The Section 734(B) Basis Adjustment Needs Repair

Abstract:     
When high-basis property or excess cash is distributed from a partnership to a partner, the distribution will trigger an adjustment to the partnership's common basis in its remaining assets. This adjustment is intended to ensure that (1) gain recognized on the distribution will not be recognized a second time and (2) basis lost by the distributed property will be moved to other, undistributed property. However, while existing rules correctly determine the amount of the basis adjustment, these rules misallocate that adjustment, thereby shifting basis from one partner to others. Examples are included and a proposed legislative fix is recommended.

Number of Pages in PDF File: 27

Keywords: taxation, partnership, basis, basis adjustment

JEL Classification: H25, K34

Accepted Paper Series