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partnership taxation

What is a Partnership?
• IRC 761(a): syndicate, group, pool, joint venture or other
unincorporated organization through or by means of
which any business, financial operation, or venture is
carried on, and which is not a corporation or a trust or
• Reg. 1.761-1(a): joint undertaking merely to share
expenses is not a partnership
• IRC 761(f): if only members are spouses, they both
materially participate, and they elect, joint venture is not
treated as a partnership
Types of Partnerships
General partnership
Limited partnership
Limited liability partnership
Limited liability company
Limited liability limited partnership
Check-the-box Regulations
• Any business entity other than an entity formed as a
“corporation” can be taxed either as a passthrough entity or a
• Election is made on Form 8832
• Default classification:
• One owner – disregarded entity
• More than one owner - partnership
Subchapter K
“Subchapter K is intended to permit taxpayers to conduct
joint business (including investment) activities through a
flexible economic arrangement without incurring an entity
level tax.” (Reg. 1.701-2(a))
One level of tax
Pass-through of losses
Flexible allocation of profits and losses
No S corporation restrictions (number and type of
shareholders; one class of stock)
• No reasonable compensation requirement
• No control requirement on contributions
Advantages (cont.)
• Tax-free distributions, even on liquidation
• Basis increase for partnership liabilities
• Step-up in basis in assets on death and disposition (Sec. 754
• Gain/loss allocated to contributing partner (can also be
• Can structure so no income for service partner on contribution
• Sec. 199A deduction
Higher tax rate than for corporations
No tax-free reorganizations
New partnership audit rules
Partners generally cannot be employees so have selfemployment tax
• Taxation of distributive share, even if no distributions
• No special provisions for stock dispositions:
• Sec. 1202: exclusion of gain on small business stock
• Sec. 1045: rollover of gain on qualified small business
• Sec. 1244: loss on small business stock
Tax Cuts and Jobs Act
163(j): Interest deduction limitation
199A: Qualified Business Income deduction
461(l): Excess business loss
704(d): Loss limitation for charitable contributions and foreign
• 743(d): Substantial built-in loss definition
• 708(b)(1)(B): Repeal of technical termination rule
• 1061: Carried interest rule
General Rules
• 721(a): no tax to partners or partnership on contribution
of property
• 722: basis of partnership interest to partner (“outside
basis”) is basis of property contributed
• 1223(1): partner tacks holding period for partnership
interest for asset contributed if capital or 1231 asset (not
including 1245 gain)
• 723: basis of property to partnership (“inside basis”)
carries over
• 1223(2): all property has tacked holding period to
Partnership Accounting
• Partnership keeps separate tax and book
• “Book” is value when property contributed
• Can “book up” when new partner admitted
Partnership Liabilities
Effect on Basis – Sec. 752
• Increase in share of partnership liabilities treated
as cash contribution
• Decrease in share of partnership liabilities
treated as cash distribution (return of
basis/capital gain)
• Disregard liabilities that are deductible when
paid—e.g., accounts payable of cash basis
• Recourse:
• Any partner bears economic risk of loss
• Partner’s share is based on how partners share risk of
• Nonrecourse:
• No partner bears economic risk of loss
• Partner’s share is generally in accordance with sharing
of profits (not losses)
• Syndication: not deductible or amortizable
• Organization: can elect to deduct up to $5,000 (reduced by
amount over $50,000) and amortize balance over 180 months
Aggregate v. Entity
• Aggregate: partnership is collection of partners
• Entity: partnership is entity separate from its owners
Tax Consequences
• 701: partnership not subject to tax
• 703: Partnership
• Separately states items
• Computes its taxable income in the same manner as an individual
with deductions not allowed for:
• Personal exemption
• Foreign taxes
• Charitable contribution
• Additional itemized deductions
Tax Consequences
• 701: partners taxed on partnership income, not
• 702(a): Partner taxed on “distributive share” of
partnership income—separately stated and nonseparately stated
Separately Stated Items
• Variable effect items—different treatment to different
• Special allocations
• Total of everything else (non-separately stated)
Outside Basis Adjustments
Sec. 705
• Increase by:
• Distributive share of taxable income
• Distributive share of tax-exempt income
• Decrease by:
• Distributions to partner
• Distributive share of partnership loss
• Share of nondeductible expenses
Order of Basis Adjustments
1. 705(a)(1) increases
2. Distributions
3. 705(a)(2) deductions/losses
Loss Limitations
704(d) partnership basis
465 at-risk rules
469 passive loss rules
461(l) excess business loss (new TCJA)
Partnership Loss Limitation
• 704(d):
• Losses allowed only to extent of partner’s outside
• Carry forward excess proportionate to character of loss
• 704(d)(3): expenses subject to limit include foreign
taxes and charitable contribution deductions (but not
excess of FMV over AB)
• 705(a)(2): Outside basis decreased, but not below zero
Special Allocations
• Allocations do not have to be proportionate to capital
• 704(a): Distributive share is as indicated in partnership
• 761(c): Partnership agreement includes any
modifications up to filing of return
• 704(b):
• Allocations must have “substantial economic effect” (SEE)
• Otherwise are in accordance with partner’s interest in
partnership (PIP)
Substantial Economic Effect
1. Economic effect – consistent with economic business
2. Substantial – reasonable possibility that allocation will
affect dollar amount allocated apart from tax
Economic Effect (“Big 3”)
1. Capital accounts maintained in accordance with
2. Upon liquidation, distributions in accordance with
positive capital account balances
3. Partner unconditionally obligated to restore deficit
capital account (DRO) by later of end of tax year of
liquidation or 90 days of liquidation
Capital Account Maintenance
1. Increase by:
• Cash contributed to partnership
• FMV property contributed to partnership (net of liabilities)
• Allocations of book income/gain, including tax-exempt
2. Decrease by:
Cash distributed to partner
FMV of property distributed to partner (net of liabilities)
Allocations of nondeductible expenses
Allocations of book loss/deductions
Alternate Test for DRO
1. Allocation does not create or increase a deficit
• Consider reasonably expected future distributions
(assuming FMV of asset is its adjusted basis)
• Consider limited obligations to restore capital account,
e.g., note from partner, obligations under partnership
agreement or state law
2. Agreement has a qualified income offset (QIO)
• If partner has deficit capital account as a result of
unexpected distribution, partner will be allocated
income/gain as soon as possible to eliminate deficit
Partners’ Interest in Partnership
• Manner in which partners have agreed to share the economic
benefit or burden of the income/deduction items being
• Consider all facts and circumstances related to economic
arrangement of partners:
• Relative contributions to partnership
• Interests in economic profits and losses different from interests in
taxable income/loss
• Interests of partners in cash flow and nonliquidating distributions
• Rights to capital on liquidation
• Special allocation must have an effect other than tax
• Reasonable possibility that the allocation will affect
substantially the dollar amount to be received by
partners independent of tax consequences
• Special rules:
1. Shifting allocation
2. Transitory allocation
3. General rule—after-tax
Shifting Allocation
• “Strong likelihood” that allocation will not affect
capital accounts but total tax liability of partners will
be less
• Presumption if in fact above occurred
• Consider special circumstances of partner
• Generally offsetting allocation in same year
Transitory Allocation
• “Possibility” that, over more than one year, an original
allocation will be offset by an offsetting allocation
• “Strong likelihood” that allocation will not affect
capital accounts but total tax liability of partners will
be less
• Presumption if in fact above occurred
• Safe harbor: five-year rule—not transitory if offsetting
allocation not within five years of original allocation
General Rule
• After-tax economic consequences of at least one partner
are enhanced, AND
• Strong likelihood that the after-tax economic
consequences of no partner will be substantially
Allocations Attributable to
Nonrecourse Debt
• Partnership minimum gain: nonrecourse debt – adjusted
• Nonrecourse deduction (NRD): deduction attributable to
nonrecourse financing that creates or increases
partnership minimum gain (no NRD until basis is less
than nonrecourse debt)
• Partner’s share of partnership minimum gain: can reduce
capital account below zero to extent of this
• Minimum gain chargeback: allocate minimum gain to
partners who were allocated NRD
Safe Harbor for NRD Allocation
1. Partnership agreement satisfies SEE tests
2. NRDs allocated in a manner that is “reasonably
consistent” with allocations of some other “significant”
partnership item attributable to property securing debt
3. Partnership agreement has minimum gain chargeback
4. All other material allocations and capital account
adjustments respected under regulations
Target Allocations
• Tax follows cash
• Determine what each partner gets on liquidation and
back into income/loss allocations
• Should meet “economic effect equivalence” test if
liquidation would produce same results as Big 3
Allocations for Contributed
Property Sec. 704(c)
• Income, gain, loss, and deduction with respect to
property contributed to partnership shall be shared
among the partners “so as to take account of the
variation” between basis and FMV
• Three methods in regulations:
1. Traditional
2. Traditional with curative allocation
3. Remedial
Traditional Method
• Any built-in gain (BIG)/loss (BIL) on sale allocated to
contributing partner; remaining in accordance with
partnership agreement
• Subject to “ceiling rule”: total gain/loss allocated to a
partner may not exceed the tax gain/loss realized by
Traditional Method
With Curative Allocation
• Partnership makes reasonable curative allocations of
other partnership tax items of income/loss to correct
ceiling rule distortions
• Made solely for tax purposes
• Does not have economic effect
• Does not affect capital accounts
• Cannot exceed amount necessary to offset effect of
ceiling rule
• Income/loss allocated must have same character and tax
consequences as tax items affected by ceiling rule
• Must be made over “reasonable period of time”
Remedial Method
• Make remedial allocation to noncontributing partner
equal to the full amount of disparity between book and
tax and offsetting remedial allocation to contributing
• Essentially is traditional method without ceiling rule
Characterization of Gain
of Contributed Property (Sec. 724)
• Unrealized receivables: ordinary income
• Inventory (including any noncapital or non-1231 assets):
OI for 5 years
• Capital loss property: capital loss for 5 years up to built-in
Depreciation of
Contributed Property
• Traditional: allocate depreciation first to noncontributing
partner equal to book depreciation, balance to
contributing partner, subject to ceiling rule (cannot
allocate more than tax depreciation)
• Traditional with curative: make curative allocation to
noncontributing partner of depreciation from another
asset, or ordinary income to contributing partner
• Remedial: allocate full book depreciation to
noncontributing partner; offsetting allocation of ordinary
income to contributing partner; compute book
depreciation by bifurcating asset
Effect of Depreciation
• BIG/BIL of contributing partner takes into consideration
depreciation and equals difference between adjusted
basis and book value after deductions for tax and book
depreciation, respectively
New Partner Admitted
1. Special allocation of BIG at time partner admitted
2. Reverse Sec. 704(c) allocation/book up
3. If neither No. 1 nor No. 2, there is a capital shift that
may be a gift or compensation.
Gift Partnership Interests
• 704(e): applies to all gifts of partnership interests, and a
purchase of a partnership interest from a family member
(spouse, ancestors, and lineal descendants)
• Donor must receive reasonable compensation for services and
rate of return on donee’s capital not be proportionately
greater than return on donor’s capital
• Culbertson standard: partnership is created when parties in
good faith had bona fide intent to join together and conduct
business as partners
Varying Interest Rules
• 706(c)(1): Partnership year does not close unless is a
partnership termination
• 706(c)(2): If partner terminates entire interest,
partnership year closes for that partner
• 706(d): For change in partnership interests during year,
distributive share determined by method in regulations
Methods for Varying Interests
1. Allocate “extraordinary items” (generally, gains on
dispositions) among partners in proportion to their interests
in the partnership items at the time of day on which
extraordinary item occurs.
2. Use one of following methods:
a. Interim closing of books – default rule
b. Proration – based on number of days
Anti-avoidance Rule
• For cash basis partnership, essentially requires accrual
treatment for interest, taxes, services, use of property
(“allocable cash basis item”)
• Allocate to day in period to which attributable
• If attributable to Year 1 but paid in Year 2, assign to first day of
Year 2 and allocate based on varying interests in Year 1; if no
longer a partner, capitalize in bases of partnership assets
• If paid in Year 1 and attributable to Year 2, assign to last day of
Year 1 and allocate to ownership on that day
Anti-abuse Rule
Lower-tier Partnership
• Partners in upper-tier partnership of lower-tier loss
partnership are allocated pro rata amount of lower-tier
partnership loss even if interim closing method used by
upper-tier partnership
Recourse Liabilities
• Generally recourse liabilities allocated as partners
share losses
• Partner’s share of recourse liability equals portion of
liability for which partner bears economic risk of loss if
all assets are worthless and all debt due and payable
• Limited partners generally are allocated no recourse
Nonrecourse Liabilities
Allocated (sum of):
1. Partner’s share of partnership minimum gain same as
2. 704(c) gain if liabilities secured by contributed
property and amount realized is amount of debt
3. Excess nonrecourse liabilities – how share profits,
• Significant item method: as specified if reasonably
consistent with allocation of some significant item of
partnership gain/income
• Alternative method: manner reasonably expected that
deductions attributable to nonrecourse liability will be
• Additional method: 704(c) gain in excess of #2; remaining
using one of the other methods
• Facts and circumstances
Types of Payments to Partners
for Services
1. 707(a)(1): transactions in nonpartner capacity
2. 707(c): guaranteed payments
3. 702/731: distributive share/distributions
Nonpartner Payments
• 707(a)(1): treated as occurring with one not a
• 267(a)(2), 267(e): partnership cannot deduct
payment until partner includes in income
Partner – Employee Status
• General partners: both distributive share and guaranteed
payments are self-employment income (Rev. Rul. 69-184)
• Limited partners: exception in Sec. 1402(a)(13)
• Old proposed regulations: define limited partner to include all
partners except a partner that has liability for partnership
debt, has authority to contract for the partnership, or
participates in the partnership’s trade or business for more
than 500 hours during the year
• Reg. 301.7701-2(c)(2)(iv)(C)(2): partnership that owns
disregarded entity (which generally is treated as corporation
for purposes of employment tax) that employs a partner is
disregarded for purposes of self-employment tax
Disguised Payments
Sec. 707(a)(2)(A)
• If partner performs services or transfers property to
partnership, related allocation and distribution to
partner, and properly viewed as with nonpartner, will be
treated as such (disguised payment)
• Factors:
Risk as to amount of payment
Transitory status of partner
Closeness in time to services and payment
Tax-motivated partner
Value of profits interest is small in comparison to allocation
Guaranteed Payments
• 707(c): Payments to partner for services or use of capital
that is determined without regard to partnership income
is treated as payment to nonpartner for purposes of
Secs. 61, 162, and 263
• For timing purposes, is treated as made to partner
• 1.707-1(c): Partner must include in income when
partnership takes deduction, even if partner does not
Contribution of Services
Capital Interest
• Interest in future profits and in assets
• Include value of interest in income (less any payment for
property) when not subject to “substantial risk of
• Other partners get allocation of deduction related to
capital interest grant, and partnership considered as if
sold part of asset with gain/loss allocated to other
• Can make Sec. 83(b) election to include in income when
granted; if forfeit interest after making election:
• No deduction to partner
• Partnership includes amount previously deducted in year of
Contribution of Services
Profits Interest
• Interest in future profits and appreciation only
• Rev. Proc. 93-27 Safe Harbor--taxable only if:
• Substantially certain and predictable stream of income
from partnership assets
• Disposes of interest within two years of receipt
• Limited partnership interest in publicly traded
• Rev. Proc. 2001-43:
• Whether an interest is profits interest is tested at time
of grant
• Not taxable on grant or vesting
• Requirements: treat as partner and no deduction by
Carried Interest (Sec. 1061)
• Imposes three-year holding period in determining fund
manager’s share of long-term capital gain attributable to a
partnership profits interest received in connection with
performance of services
• If not meet three-year period, is short-term capital gain (but
still can be offset by capital losses)
• Only applies to noncorporate partners (does apply to S
corporation partner)
• Does not apply to capital interests
Carried Interests (cont.)
• Only for “applicable partnership interest”: partnership
interest transferred in connection with performance of
substantial services in an “applicable trade or business”
• Applicable trade or business:
• Raising or returning capital
• Investing in or developing a range of “specified assets”
• Financial investments including securities, commodities, options
derivatives, and cash equivalents
• Real estate held for rental or investment
Types of Payments to Partners
1. 707(a)(1): transactions in nonpartner capacity
2. 707(c): guaranteed payments
3. 702/731: distributive share/distributions
Sale/Exchange of Property
Related Party Rules
• Related party rules for sale/exchange of property between
partnership and partner who owns more than 50% of partnership,
or two partnerships controlled by same persons
• 707(b)(1): Disallows loss; on subsequent sale, gain not recognized
to extent of disallowed loss
• 707(b)(2): Gain on sale of property that is not a capital asset in
hands of transferee is ordinary income
• 707(b)(3): Sec. 267 constructive ownership rules apply
• Partner owns more than 50% of partnership (including
indirect ownership, e.g., family attribution from spouse,
brother, sister, lineal descendant, ancestor)
• Two partnerships in which the same persons own more than
Sale/Exchange of Property
Disguised Sale
• 707(a)(2)(B): Disguised sale—treat as nonpartner or as transaction
between two partners:
• Contribution by partner to partnership
• Related transfer of property by partnership to partner
• Properly viewed as sale/exchange
• Presumption (both rebuttable):
• Is sale/exchange if property transfer within two years of
partner’s contribution contributed property becomes obsolete
• Not sale/exchange if more than two years
• Two requirements:
• Transfer of property by partnership would not have been
made if partner did not make contribution
• If transfers not simultaneous, partnership transfer is not
dependent on entrepreneurial risks of partnership operations
Seller Consequences
• 741: capital gain except as provided in Sec. 751
• Amount realized includes debt relief
• 751(a): ordinary income to extent gain attributable to:
• Unrealized receivables
• Rights to payments for goods (other than from capital asset) or
• Depreciation recapture
• Franchises, trademarks, trade names
• Inventory items
• Sec. 1221(a)(1) – held for sale to customers
• Any non-capital or non-1231 asset, including receivables
• Any other property held by partnership that would be inventory if
held by partner
• 751(f): look through to assets of lower-tier partnership
Capital Gains Lookthrough
• 1(h)(5): Look through to partnership assets for lower rates—
collectibles, unrecaptured Sec. 1250 gain, capital gains
• Compute:
Amount realized – basis = total gain
- 751 gain
- other gains with special rates (but not losses)
= residual capital gain/loss
Buyer Consequences
• 742: cost is outside basis, including partner’s share of
• 743(a): no inside basis adjustment unless Sec. 754 election or
partnership has substantial built-in loss (BIL)
• 743(b):
• Partnership can elect under Sec. 754 to adjust inside basis
for built-in gain (BIG) or BIL for transferee partner
• Must adjust basis for substantial BIL even if no election
• Substantial BIL —partnership basis in assets exceeds
FMV by more than $250,000
• Effective 2018, substantial BIL also exists if transferee
would be allocated net loss in excess of $250,000 upon
hypothetical disposition by partnership of all its assets
after transfer
see note on assignment
Inside Basis Adjustment
Sec. 743/754 Election
• Can adjust inside basis of assets to buyer by difference
between outside basis and buyer’s share of inside basis
• Share of inside basis:
• Interest in “previously taxed capital” (PTC):
Cash buyer would receive if all assets sold and
partnership liquidated
+ Tax loss allocated to buyer
- Tax gain allocated to buyer
• + Share of partnership liabilities
Allocate Adjustment
Sec. 755
• Divide assets into two classes:
• Capital and Sec. 1231 assets
• All others
• Allocate basis adjustment between classes and within
class based on allocations of gain/loss to that partner if
all assets sold for FMV
Sec. 704(c) to Buyer
• Gain potential transfers to buyer
• Loss potential does not transfer to buyer; basis is FMV at
time of contribution
Distributions of Money
• 731(a): gain recognized to partner on distribution to
extent money exceeds outside basis; no loss
• 731(b): money includes marketable securities
• 752(b): decrease in share of partnership liabilities is
deemed distribution
• 731(c): basis in marketable security determined under
Sec. 732, plus any gain recognized
Distributions of Property
• 731: no gain or loss recognized (with some exceptions)
• 732: basis of property is same as basis to partnership,
but shall not exceed partner’s outside basis
• 732(c): if bases of property exceed outside basis
(reduced by money distributed) and more than one
property distributed:
• Allocate first to bases of unrealized receivables and inventory
• If bases of unrealized receivables and inventory exceed outside
basis, first reduce asset bases in proportion to built-in loss and
then in proportion to asset bases (after adjustment for built-in
• Allocate any remaining bases to other assets under same formula
Effect on Outside Basis
• 733: Reduce by money distributed and adjusted bases of
property distributed
732(d) Election
• No Sec. 754 election in effect
• If property distributed to partner within 2 years of
partner acquiring interest in partnership, partner can
elect to have basis step-up on assets distributed as if had
Sec. 754 election in effect
Character of Distributed
Property (Sec. 735)
• Generally takes character to partner
• Exceptions:
• Unrealized receivables – ordinary income
• Inventory – ordinary income if sold within 5 years
• Recapture – rules n/a but carries over to transferee
Partnership Consequences
• 731(b): no gain/loss to partnership on distribution
• 734(a): generally distribution has no effect on inside
basis unless Sec. 754 election or “substantial basis
• 734(b): if Sec. 754 election:
• Can increase inside bases of assets not distributed by amount of
gain recognized by distributee partner
• If basis of asset to partner is less than basis to partnership,
partnership can increase basis in remaining assets equal to
• 755: allocation of basis adjustment
• Allocate to assets of same character as distributed property
• In proportion to appreciation in those properties
Effect on Capital Accounts
• Gain/loss treated as recognized and capital accounts of
partners increased/decreased
• Capital account of distributee partner reduced by value
of property distributed
Mixing Bowl Transactions
Sec. 704(c)(1)(B)
Distribution of BIG property contributed by one partner to
another partner within 7 years
• Treated as if contributing partner sold BIG property for
FMV at time of distribution with Sec. 704(c);
precontribution gain allocated to contributing partner;
no other allocation for post-contribution gain/loss
• Basis of contributing partner’s partnership interest and
distributed property increased by gain
Mixing Bowl Transactions
Sec. 737
Distribution of other property to partner contributing BIG
property within 7 years
• Contributing partner recognizes lesser of
• Precontribution gain under Sec. 704(b)(1)(B)
• FMV of distributed property at time of distribution
– outside basis
• Basis of contributing partner’s partnership interest and
of contributed property increased by gain recognized
• Character of gain determined by property contributed
Sec. 751(b) Distributions
• Unrealized receivables—includes recapture
• Inventory:
Held for sale to customers in ordinary course
Any property except cash, Sec. 1231 and capital assets
Above two items if would be such property to distributee
All inventory must be “substantially appreciated”—FMV exceeds
120% of basis; include unrealized receivables in calculation
(recapture has zero basis)
Analysis of
Disproportionate Distribution
1. Deemed to receive share of non-Sec. 751 assets and then
exchanged with partnership for actual assets received in
taxable transaction to partner and partnership
2. Partnership gain in deemed exchange allocated to
nondistributee partners
3. Apply regular distribution rules to pro rata portion of
Types of Payments
• 736(b): Payment in exchange for partner’s interest in
partnership; treat as liquidating distribution
• N/A retirement of general partner in services partnership for:
• Unrealized receivables (not including recapture)
• Goodwill not provided for in agreement (to extent exceed partner’s
share of basis of goodwill)
• 736(a): Other payments are either distributive share or
guaranteed payment (premium payment and excepted
categories above for general service partner)
736(b) Distributions
Consequences to Partner
• Gain to partner only if money (cash, liabilities,
marketable securities) exceeds basis in partnership
interest (same rule as nonliquidating distribution)
• Reduce outside basis in same order as nonliquidating
distribution (money, inventory/unrealized receivables,
other property)
• If partner receives ONLY cash, unrealized receivables, and
inventory, can deduct loss if outside basis exceeds inside
bases of assets distributed (capital loss)
736(b)—Basis of Assets Received
• Generally same as basis to partnership
• If basis in partnership interest less than basis of other
assets, allocate difference first in proportion to decline
in value and then in proportion to basis after
adjustment for value decline (same as nonliquidating
• If basis in partnership interest more than basis in
assets, allocate excess first in proportion to unrealized
appreciation; allocate remaining in proportion to FMV
• Do allocations of above first to inventory/unrealized
736(b) – Consequences to
• 731(b): Generally recognizes no gain or loss
• 734(a): Inside basis generally not adjusted unless make Sec.
754 election or “substantial basis reduction”
• 734(b): If Sec. 754 election, partnership increases inside basis
of retained assets by gain recognized by distributee partner
and decreases by loss recognized by distributee partner; can
allocate increases/decreases only to capital or 1231 assets
• 734(d): Substantial basis reduction with respect to distribution
if sum of loss recognized by distributee partner + increases to
basis of assets is more than $250,000; requires downward
• 751(b): Applies to Sec. 736(b) distributions (not Sec. 736(a))
736(b) – Partnership Consequences
754 Election
• Adjust bases of retained assets:
+ Gain recognized by distributee
+ Downward basis adjustment of assets
- Loss recognized by distributee
- Upward basis adjustment of assets
- Substantial basis reduction
• Allocate among assets under Sec. 755