Reporting aspects of Sec. 743(b) adjustments.

• Author: Kim, Grace

The reporting rules for partnerships regarding basis adjustments under Sec. 743(b) have been in place for over 20 years, but, often, not all the pieces of the rules are stuck in the memory of a partnership's advisers. Thus, at compliance work time, as well as throughout the year, a review of the various pieces of the rules will help ensure that a partnership return is complete and that computations are accurate. Knowing the reporting rules is important; but, of course, there is no substitute for gathering complete information and understanding the Subchapter K rules to apply them properly. However, the reporting rules need to be more detailed to address certain common transactions.

Background

If a partnership has an election under Sec. 754 in effect, a basis adjustment under Sec. 743(b) to partnership property is made upon a sale or exchange of a partnership interest or a transfer of a partnership interest on the death of a partner. Additionally, even if a partnership does not have an election under Sec. 754 in effect, if the partnership has a "substantial built-in loss," the partnership is required to make a Sec. 743(b) basis adjustment upon such a transfer.

A substantial built-in loss with regard to a transfer of an interest in a partnership is present if (1) the partnership's adjusted basis in the partnership property exceeds by more than $250,000 the fair market value (FMV) of the property, or (2) the transferee partner would be allocated a loss of more than $250,000 if the partnership assets were sold for cash equal to their FMV immediately after such transfer.

The definition of a substantial built-in loss was broadened in the law known as the Tax Cuts and Jobs Act, P.L. 115-97. Prior to the amendment in 2017, a substantial built-in loss was present only if the first part of the definition was met--i.e., the partnership's adjusted basis in the partnership property exceeded by more than $250,000 the FMV of the property. A Sec. 743(b) basis adjustment is made only with respect to the transferee; it differs from a basis adjustment under Sec. 734(b), which is a common basis adjustment that is not isolated to one partner. The substantive aspects of Sec. 743(b) adjustments are not the focus of this discussion. Rather, this discussion focuses on their reporting aspects.

The current reporting rules for partnerships with regard to Sec. 743(b) adjustments were promulgated in T.D. 8847, in which the Sec. 743(b) adjustment rules, along with other basis adjustment and allocation rules, were overhauled. At that time, the IRS and Treasury affirmatively moved to place the reporting responsibility concerning Sec. 743(b) adjustments onto partnerships, as opposed to partners. Prior to these 1999 amendments, notwithstanding that partnerships were required to make and allocate basis adjustments under the then-current regulations, transferees were required to report the basis adjustments. There was a perceived lack of clarity about when (i.e., before or after the Schedule K-1, Partner's Share of Income, Deductions, Credits, etc.) the effect of the basis adjustment to specific partnership items was to be determined or who was required to make and report the adjustments to the partnership items.

Thus, in the proposed regulations that preceded T.D. 8847, the IRS and Treasury explained that the proposed regulations "clarify that partnerships are required to make the basis adjustments" and that the proposed regulations "place the responsibility for reporting basis adjustments on partnerships" (preamble to REG-209682-94). The IRS and Treasury explained further their...