Liquidating property distribution depreciation
A (sometimes fleeting) goal of partnership taxation is to keep inside basis equal to outside basis.(3)In accounting for a partner's outside basis, positive items are generally considered before negative items.Contributions to the partnership and a partner's distributive share of partnership income and gain items increase basis.Basis allocations (if any) to the distributee partner's assets were premised on the adjusted bases of the properties distributed and, in certain cases, on the distributed assets' relative adjusted bases; any relation to the properties' FMVs was mere coincidence.This produced some interesting results--assets were sometimes allocated bases well above or below their FMVs.
This article reviews the property distribution rules in light of the changes to Sec.EXECUTIVE SUMMARY* The allocation of basis among noncash assets requires the bifurcation of such assets into two categories.* The increase procedure only applies to liquidating distributions; its use is required when the allocable outside basis exceeds the carryover basis of the assets distributed to the partner in liquidation.* The distribution rules are further complicated when the property distributed is subject to depreciation recapture.Changes made by the Taxpayer Relief Act of 1997 and the Internal Revenue Service Restructuring and Reform Act of 1998 altered the way basis is allocated to property distributed to partners in liquidating and nonliquidating distributions. This article's many examples illuminate these rules and offer planning guidance.The Taxpayer Relief Act of 1997 (TRA '97), Section 1061, changed the method of allocating basis to distributed properties to more closely reflect their FMVs.The IRS Restructuring and Reform Act of 1998 (IRSRRA '98), Section 6010(m), clarified the TRA '97 provision.