Why 754 election

This Section5. Because we cannot match transferors and transferees of units, we must maintain uniformity of the economic and tax characteristics of the units to a purchaser of these units. In the absence of uniformity, we may be unable to completely comply with a number of federal income tax requirements, both statutory and regulatory. A lack of uniformity can result from a literal application of Treasury Regulation Section 1.

Any non-uniformity could have a negative impact on the value of the units. In its capacity as the sole manager of the Company, PC Corp will ensure that, on and after the date hereof and continuing throughout the term of this Agreement, the Company including any successors to the Company as a result of terminations occurring pursuant to Section b l B of the Code will have in effect an election under Section of the Code and under any similar provisions of applicable U.

Build document automations that allow you, your staff, and your clients to auto-populate contract templates. It allows me to work quickly, get something straight from my head and out into the public.

The most powerful no code toolkit for building legal practice automations. Afterpattern Menu. Product Features Solutions. Resources Guides For law firms, courts, and legal aid. Consider the following scenario. Every partnership is different, and choosing to make a election is not always the right decision. When considering tax strategies for clients, it is important to remain up to date and utilize the best resources. Among our self-study offerings, we offer courses that cover Section in-depth, including Planning for the Death of the Majority Shareholder.

Inside Cost Basis vs. These are defined as follows: Inside Cost Basis This is the basis of an asset owned by a partnership, or the price paid for an asset at the time of acquisition. How does the election work when there is a transfer of an interest? When a new partner acquires an interest from a former partner, the price paid is based on the fair market value of the interest which is based on the underlying value of assets of the partnership. What is the downside to the election? As mentioned before, this is a permanent election that is only revocable with IRS consent.

Furthermore, the election is an entity level election and all partners are subject to the rules as they pertain to that specific partnership. It would be wise to check the operating agreement if applicable to see if a election is allowed and how the determination to make it is made between the partners. If there is a transfer of an interest or a distribution in property and the inside and outside basis has a disparity, the election can be beneficial to accelerate deductions, if there is greater inside basis than outside basis.

Before making the election, the partners should consider the likelihood of the assets declining in value and the extent of separate accounting they are willing and able to handle.

Skip to main content. Share Post. November 11, This example refers to a Section b adjustment. These adjustments are more common with hedge funds and private equity funds. ABC purchases a portfolio of stocks and retains some cash to pay expenses. Below is the balance sheet immediately after the formation:. After a period of time, the portfolio of stocks increase in value.

The effect is that both Partner A and Partner D were taxed on the same gain, which is obviously not an optimal outcome. This would seem to correct the earlier double tax situation.

However, there is the issue of the timing as well as the limitation on the deductibility of a capital loss. This could result in a double tax situation that may take a significant amount of time to correct. The above scenario can be remedied by the fund making a Section election and adjusting the basis pursuant to Section b.

The regulations under IRC Section provide guidance regarding how to allocate the basis adjustment. There are three scenarios described in the regulations:. For purposes of this post, we will focus on the Section b transfer with non-substitute basis as that is the most applicable to hedge funds and private equity funds.

In a fund context, the vast majority of assets would likely be capital gain property. First, the basis adjustment is allocated among the two classes and then allocated to each asset within the class.

The allocation of the basis adjustment between the classes and within each class is dictated by allocation of gain or loss that the transferee partner would receive if, immediately after the transfer of partnership interest, the partnership had a hypothetical liquidation to the FMV of the assets.