Special sec. 179 Basis Rules with Respect to Estates and Trusts

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IRC section 179(d)(4) provides that section 179 does not apply to estates and trusts. Treas. Reg. 1.179-1(f)(3) states that a partnership's or S corporation's basis in section 179 property is not reduced to reflect the portion of section 179 expense that is allocable to estate or trust partners or shareholders and that the partnership or S corporation may claim depreciation with respect to any depreciable basis resulting from the estate's or trust's inability to deduct its allocable portion of section 179 expense.

Any depreciable tangible property additions allocable to estate and trust partners that would have been deducted under section 179 but for their ineligibility must nonetheless be capitalized, and the depreciation expense must be allocated to the estate and trust partners, causing temporary basis imbalance between the estate and trust partners and other partners until the basis of the property is fully recovered or disposed of.

One method of avoiding such a basis imbalance among partners is to plan to specially allocate deductions for section 179 property to other partners and to specially allocate an equal amount of other deductions to estate and trust partners. However this type of allocation would come under attack since it lacks substantial economic effect.

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