PRIA, Government Policy, Made Personal

Summary

Partnerships must change the tax basis of their property after giving a partner property only if the partnership made the section 754 election or the distribution causes a big basis drop. When one of those things happens, the partnership must raise its basis by any taxable gain the receiving partner reports and, for property where section 732 decides the partner’s starting basis, by the amount the partnership’s old basis exceeded the partner’s basis. The partnership must lower its basis by any taxable loss the receiving partner reports and, for property where section 732 applies, by the amount the partner’s basis exceeds the partnership’s old basis. The rule about adding the partnership’s old-basis excess does not apply when the distributed item is an interest in another partnership that has not made a section 754 election. How the partnership spreads these increases or decreases among its properties follows the rules in section 755. A “substantial basis reduction” happens when the total decrease amounts are more than $250,000 (see rules under section 743(d)(2)). Securitization partnerships are never treated as having a substantial basis reduction.

Title 26, §734

Internal Revenue Code, Source: USLM XML via OLRC

(a)General rule

The basis of partnership property shall not be adjusted as the result of a distribution of property to a partner unless the election, provided in section 754 (relating to optional adjustment to basis of partnership property), is in effect with respect to such partnership or unless there is a substantial basis reduction with respect to such distribution.

(b)Method of adjustment

In the case of a distribution of property to a partner by a partnership with respect to which the election provided in section 754 is in effect or with respect to which there is a substantial basis reduction, the partnership shall—

(1)increase the adjusted basis of partnership property by—

(A)the amount of any gain recognized to the distributee partner with respect to such distribution under section 731(a)(1), and

(B)in the case of distributed property to which section 732(a)(2) or (b) applies, the excess of the adjusted basis of the distributed property to the partnership immediately before the distribution (as adjusted by section 732(d)) over the basis of the distributed property to the distributee, as determined under section 732, or

(2)decrease the adjusted basis of partnership property by—

(A)the amount of any loss recognized to the distributee partner with respect to such distribution under section 731(a)(2), and

(B)in the case of distributed property to which section 732(b) applies, the excess of the basis of the distributed property to the distributee, as determined under section 732, over the adjusted basis of the distributed property to the partnership immediately before such distribution (as adjusted by section 732(d)).

Paragraph (1)(B) shall not apply to any distributed property which is an interest in another partnership with respect to which the election provided in section 754 is not in effect.

(c)Allocation of basis

The allocation of basis among partnership properties where subsection (b) is applicable shall be made in accordance with the rules provided in section 755.

(d)Substantial basis reduction

(1)In general

For purposes of this section, there is a substantial basis reduction with respect to a distribution if the sum of the amounts described in subparagraphs (A) and (B) of subsection (b)(2) exceeds $250,000.

(2)Regulations

For regulations to carry out this subsection, see section 743(d)(2).

(e)Exception for securitization partnerships

For purposes of this section, a securitization partnership (as defined in section 743(f)) shall not be treated as having a substantial basis reduction with respect to any distribution of property to a partner.

Notes & Related Subsidiaries

Editorial Notes

Amendments

2005—Subsec. (a). Pub. L. 109–135, § 403(bb)(1), inserted “with respect to such distribution” before period at end. Subsec. (b). Pub. L. 109–135, § 403(bb)(2), reenacted heading without change and amended introductory provisions generally. Prior to amendment, introductory provisions read as follows: “In the case of a distribution of property to a partner, a partnership, with respect to which the election provided in section 754 is in effect or unless there is a substantial basis reduction, shall—”. 2004—Pub. L. 108–357, § 833(c)(5)(A), substituted “Adjustment to basis of undistributed partnership property where section 754 election or substantial basis reduction” for “Optional adjustment to basis of undistributed partnership property” in section catchline. Subsec. (a). Pub. L. 108–357, § 833(c)(1), inserted “or unless there is a substantial basis reduction” before period at end. Subsec. (b). Pub. L. 108–357, § 833(c)(2), inserted “or unless there is a substantial basis reduction” after “section 754 is in effect” in introductory provisions. Subsec. (d). Pub. L. 108–357, § 833(c)(3), added subsec. (d). Subsec. (e). Pub. L. 108–357, § 833(c)(4), added subsec. (e). 1984—Subsec. (b). Pub. L. 98–369 inserted at end “Paragraph (1)(B) shall not apply to any distributed property which is an interest in another partnership with respect to which the election provided in section 754 is not in effect.”

Statutory Notes and Related Subsidiaries

Effective Date

of 2005 AmendmentAmendment by Pub. L. 109–135 effective as if included in the provision of the American Jobs Creation Act of 2004, Pub. L. 108–357, to which such amendment relates, see section 403(nn) of Pub. L. 109–135, set out as a note under section 26 of this title.

Effective Date

of 2004 Amendment Pub. L. 108–357, title VIII, § 833(d)(3), Oct. 22, 2004, 118 Stat. 1592, provided that: “The

Amendments

made by subsection (c) [amending this section] shall apply to distributions after the date of the enactment of this Act [Oct. 22, 2004].”

Effective Date

of 1984 Amendment Pub. L. 98–369, div. A, title I, § 78(b),

July 18, 1984, 98 Stat. 597, provided that: “The amendment made by subsection (a) [amending this section] shall apply to distributions after

March 1, 1984, in taxable years ending after such date.”

§734 Adjustment to Basis of Undistributed Partnership Property Where Section 754 Election or Substantial Basis Reduction

Summary

Title 26, §734

Notes & Related Subsidiaries

Editorial Notes

Amendments

Statutory Notes and Related Subsidiaries

Effective Date

Effective Date

Amendments

Effective Date

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