Basis Adjustment Under Section 734

• Pages: 271-280
• Author: James R. Repetti,William H. Lyons,Charlene D. Luke

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Chapter Fourteen

BASIS ADJUSTMENT UNDER

SECTION 734

We have seen that when a partnership interest is sold, § 743(b)

provides a way f or the purchaser to obtain inside b asis adjustments

on a partnership’s assets.

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When a partnership makes distribut ions

to partners, inside basis adjustments on p artnership assets are also

available. The same election governs bo th kinds of inside-basis

adjustments. If a § 754 election is in effect, partnerships will adjust

inside basis under § 743(b) when partnership interests are

transferred and under § 734(b) when partnerships make

distributions. In addition, even if a § 754 election is not in effect,

§ 734, like § 743, requires a partnership to reduce the inside basis of

its assets for distributions that wo uld have triggered a substantial

downward reduction had a § 754 election been in effect. These

adjustments do not affect the partners’ capital accounts or

partnership asset book values.

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Section 734(b) differs from § 743(b) in three important ways:

(1) Section 743(b) adjustments are made “with respect to

the transferee partner only”;

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the benefits (or

detriments) of adjustments required by § 734(b) are

shared by all the partners.

(2) All sales, exchanges, or transfers at death will trigger

§ 743(b) adjustments if a § 754 election is in effect. As

discussed below, however, many distributions will n ot

lead to basis adjustments under § 734(b) even if the

election has been made.

(3) Section 743(b) wo rks well. As we shall see, § 734(b)

sometimes produces absurd results, at least if it is read

literally.

Here is a very important reminder. The “distributions” that

trigger adjustments under § 734(b) are distributions as determined

1

Chapter 10 § B.3. For discussion about § 743(b) adjustments upon the death of

a partner, see Chapter 15 § A.2.b.

2

Reg. § 1.704–1(b)(2)(iv)(m). As discussed in Chapter 7 § E, the partnership

may in connection with distributions elect to write up or down the book value of all

partnership assets, generating book gain or loss and setting in motion future reverse

§ 704(c) allocations. Reg. § 1.704–1(b)(2)(iv)(f). Regardless of whether the partnership

writes up or down the book value of all partnership assets, in-kind distributions

require revaluation of the distributed asset. Reg. § 1.704–1(b)(2)(iv)(e)(1).

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§ 743(b).