Reverse 704(c) Allocations: Partnership Revaluations, Triggering Events, and Recent IRS Guidance

Description

Whenever a partner contributes appreciated or depreciated property to an entity treated as a partnership for U.S. federal tax purposes, Section 704(c) governs permissible tax allocations of gain or loss. Section 704(c) operates to prevent the shifting of tax liabilities for built-in gains and losses among partners when a partner contributes property that has a fair market value different from the basis that the partnership takes in the contributed property.

There are two types of 704(c) allocations: “forward” allocations at the time of contribution of appreciated property and “reverse” allocations on the occurrence of certain events specified in the partnership operating agreement. Any reverse allocation must have “substantial economic effect,” and the IRS frequently challenges allocations it considers as an unreasonable attempt to shift tax consequences among partners.

Reverse Section 704(c) allocations are complex. While the Code provides elective methods for allocations to address inequities in allocating gain or loss from appreciated or depreciated property, advisers must be fully aware of the anti-abuse rules found in the Section 704(c) regulations, which limit the scope of allocations permitted.

Listen as our panel of experienced tax practitioners provides a thorough and practical guide to Section 704(c) reverse allocations to avoid costly tax consequences.