Discussion:734(b) Adjustment and Capital Accounts (754 Election)
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Discussion Forum Index --> Accounting Questions --> 734(b) Adjustment and Capital Accounts (754 Election)
| 20 November 2007 | |
| In section 1.704-1(b)(2)(iv)(m)(4), the regs say to adjust the capital account by the amount of 734(b) adjustments (assuming a 754 election has been made). I understand that you adjust the inside basis of the assets, but am not sure why or how you would adjust the capital accounts as the regs indicate to do. Does anyone know what adjustment to the capital accounts that you make? And why would this be done? I may be wrong, but I don't think the regs are talking about the tax capital accounts because if you adjust the inside basis of the assets and the tax capital accounts by the same adjustment then you basically are undoing the what the 734(b) adjustment achieves.
Here is an example with numbers (Sorry about the space between the 3 pictures--just can't seem to get rid of it): Assume that there are 3 partners (A, B & C) and each have an equal share in the business. Also, assume that there is a 754 election in place and all assets are capital assets (Cap #1 and Cap #2). Here is the balance sheet before the event that gives rise to the 734(b) adjustment:
Now assume that the partnership distributes $2,000 to (A) in total liquidation of his interest Here is the balance sheet after the event that gives rise to the adjustment, but before reflecting the adjustment
All of the adjustment of $1,000, which is the gain that (A) would recognize would be applied to Cap #2 because it has appreciation and the appreciation is more than the $1,000 adjustment (you cap it at $1,000--the amount of the adjustment). Here is the balance sheet after the adjustment:
So my question is two fold: (1) Do i also apply the adjustment to the book basis of the asset (so Cap #2 would have a tax and book basis of $1,200 after applying the adjustment)? (2) How do i adjust the capital accounts according to Section 1.704-1(b)(2)(iv)(m)(4) of the regs? I would not think that i would adjust the tax capital account because that would undo what 734(b) attempts to achieve. Also, if i do adjust the book basis in question (1) above then i wouldn't think that you would change the book capital accounts. However, if i do not adjust the book basis of the asset then i would think you would reduce the book capital accounts by $500 each. Thanks Darius | |
