IRC 754: Partnership and Pass-Through Entity Basis Adjustments

Transcription

1 IRC 754: Partnership and Pass-Through Entity Basis Adjustments Mastering Election Rules and Tackling Complex Decisions for Distributions and Sales of Interests TUESDAY, JANUARY 21, 2014, 1:00-2:50pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection and phone line (no sharing) if you need to register additional people, please call customer service at x10 (or x10). Strafford accepts American Express, Visa, MasterCard, Discover. Respond to verification codes presented throughout the seminar. If you have not printed out the Official Record of Attendance, please print it now. (see Handouts tab in Conference Materials box on left-hand side of your computer screen). To earn Continuing Education credits, you must write down the verification codes in the corresponding spaces found on the Official Record of Attendance form. Complete and submit the Official Record of Attendance for Continuing Education Credits, which is available on the program page along with the presentation materials. Instructions on how to return it are included on the form. To earn full credit, you must remain on the line for the entire program. WHOM TO CONTACT For Additional Registrations: -Call Strafford Customer Service x10 (or x10) For Assistance During the Program: - On the web, use the chat box at the bottom left of the screen - On the phone, press *0 ( star zero) If you get disconnected during the program, you can simply call or log in using your original instructions and PIN.

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4 IRC 754: Partnership and Pass-Through Entity Basis Adjustments Jan. 21, 2014 Lawrence Staat, Harrison Held Dina Wiesen, Deloitte

5 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 5

6 Dina Wiesen, Deloitte BASIS OVERVIEW, SECT. 754, 734, 743 AND TIERD PARTNERSHIPS

7 Agenda Overview/Introduction to Basis Adjustments Section 754 Section 734 Common issues, allocation, and example Section 743 Common issues, allocation, and example Section 754 Tiered Partnerships 7

8 Section 754 Election to adjust basis of partnership property If made, partnership must adjust basis pursuant to sections 734(b) and 743(b) Election is made on a timely-filed partnership return. See Reg for 12 month extension of time to file election Once made, election is effective for all future years unless revoked with approval of district director Mandatory adjustments without section 754 election in some cases 8

9 Section 734(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. 9

10 Partnership Distributions Current Distributions Any distribution if, after the distribution, the distributee remains a partner Gain or loss recognized by distributee? Generally, no gain or loss recognized Exception: gain recognized if amount of cash distributed exceeds partner s outside basis Basis considerations Distributee generally takes a carryover basis in the distributed property, but basis is limited to the distributee s outside basis Distributee partner reduces its outside basis by basis taken in distributed property 10

11 Partnership Distributions Liquidating Distributions Any distribution if, after the distribution, the distributee is no longer a partner Gain or loss recognized by distributee? Generally, no gain or loss recognized Gain recognized if cash distributed exceeds partner s outside basis Loss recognized if: Only cash, unrealized receivables, and/or inventory are distributed, and Amount of money and inside basis of assets distributed are less than distributee s outside basis Distributee takes a substituted basis in distributed property after its outside basis has been reduced for any cash received 11

12 Section 743(a) General Rule The basis of partnership property shall not be adjusted as the result of a transfer of an interest in a partnership by sale or exchange or on the death of 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 the partnership has a substantial built-in loss immediately after such transfer. 12

13 Basis Adjustments - Overview Section 754 Election/mandatory Section 734(b) Distribution of property/cash Section 743(b) Transfers of partnership interest 13

14 Mandatory Basis Adjustments Where there is a substantial basis reduction or a substantial built-in loss, sections 734(b) and 743(b) require basis adjustments A substantial basis reduction for purposes of section 734(b) is a downward adjustment of more than $250,000 A substantial built-in loss for purposes of section 743(b) exists when the partnership s basis in the assets exceeds the assets fair market value by more than $250,000 Rules under sections 734(b) and 743(b) do not apply to securitization partnerships Section 743(b) basis adjustments to partnership assets do not apply to certain electing investment partnerships 14

15 Section 755 Allocation Rules: Section 734(b) Adjustment First apply general rule of section 755(b) and divide partnership assets into two classes: (1) Capital and section 1231(b) assets, and (2) All other assets If distributee partner recognizes gain or loss because of the distribution, the section 734(b) adjustment is allocated to the capital and section 1231(b) class of assets If distributee partner takes distributed asset with a basis different from partnership s basis immediately before the distribution, amount of difference is allocated to same class of asset as distributed property 15

16 Section 734(b) Example X, Y, and Z are equal partners in partnership XYZ Capital Partners LP. On January 1, 2011, XYZ s balance sheet was as follows (amounts are in thousands): Assets Book Tax FMV Cash $300 $300 $300 Securities $1500 $1500 $600 Total $1800 $1800 $900 Capital Accounts Book Tax FMV X $600 $600 $300 Y $600 $600 $300 Z $600 $600 $300 Total $1800 $1800 $900 16

17 Section 734(b) Example (cont.) On January 1, 2011, XYZ Capital Partners LP redeems Z for $300,000. XYZ does not have a section 754 election in place. The redemption of Z is a liquidating distribution Z redeems his partnership interest for $300,000 and has an outside basis of $600,000. Therefore Z recognizes a loss of $(300,000). XYZ does not or cannot allocate Z losses in a fill-down allocation XYZ must reduce the basis of partnership assets due to the substantial basis reduction under section 734(b) 17

18 Section 734(b) Example (cont.) Immediately after Z s redemption, XYZ Capital Partners LP s balance sheet is as follows (amounts are in thousands): Assets Book Tax FMV Cash $0 $0 $0 Securities $600 $1500 $600 Securities 734(b) $(300)* Total $600 $1200 $600 Capital Accounts Book Tax FMV X $300 $600 $300 Y $300 $600 $300 Total $600 $1200 $600 *the basis adjustment would be allocated to the securities according to section

19 Section 755 Allocation Rules: Section 743(b) Adjustment Section 743(b) basis adjustment allocated to partnership assets generally equals gain or loss that would be allocated to the transferee from a hypothetical transaction where immediately after the transfer of the partnership interest all of partnership property is sold in a fully taxable transaction for fair market value Basis adjustments arising from the same transfer can be positive and negative Special rules for substituted basis transaction under Treas. Reg (b)(5) 19

20 Section 743(b) Example X, Y, and Z are equal partners in partnership XYZ Capital Partners LP. On January 1, 2011, XYZ s balance sheet was as follows (amounts are in thousands): Assets Book Tax FMV Cash $300 $300 $300 Securities $1500 $1500 $600 Total $1800 $1800 $900 Capital Accounts Book Tax FMV X $600 $600 $300 Y $600 $600 $300 Z $600 $600 $300 Total $1800 $1800 $900 20

21 Section 743(b) Example (cont.) On January 1, 2011, X acquires Z s one-third interest in Capital Partners LP $300,000. XYZ does not have a section 754 election in place. The sale from Z to X is a trigger event under section 743(b) XYZ s basis in its assets is $1,800,000 while the FMV is $900,000. Therefore XYZ has a substantial built-in loss immediately after the sale. X s proportionate share of inside basis is $600,000 while the outside basis in the purchased partnership interest is $300,000. XYZ must reduce the basis of partnership assets by $300,000 due to the excess inside basis over outside basis of the transferred partnership interest The basis adjustment only impacts X 21

22 Section 743(b) Example (cont.) Immediately after X s acquisition, XYZ Capital Partners LP s balance sheet is as follows (amounts are in thousands): Assets Book Tax FMV Cash $300 $300 $300 Securities $1500 $1500 $600 Securities 743(b) $(300)* Total $1800 $1500 $900 Capital Accounts Book Tax** FMV X $1200 $900 $600 Y $600 $600 $300 Total $1800 $1500 $900 *the basis adjustment would be allocated to the securities according to section 755 ** outside basis 22

23 Section 754: Tiered Partnerships Rev. Rul Upper-tier and lower-tier partnership must have election in effect in order to push section 743(b) adjustment down to lower-tier s assets Rev. Rul Upper-tier and lower-tier partnership must have election in effect in order to push section 734(b) adjustment down to lower-tier s assets Allocation of step-up among upper-tier partnership s assets under section 755 Interest in lower-tier partnership treated as a capital asset for purposes of section 755, regardless of lower-tier partnership s asset composition 23

24 Slide Intentionally Left Blank

25 Lawrence Staat, Harrison Held SCENARIOS

26 Storyline 1. At the beginning of Year 1, H and W each contribute $2,500,000 to a new LLC in exchange for a 50% membership interest. They are co-managers of the LLC. The LLC purchases an apartment building for $5,000, In Years 1 4, the LLC operates the apartment building and generates cash which the LLC distributes to the H&W except for $100,000 which it retains and invests each year in marketable securities 3. At the beginning of Year 5, H dies and his LLC interest is transferred to a marital trust (MT) for his W and children. 4. The LLC makes the standard 754 election and makes the required calculations under 743(b). 5. In Years 5 9, the LLC operates the apartment building and generates cash which the LLC distributes to MT and W except for $100,000 which it retains and invests each year in marketable securities. 6. At the beginning of Year 10, W dies and her LLC interest is transferred to a trust (WT) for her children. 7. At the beginning of Year 11, the LLC distributes the marketable securities nonproratably to the two trusts and retains the apartment building. 26

27 1. At the beginning of Year 1, H and W each contribute $2,500,000 to a new LLC in exchange for a 50% membership interest. They are co-managers of the LLC. The LLC purchases an apartment building for $5,000,000. LLC Balance Sheet FMV Basis Assets Building $4,000,000 $4,000,000 Land $1,000,000 $1,000,000 Total $5,000,000 $5,000,000 Liabilities $0 $0 Capital H $2,500,000 $2,500,000 W $2,500,000 $2,500,000 Total $5,000,000 $5,000,000 27

28 2. In Years 1 4, the LLC operates the apartment building and generates cash which the LLC distributes to the H&W except for $100,000 which it retains and invests each in marketable securities The LLC depreciates the building over 27.5 years at $150,000 per year. Depreciation Allowance LLC H W Building $4,000,000 Years 27.5 Dep (year) $145,455 Rounded $150,000 $75,000 $75,000 28

29 3. At the beginning of Year 5, H dies and his LLC interest is transferred to a marital trust (MT) for W and his children. LLC Balance Sheet FMV Basis Gain (Loss) MT s Share 50% Assets Building $6,000,000 $3,400,000 $2,600,000 $1,300,000 Land $1,500,000 $1,000,000 $500,000 $250,000 Marketable Security A $120,000 $100,000 $20,000 $10,000 Marketable Security B $150,000 $100,000 $50,000 $25,000 Marketable Security C $90,000 $100,000 ($10,000) ($5,000) Marketable Security D $60,000 $100,000 ($40,000) ($20,000) $7,920,000 $4,800,000 $3,120,000 $1,560,000 Liabilities $0 $0 Capital MT $3,960,000 $2,400,000 $1,560,000 $1,560,000 W $3,960,000 $2,400,000 $1,560,000 Total $7,920,000 $4,800,000 $3,120,000 29

30 Slide Intentionally Left Blank

31 3(a). Notice the Following: 1. If the LLC sells all of its assets, the LLC will realize a gain of $3,120,000 and MT s share will be $1,560, If the LLC continues to operate the apartment building, the LLC will continue to depreciate the building at a rate of $150,000 per year, and MT s share will be $75, MT s basis in its LLC interest (MT s outside basis) is stepped up to its FMV at H s date of death. Though the FMV of the LLC s assets if $7,920,000, and MT s share is $3,960,000, the FMV of MT s interest in the LLC is only $3,366,000 due to discounts for lack of control (DLOC) and lack of marketability (DLOM), totaling $594,000, calculated as follows. FMV of MT s Interest (MT s Outside Basis (Post-Death)) MT s share of FMV LLC assets $3,960,000 DLOC/DLOM 15% ($594,000) Outside basis (742) $3,366,000 31

32 3(b). If a 754 Election is Made, MT Will Benefit as Follows: 1. If the LLC sells all of its assets, the LLC will still realize a gain of $3,120,000, but MT s gain will be reduced $966,000 from $1,560,000 to $594, If the LLC continues to operate the apartment building, the LLC will continue to depreciate the building at a rate of $150,000 per year, but MT s depreciation amount will be increased by $30,000, from $75,000 to $105,

33 4. LLC makes the 754 election and makes the required calculations under 743(b). (a). First the LLC calculates the amount of the 743 adjustment to be made to MT s share of the LLC s basis in its assets (inside basis). 743 Adjustment Amount ( (b)) MT s outside basis (742) $3,366,000 MT s inside basis ( (s)1) $2,400, Adjustment Amount (positive) $966,000 (b). Next, the LLC allocates MT s 743 adjustment amount between two classes of assets (ordinary income assets and capital gain assets) based on the amount of gain/loss in each class and then among the assets in each class by calculating the 755 allocation amount for each asset. In this example, there are no ordinary income assets, so all of MT s 743 adjustment amount is allocated among capital gain assets. No adjustment is made to W s basis. 33

34 4(b)(1) (b)(3)(ii) Allocation of 743 Adjustment Amount Among Capital Assets (7+9) 12 (8+10) 13 (11+12) Share of Gain/Loss 755 Allocation Amount Share of Adjusted Basis Inside Basis Assets Value at H's DoD (d) Adjusted Basis at H's DoD (d) Gain/Loss at H's DoD MT 50% W 50% MT W MT 50% W 50% MT W X-Total Building $6,000,000 $3,400,000 $2,600,000 $1,300,000 $1,300,000 $850,000 $0 $1,700,000 $1,700,000 $2,550,000 $1,700,000 $4,250,000 Land $1,500,000 $1,000,000 $500,000 $250,000 $250,000 $137,500 $0 $500,000 $500,000 $637,500 $500,000 $1,137,500 Marketable security A $120,000 $100,000 $20,000 $10,000 $10,000 $1,000 $0 $50,000 $50,000 $51,000 $50,000 $101,000 Marketable security B $150,000 $100,000 $50,000 $25,000 $25,000 $13,750 $0 $50,000 $50,000 $63,700 $50,000 $113,750 Marketable security C $90,000 $100,000 ($10,000) ($5,000) ($5,000) ($11,750) $0 $50,000 $50,000 $38,250 $50,000 $88,250 Marketable security D $60,000 $100,000 ($40,000) ($20,000) ($20,000) ($24,500) $0 $50,000 $50,000 $25,500 $50,000 $75,500 Total capital assets $7,920,000 $4,800,000 $3,120,000 $1,560,000 $1,560,000 $966,000 $0 $2,400,000 $2,400,000 $3,366,000 $2,400,000 $5,766,000 34

35 4(b)(2). Calculation of the 755 Allocation Amount for MT s Basis in Building (b)(3)(ii). Effect on MT s Gain Basis Gain(Loss) Effect of 755 Allocation Amount on Building Gain ( (j)(3)(i) MT's share of LLC's gain on building $1,300,000 $1,300,000 MT's share of gain on all assets $1,560,000 MT's 743 Adjustment Amount (positive) ($966,000) MT's share of gain on all assets after 743 adjustment $594,000 $594,000 Numerator: FMV Building $6,000,000 Denominator: FMV all assets $7,920,000 FMV building as % of FMV all assets % % MT's share of gain after 743 adjustment, allocated to building $450,000 ($450,000) 755 allocation amount for MT's basis in building $850,000 $850,000 ($850,000) MT's share of LLC basis in builidng $1,700,000 MT's inside basis in building $2,550,000 ($2,550,000) MT's share of FMV of building $3,000,000 MT's gain on building $450,000 $450,000 35

36 4 (c). Next the LLC calculates the additional depreciation allowance for the 755 allocation amount for the building Depreciation 755 allocation amount for MT s basis in building $850,000 Years 27.5 Additional depreciation allowance $30,909 Rounded $30,000 36

37 5. In Years 5-9, the LLC operates the apartment building and generates cash flow which the LLC distributes to the HT & W except for $100,000 which it retains and invests each year in marketable securities. Depreciation Allowance LLC MT W Building $150,000 $75,000 $75,000 Building and additional depreciation $30,000 from 743 adjustment Total $150,000 $105,000 $75,000 37

38 6. At the beginning of Year 10, W dies and her LLC interest is transferred to a trust (WT) for children. LLC Balance Sheet Basis FMV Gain/(Loss) Building $2,650,000 $7,000,000 $4,350,000 Land $1,000,000 $1,750,000 $750,000 Marketable security A $100,000 $150,000 $50,000 Marketable security B $100,000 $200,000 $100,000 Marketable security C $100,000 $120,000 $20,000 Marketable security D $100,000 $80,000 ($20,000) Marketable security E $200,000 $150,000 ($50,000) Marketable security F $200,000 $220,000 $20,000 $4,450,000 $9,670,000 $5,220,000 Liabilities $0 $0 Capital HT $2,225,000 $4,835,000 WT $2,225,000 $4,835,000 Total $4,450,000 $9,670,000 38

39 6 (a). The 754 election is in effect and requires the LLC to make 743(b) basis adjustments. The LLC is required to adjust WT s inside basis to equal WT s new stepped up outside basis (FMV of W s LLC interest at W s date of death). It also requires the LLC to do the same for MT s inside basis because MT also has a new stepped-up outside basis as the result of being includible in W s gross estate for estate tax purposes. The new outside basis of both WT and MT is $4,109,790, calculated as follows: FMV of MT s and WT s interests (MT s and WT s Outside Basis (Post-Death) FMV of LLC assets $9,670,000 HT s ownership 50% HT s share of FMV LLC assets $4,835,000 DLOC/DLOM 15% ($725,250) Outside basis (742) $4,109,750 39

40 6 (b). The 743 adjustment amount for both WT and MT is $1,884,750, calculated as follows: 743 Adjustment Amount (b) Outside basis (742) $4,109,750 Inside basis $2,225, adjustment amount $1,884,750 (positive) 40

41 6 (c). The 755 allocation of the 743 adjustment amount is shown below (col. 7 and 8) (7+9) 12 (8+10) 13 (11+13) Share of Gain/Loss 755 Allocation Amount Share of Adjusted Basis Inside Basis Assets Marketable Securities FMV (d) Adjusted Basis (d) Gain/Loss MT 50% WT 50% MT WT MT 50% WT 50% MT WT X-Total Marketable security A $150,000 $100,000 $50,000 $25,000 $25,000 $13,750 $13,750 $50,000 $50,000 $63,750 $63,750 $127,500 Marketable security B $200,000 $100,000 $100,000 $50,000 $50,000 $35,000 $35,000 $50,000 $50,000 $85,000 $85,000 $170,000 Marketable security C $120,000 $100,000 $20,000 $10,000 $10,000 $1,000 $1,000 $50,000 $50,000 $51,000 $51,000 $102,000 Marketable security D $80,000 $100,000 ($20,000) ($10,000) ($10,000) ($16,000) ($16,000) $50,000 $50,000 $34,000 $34,000 $68,000 Marketable security E $150,000 $200,000 ($50,000) ($25,000) ($25,000) ($35,250) ($35,250) $100,000 $100,000 $63,750 $63,750 $127,500 Marketable security F $220,000 $200,000 $20,000 $10,000 $10,000 ($6,500) ($6,500) $100,000 $100,000 $93,500 $93,500 $187,000 Total securities $920,000 $800,000 $120,000 $60,000 $60,000 ($9,000) ($9,000) $400,000 $400,000 $391,000 $391,000 $782,000 Real Estate FMV (d) Adjusted Basis (d) Gain/Loss MT 50% WT 50% MT WT MT 50% WT 50% MT WT X-Total Building $7,000,000 $2,650,000 $4,350,000 $2,175,000 $2,175,000 $1,650,000 $1,650,000 $1,325,000 $1,325,000 $2,975,000 $2,975,000 $5,950,000 Land $1,750,000 $1,000,000 $750,000 $375,000 $375,000 $243,750 $243,750 $500,000 $500,000 $743,750 $743,750 $1,487,500 Total Real Estate $8,750,000 $3,650,000 $5,100,000 $2,550,000 $2,550,000 $1,893,750 $1,893,750 $1,825,000 $1,825,000 $3,718,750 $3,718,750 $7,437,500 Total capital assets $9,670,000 $4,450,00$ $5,220,000 $2,610,000 $2,610,000 $1,884,750 $1,884,750 $2,2250,000 $2,2250,000 $4,.109, 750 $4,109,750 $8,219,500 41

42 Slide Intentionally Left Blank

43 7. At the beginning of Year 11, the LLC distributes the marketable securities nonportably to the two trusts and retains the apartment building. LLC Balance Sheet Before Distribution Basis FMV Gain/(Loss) Building $2,500,000 $7,000,000 $4,500,000 Land $1,000,000 $1,750,000 $750,000 Marketable security A $100,000 $180,000 $80,000 Marketable security B $100,000 $220,000 $120,000 Marketable security C $100,000 $130,000 $30,000 Marketable security D $100,000 $80,000 ($20,000) Marketable security E $200,000 $130,000 ($70,000) Marketable security F $200,000 $220,000 $20,000 $4,300,000 $9,710,000 $5,410,000 Liabilities $0 $0 Capital HT $2,150,000 $4,855,000 WT $2,150,000 $4,855,000 Total $4,300,000 $9,710,000 43

44 7(a). The LLC distributes the marketable securities A,D, and F to MT (col. 3 next slide) and B,C and E to WT (col. 4 next slide) Since the distribution to MT does not liquidate MT s LLC interest, the basis of each security in the hands of MT after the distribution is the LLC s basis(col. 3 in 6(c) on a prior slide). Plus MT s 755 allocation amount for the security (col. 7 in 6(c) on a prior slide). 732(a)(1), (b), and (g)(1). MT s 755 allocation amount for each security distributed to WT (col. 7 in 6(c.) on a prior slide) must be reallocated to MT s share of the LLC s basis in the retained property (building and land) (c.) and (g)(2)(ii). The reallocation process requires segregating and totaling the unrealized appreciation and depreciation of the retained properties. See 7(d) on the next slide for explanation of the process. 44

45 7(a). (Cont.) Distributed Assets FMV on Date of Distribution Unrealized Appreciation (Depreciation) of Retained Property Unrealized (Depreciation) Unrealized (Appreciation) Assets LLC (d) MT WT LLC MT WT MT WT Distributed Marketable security A $180,000 $180,000 Marketable security B $220,000 $220,000 Marketable security C $130,000 $130,000 Marketable security D $80,000 $80,000 Marketable security E $130,000 $130,000 Marketable security F $220,000 $220,000 Total securities $960,000 $480,000 $480,000 $0 $0 $0 $0 $0 Retained (Real Estate) Building $4,500,000 $2,250,000 $2,250,000 Land $750,000 $375,000 $375,000 Total Real Estate $0 $0 $0 $5,250,000 $0 $0 $2,625,000 $2,625,000 Total capital assets $960,000 $480,000 $480,000 $5,250,000 $0 $0 $2,625,000 $2,625,000 45

46 7(b). MT s 755 allocation amount for each security distributed to WT (col 12 below) is reallocated to MT s share of the LLC s basis in the retained property (building and land) as shown below in col 15. Col 18 shows the post-distribution bases of MT s securities and MT s inside basis for the retained property MT s Basis in Securities Distributed to MT and Inside Basis in LLC Remaining Property After Distributions Assets Distributed LLC s Basis in Property After (g) Adjustment (d) LLC Basis MT Adj Allocation of MT Adjustment in Reling Prop Reling Property Step 1 Result 1 Step 2 Result 2 MT Adj MT Basis Marketable security A $100,000 $13,750 $113,750 Marketable security B $35,000 Marketable security C $1,000 Marketable security D $100,000 ($16,000) $84,000 Marketable security E ($36,250) Marketable security F $200,000 ($6,500) $193,500 Total securities $400,000 ($250) $0 $0 $0 $0 ($8,750) $391,250 Retained (Real MT s Share Estate) of LLC Basis Building $1,325,000 $1,325,000 ($182) $1,324,818 $1,650,000 $2,974,818 Land $500,000 $500,000 ($68) $499,932 $243,750 $743,682 Total Real Estate $1,825,000 $0 $0 $1,825,000 ($250) $1,824,750 $1,893,750 $3,718,500 Total capital assets $2,250,000 ($250) $0 $1,825,000 ($250) $1,824,750 $1,885,000 $4,109,750 46

47 7(c). LLC must make same calculation for WT WT s Basis in Securities Distributed to WT and Inside Basis in LLC Remaining Property After Distributions Assets Distributed LLC s Basis in Property After (g) Adjustment (d) LLC Basis WT Adj Marketable security A $13,750 Allocation of WT Adjustment in Reling Prop Reling Property Step 1 Result 1 Step 2 Result 2 WT Adj WT Basis Marketable security B $100,000 $35,000 $135,000 Marketable security C $100,000 $1,000 $101,000 Marketable security D ($16,000) Marketable security E $200,000 ($36,250) $163,750 Marketable security F ($6,500) Total securities $400,000 ($8,750) $0 $0 $0 $0 ($250) $399,750 Retained (Real MT s Share Estate) of LLC Basis Building $1,325,000 $1,325,000 ($6,353) $1,318,647 $1,650,000 $2,974,818 Land $500,000 $500,000 ($2,397) $497,603 $243,750 $743,682 Total Real Estate $1,825,000 $0 $0 $1,825,000 ($8,750) $1,816,250 $1,893,750 $3,710,000 Total capital assets $2,250,000 ($8,750) $0 $1,825,000 ($8,750) $1,816,250 $1,893,500 $4,109,750 47

48 7(d) (g) Basis Adjustment on Distributions of Adjusted Property to Another Partner Since the LLC made non-prorata distributions of property to the members, MT s inside basis in LLC s remaining property must be adjusted to include MT s 743 basis adjustments for the property not distributed to MT (g)(2)(ii). The total of these adjustments must be allocated first among properties with unrealized appreciation in proportion to (but only to the extent of) their unrealized appreciation (Step 1) and then among all remaining properties in proportion to their fair market value (Step 2) (c)(2)(ii). A decrease must be allocated first among properties with unrealized depreciation or proportions to (but only to the extent of) their unrealized depreciation(step 1) and then among all remaining properties in proportion to their adjusted bases after the first allocation (Step 2) (c)(2)(ii) 48