Partnership must delay sec. 734(b) adjustments until retiring partner recognizes gain or loss.
When a retiring partner receives a payment in exchange for his interest in partnership property under Sec. 736(b), the payment is treated as a distribution by the partnership, and the partner's gain or loss is determined under Sec. 731. Sec. 736(b) payments could be made to a partner in a lump sum or in a series of payments. In general, when a series of payments is made, recognition of gain or loss is deferred until the payments exceed the partner's basis in the partnership interest or until the final payment is made. When the total amount of Sec. 736(b) payments to be made to a partner is fixed, however, the partner may determine the amount of gain or loss attributable to each payment by applying a ratable portion of his basis in the partnership interest to each payment.
Generally, the basis of partnership property is not adjusted when the partnership makes a distribution to a partner. If, however, the partnership has made a Sec. 754 election, the partnership property's basis is adjusted to reflect the gain or loss recognized by the distributee partner under Sec. 731.
Although the gain or loss a retiring partner will recognize can be determined when the total amount of Sec. 736(b) payments becomes fixed, Rev. Rul. 93-13 directed that the partnership may not adjust the bases of its assets at that time. Rather, the partnership must match the timing and amount of the Sec. 734(b) basis adjustment with the timing and amount of the retiring partner's gain or loss. This delay may cause problems for the partnership and the remaining partners.
Example: PS, a partnership owned equally by A, B and C, will retire A by making annual Sec. 736(b) payments of $25 for four years. PS currently has $100 cash and asset Z, with an adjusted basis of $80 and a fair market value of $200. A's basis in his partnership interest is $60. If A does not elect to recognize his gain ratably with each payment, A will not recognize gain until year 3. Consequently, PS may not make any adjustment to Z's basis until year 3. If PS sells Z in year 2, B and C must each recognize $60 of income ($20 more than would have been recognized if PS could make the Sec. 734(b) basis adjustment when the amount of A's Sec. 736(b) payments became fixed).
While complicated, the effects of these problems may be mitigated by a carefully negotiated retirement agreement.
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|Publication:||The Tax Adviser|
|Article Type:||Brief Article|
|Date:||Jun 1, 1993|
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