Question

Samantha is a forty percent partner in Stevens LLC. Her tax basis in her partnership interest is $57,000. She received a non-liquidating distribution of real property (§1231 property to the partnership) with a fair market value of $100,000 and a tax basis of $65,000. Following the distribution, the partnership had remaining assets as follows: Basis FMV Cash $ 10,000 $ 10,000 Real Estate (§1231 Property): Tract 1 54,000 70,000 Tract 2 65,000 45,000 Tract 3 71,000 95,000 $200,000 $220,000 i. Assume the LLC has a §754 election in effect. What will be the amount of the basis adjustment under §734(b)? ii. How will the basis adjustment be allocated among the partnership’s remaining properties?

Answer 1

1. Samantha's outside tax basis in partnership interest is $ 57,000 and she received a distribution of real property with a tax basis of $ 65,000, thus basis adjustment under section 734(b) is $8,000 ($57000-$65000).

2. basis adjustment will be allocated among the partnership's remaining properties on a proportionate basis to adjust the inside basis of the partnership to the oustside basis of partners.

As per sec 734(b), when property is distributed to partner and sec 754 is in effect, basis adjustment is done to make the inside basis of the partnership equals to outside basis of partners. In this case, the outside basis of partners is

Samantha's basis of interest 40% $57000

Other partners basis of interest 60% $85500

Total $142500

Property distributed with a basis of $65000, so the basis adjustment to be done to make the inside basis of partnership equal to outside basis of partners. After distribution, the basis of the partnership is $200000.

When a distribution is made under sec 734(b), allocation of basis adjustment is done among the remaining properties in any manner as per section 755 between basis and Fair market value .