743 adjustment – Is this messed up?

Technical topics regarding tax preparation.
#1
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In year 2, a 50/50 partnership admitted 5 additional partners for 70k (cash contributed to the MMLLC) diluting the interest of the original partners, I see that a 743(b) adjustment was made to the original partners’ capital accounts and not to the newly admitted partners. If I am correct, the 743(b) adjustment should only affect the newly admitted partners? The original partners went from 50/50 interest to 35/30 in this case. Unless I am mussing something, I think the preparer messed up in this case and whipped out some numbers to tie the tax capital and the liabilities to the basis. Can you shed some light on this? Thank you.
 

#2
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Yes. The 743(b) adjustment should affect the inside basis of the transferee, not the transferor. Think about it in the context of a partner who sells his entire interest to another individual and leaves.

I'm skeptical whether you actually have a partner selling his/her interest to a new partner in this fact pattern though? I see a partnership issuing units to a new partner for a cash contribution. The new partner would have no disparity between inside and outside basis immediately after exchanging cash for units and thus there wouldn't be a need for a 743(b) adjustment? Perhaps there's some rule about constructive sales -- I don't know.
 

#3
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ManVsTax wrote:Yes. The 743(b) adjustment should affect the inside basis of the transferee, not the transferor. Think about it in the context of a partner who sells his entire interest to another individual and leaves.

I'm skeptical whether you actually have a partner selling his/her interest to a new partner in this fact pattern though? I see a partnership issuing units to a new partner for a cash contribution. The new partner would have no disparity between inside and outside basis immediately after exchanging cash for units and thus there wouldn't be a need for a 743(b) adjustment? Perhaps there's some rule about constructive sales -- I don't know.


I reviewed the entries for the year in question and verified that the 70k was deposited in the MMLLC bank account and the 743(b) 15 SL was booked for the original 50/50 partners. Also, I think the preparer used a plug in number under contribution on the k1 and the basis worksheet to arrive at the ending capital account balance for that year. The cash contribution DOES NOT agree with the books. Weird scenario! My best guess would be that the preparer covered up the capital account disparity from the prior year, just a hunch. If the original partners sold their partial interest then shouldn't there be a transfer of capital line item on the BS? I don't see it.
 

#4
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What is a "743(b) 15 SL"?

Sergeant_Tax wrote:My best guess would be that the preparer covered up the capital account disparity from the prior year, just a hunch.


Generally, there should not be a prior year inside-outside basis disparity for the original partners based on what you laid out in the OP. You understand how that works right? I think you might be using "disparity" in the wrong context and really mean "error".

Sergeant_Tax wrote:If the original partners sold their partial interest then shouldn't there be a transfer of capital line item on the BS? I don't see it.


We used to do transfer of capital interest on "other increases" and "other decreases" on the M-2 at a prior firm I worked with. Shows up on the capital account analysis (Item L) on the K-1s too. But again, I think you need to find out if this is really a transfer/sale of interest and if that even matters.

Sounds like the other preparer doesn't have a good grasp on what they're doing. Might be an opportunity for you to pick up the 1065 as a client if you're comfortable with what needs to be done and can articulate that and your value to the owners (I'm assuming at least one of which is your client).
 

#5
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What is a "743(b) 15 SL"?


I meant to say 754 asset was debited and the capital account was credited for the original partners, the step up is being amortized over 15 years on a SL basis.

My best guess would be that the preparer covered up the capital account disparity from the prior year, just a hunch.


Yes, I meant to say error.

We used to do transfer of capital interest on "other increases" and "other decreases" on the M-2 at a prior firm I worked with. Shows up on the capital account analysis (Item L) on the K-1s too. But again, I think you need to find out if this is really a transfer/sale of interest and if that even matters.

Sounds like the other preparer doesn't have a good grasp on what they're doing. Might be an opportunity for you to pick up the 1065 as a client if you're comfortable with what needs to be done and can articulate that and your value to the owners (I'm assuming at least one of which is your client).


Correct, lets say if this was a partial transfer of interest then there should've been entries made under the M1/K1 to account for the partial capital account transfer to the new partners. Based on the JEs for the cash contribution of the new partners I don't think this was a sale of interest by the original 50/50 partners.

To my understanding, the 743(b) step up adjustment should've been allocated to the incoming partners as long as they purchased the interest from the original partners, but the fact that the 70k contribution was deposited in the MMLLC bank account is throwing me off.
 

#6
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I think what you need to have is a 704(c) allocation.
~Captcook
 


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