Repairing Inside Basis Adjustments
29 Pages Posted: 30 Dec 2005 Last revised: 12 Sep 2015
Date Written: 2005
Optional basis adjustments under Subchapter K have come under increased scrutiny as a result of tax shelter abuses involving partnerships. Recent legislation requires mandatory adjustments under sections 734(b) and 743(b) upon certain distributions of partnership property and transfers of partnership interests. These amendments were targeted at situations in which the failure to make such adjustments potentially gave rise to duplication of losses. While preventing loss duplication may be particularly urgent, these anti-tax-shelter measures represent a retreat from broader proposals calling for mandatory section 734(b) adjustments for both current and liquidating distributions.
In a recent article, Professor Abrams criticizes the common basis approach of section 734(b) for failing to allocate adjustments properly when partnership property is revalued following a non-pro rata current distribution of appreciated property. This article reviews and critiques Abrams' proposed repairs to section 734(b). It suggests an alternative approach that would treat a non-pro rata current distribution of appreciated property as a deemed sale and extend section 704(c) principles to allocate the section 734(b) adjustment in a manner that aligns the continuing partners' post-distribution shares of inside basis, gain, and value.
Keywords: partnership, basis adjustments, 734, 743, tax shelter, loss duplication, inside basis, partial liquidation
JEL Classification: K34
Suggested Citation: Suggested Citation