Complications in Section 743(b) Substituted Basis Transactions

The following article Complications in Section 743(b) Substituted Basis Transactions originally appeared in the May 2024 issue of The Tax Adviser.

Section 743(b) basis adjustments are often challenging to complete accurately due to their inherent complexity. For Section 743(b) adjustments in substituted basis transactions, this challenge is further amplified by a divergent set of rules for allocating the adjustment among the partnership assets, compared to taxable transactions. 

As if that were not enough, the rules in Regs. Section 1.755-1(b)(5) (the final regulations) have been further modified by Prop. Regs. Section 1.755-1(b)(5), REG-144468-05 (the 2014 proposed regulations). While proposed regulations often are not effective until finalized, in this case, the modification is effective for all transactions on or after Jan. 16, 2014. As a result, practitioners must be aware that certain parts of the current language in the final regulations have effectively been superseded by the 2014 proposed regulations. 

Additionally, in situations where the transferor has a preexisting Section 743(b) adjustment and engages in a substituted basis transfer of their partnership interest, extra care must be taken when establishing the Section 743(b) adjustment for the transferee partner.

Tommy Orr reviews these complications in Section 743(b) substituted basis transactions in the full article in The Tax Adviser.