New regulations clarify partnership allocations related to contributed property.Sec. 704(c) requires that unrealized appreciation or depreciation inherent in property contributed to a partnership eventually be allocated to the contributing partner. The IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. recently issued final regulations concerning such allocations. Example: Partner A contributes land with a tax basis of $400 and a fair market value of $1,000 in exchange for a 50% interest in partnership AB; partner B contributes $1,000 in cash in exchange for his 50% interest. If AB sells the property for $1,200, the first $600 of "built-in gain" will all be allocated for tax purposes to A, who contributed the land. The allocation The apportionment or designation of an item for a specific purpose or to a particular place. In the law of trusts, the allocation of cash dividends earned by a stock that makes up the principal of a trust for a beneficiary usually means that the dividends will be treated as rules get considerably more complicated when depreciable depreciable Of, relating to, or being a long-term tangible asset that is subject to depreciation. property is contributed to AB, providing for special allocations of depreciation expense (with limitations) to the cash contributor in such situations. The final rules, which contain some significant changes from the proposed regulations, provide significant flexibility and potential planning opportunities for taxpayers in selecting reasonable allocation methods. They provide for several different allocation methods: * Traditional method. * Traditional method with curative curative /cur·a·tive/ (kur´ah-tiv) tending to overcome disease and promote recovery. cu·ra·tive adj. 1. Serving or tending to cure. 2. allocations. * Remedial REMEDIAL. That which affords a remedy; as, a remedial statute, or one which is made to supply some defects or abridge some superfluities of the common law. 1 131. Com. 86. The term remedial statute is also applied to those acts which give a new remedy. Esp. Pen. Act. 1. method (a revision of the deferred sale method originally included in the proposed regulations and now contained in special temporary regulations issued in conjunction with the final regulations). * Any other "reasonable" method. Different reasonable allocation methods may be used by a partnership for different types of contributed property. However, the allocation methods selected must be consistently applied from year to year. In addition, the overall method or combination of methods used by the partnership must be reasonable under the facts and circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or . These special allocation rules also apply to transfers of a partnership interest to a partnership and to transfers of property by a partnership to a corporation in a tax-free exchange tax-free exchange An exchange of assets between taxpayers in which any gain or loss is not recognized in the period during which the exchange takes place. Rather, taxpayers are required to adjust the basis of assets exchanged. . The regulations (which include special anti-abuse rules) provide relative, but often uncertain, flexibility for taxpayers in choosing a proper allocation method. The Service encourages taxpayers to request a letter ruling to determine if a proposed method desired by a taxpayer will be considered "reasonable" by the IRS. |
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