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

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.

1. Review of partnership allocation rules
2. Reverse allocations
3. Revaluation methodologies
4. Layered reverse allocations
5. Regulatory allocations
6. Recent IRS Private Letter Ruling on partial netting in revaluation of investment partnership assets

The panel will review these and other key issues:

• What are the triggering events that will permit a reverse allocation and revaluing of partnership assets?
• Calculating and maintaining records of “layers” of reverse allocations
• Whether and when revaluations are appropriate or required
• Recent IRS guidance on use of partial netting in revaluation of investment partnership assets

Learning Objectives

After completing this course, you will be able to:

• Identify triggering events that permit or require reverse allocation asset revaluations
• Recognize scenarios where a forward allocation warrants a revaluation
• Discern the impact of layered reverse allocations
• Determine necessary substantiation requirements to support a reverse allocation

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, preparing complex tax forms and schedules, supervising other preparers/accountants. Specific knowledge and understanding of partnership structure, operating agreements and liquidation, including partner capital accounts, allocation and distributions; familiarity with the economic effect test; safe-harbor and non-safe harbor partnership agreements according to IRC 704

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).