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Summary of Section 754 - Research Paper Example

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A vast majority of businesses were planned and organized as partnerships, more than a decade ago. A large number of these businesses were in the real estate sector and many were professional service firms. The taxation of these businesses, organized in partnerships, was not a major issue, hence gained lesser attention from the lawmakers and tax managers alike…
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Download file "Summary of Section 754" to see previous pages... Hence, now the owners and managers who pay tax and their advisers now advance towards the transactions with the same concern, as those stated in the historic decrees of subchapter K that the partnerships concerned with tax have been asking for years: why incorporate The substantial increase in the use of partnerships has led to increasing frustration with the obsolete subchapter K regulations (most of which were spread in 1955).
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Among the most troublesome laws are those which govern the basis for adjustments on the sale or swap (exchange) of a partnership stake (Orbach, 2004). In fact, the laws --which allow the purchaser of a partnership stake to reflect the purchaser's acquiring cost in partnership resources, are among the most perplexed and highly defective aspects of partnership taxation.
At the start of the year 1998, to address these problems, the Internal Revenue Service in collaboration with the Treasury issued proposed laws and policies u/s734(b) (basis adjustments on some distributions), section743(b) (basis adjustments on transfers of partnership interests),section 751(a) (the "collapsible partnership rule" requiring recognition of ordinary income on the disposition of certain partnership interests), andsection754 (Depreciation Adjustment). (Internal Revenue Code)
The origin of partnership property is usually not affected when a partner sells or exchanges its interest in the business. As a result, if a person buys or ventures into a partnership stake or interest by sale or exchange for a sum that exceeds the transferee's allocation of the adjusted basis of partnership property, the purchase price in excess, is not reflected in the partnership's asset basis, i.e., the purchaser is not able to "push down" its purchase price to the partnership's assets When the business (partnership) makes a an election u/s754 within the stipulated time, however, a transferee partner's share of the partnership's adjusted basis in its assets ("inside basis") is stepped up or stepped down to reflect the partner's basis in the acquired business interest ("outside basis").
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We would proceed by considering an example, in relation to the partnership business, the various transactions that take place in the form of sale and exchange. More importantly, we would focus on the implications of Section 754 of the IRS, which has a major impact with respect to taxation in shaping up these transactions (Orbach, 2004). When an interested party, buys a stake or share of an existing partner's partnership interest, or the interest of a member of a limited liability corporation (LLC) taxed as a partnership, at a value which is said to be its fair value in the market the amount that the purchaser of the interest pays becomes the base for the purchaser's business interest (outside basis). In this transaction at fair market value, the buyer (new partner) assumes the seller's pro rata share of the business partnership's adjusted basis in its assets (inside basis). If the partnership's property or asset value has appreciated sufficiently, the variation between the new partner's inside and outside basis can be ...Download file "Summary of Section 754" to see next pagesRead More
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