mind. In a nontiered
etc., include the statement “Return responding transferees must comply with setting, with regard to a particular
filed pursuant to §1.743-1(k)(5).” Regs. Sec. 1.743-1(k)(2) as if an election transfer of a partnership interest, basis
This mechanism entitles the partner- under Sec. 754 were in effect at the time computations need to be done by just
ship to report the transferee’s share of of the relevant transfer. one partnership vis-à-vis one partner,
partnership items without adjustment to Additionally, information concerning and communications do not need to take
reflect the transferee’s basis adjustment in the Sec. 743(b) adjustment of a partner is place among multiple parties; so, the Sec.
partnership property. The regulations fur- to be included in the partnership return 743(b) adjustment stands a good chance
ther provide that if, following the filing on Schedule K-1. For 2021, the draft of being reported within the framework
of a return pursuant to this provision, the instructions to Form 1065, U.S. Return of the regulations. Even in those situ-
transferee provides the applicable written of Partnership Income, for Schedule K-1 ations, full compliance is not certain.
notice to the partnership, the partnership instruct taxpayers to provide: For example, transfers of partnership
must make “such adjustments as are nec- ■ Line 11, code F: For partnerships interests among family members some-
essary to adjust the basis of partnership other than publicly traded partner- times are not reported to partnerships,
property (as of the date of the transfer) in ships (PTPs), the partner’s share of and the partnership may not know that
any amended return otherwise to be filed “net positive income resulting from the transfer has taken place. Another ex-
by the partnership or in the next annual all section 743(b) adjustments,” which ample is that sometimes valuations upon
partnership return of income to be regu- was described as “the excess of all sec- the death of a partner take more than a
larly filed by the partnership” (Regs. Sec. tion 743(b) adjustments allocated to year, so the notice from the transferee to
1.743-1(k)(5)). Further, at such time, the the partner that increase the partner’s the partnership may be late.
partnership must also provide the trans- taxable income over all section 743(b) However, once tiered partnerships
feree with such information as is neces- adjustments that decrease the partner’s are involved, challenges may steeply rise
sary for the transferee to amend its prior taxable income.” in how the notice process and informa-
returns to properly reflect the adjustment ■ Line 13, code V: For partnerships tion sharing work and, ultimately, in
under Sec. 743(b). other than PTPs, the partner’s share the transferee’s receiving information
The 1999 reporting regime with of “net negative income resulting from needed to report correctly. For example,
regard to Sec. 743(b) basis adjustments all section 743(b) adjustments,” which in a tiered partnership situation where
was promulgated prior to the enactment was described as “the excess of all both the upper-tier partnership (UTP)
in 2004 of the mandatory basis adjust- section 743(b) adjustments allocated and lower-tier partnership (LTP) have a
ment rules for substantial built-in loss to the partner that decrease partner Sec. 754 election in place and there is a
situations. However, proposed regula- taxable income over all section 743(b) sale of a partnership interest in the UTP,
tions published in 2014 would make adjustments that increase partner both the UTP and the LTP will need
the reporting regime for Sec. 743(b) taxable income.” to compute basis adjustments under
adjustments apply to substantial built-in ■ Line 20, code U: For each partner, the Sec. 743(b), per Rev. Rul. 87-115. That
loss situations. The effect would be that total Sec. 743(b) adjustment net of ruling concludes that it is appropriate to
the partnership would be required to any cost recovery as a single amount treat the sale of a partnership interest in
attach a statement of adjustments to its for all asset categories; and a statement a UTP as a deemed sale of an interest in
partnership return as if an election under showing the amount of each remain- an LTP and to adjust the inside basis of
Sec. 754 were in effect at the time of the ing Sec. 743(b) basis adjustment, net LTP assets accordingly only where both
transfer solely with respect to the transfer of cost recovery by asset category. For the UTP and the LTP have an election
for which there is a substantial built-in this purpose, a “reasonable grouping under Sec. 754 in effect, based on the
loss (REG-144468-05). These proposed by asset category may be used, but rationale that such elections indicate an
regulations follow up on prior interim such grouping should not be less intent to be treated as an aggregate for
guidance in Notice 2005-32, stating detailed than the asset categories purposes of Secs. 754 and 743. Similarly,
that until further guidance is provided, listed on the Form 1065, Schedule L, Rev. Rul. 92-15 analyzes the basis con-
partnerships that are required to reduce balance sheet.” sequences of a distribution by a UTP of
the bases of partnership properties under an interest in an LTP.
the substantial built-in loss provisions Observations Proposed regulations published in
in Sec. 743 must comply with Regs. Basis adjustments are a major aspect of 2014 are directed at being consistent
Secs. 1.743-1(k)(1) through (5) as if an partnership taxation, and transactions with both Rev. Rul. 87-115 and Rev.

26 February 2022 The Tax Adviser