Reverse Section 704(c) Layers: Partnership Revaluation Events

In general, IRC Section 704(c) layers can be created in two different contexts. First, a "forward" layer is created when built-in gain (or built-in loss) property is contributed to a partnership. A "reverse" layer is generally made in advance of a change in the economic arrangement between new or existing partners to memorialize the built-in gain or loss amongst the existing partners. These reverse layers ensure that partners do not inappropriately shift gain or loss allocations that economically belong to the historical partners.

The complexity of these calculations cannot be understated. Each revaluation event creates a separate layer and amount of built-in gain or loss that is allocated to specific partnership properties. These so-called book-ups are not mandatory but allow partners to recognize the built-in gain or loss over time. The tax regulations require partnerships to employ a reasonable method for these Section 704(c) allocations, including traditional, traditional with curative allocations, or the remedial method. The method chosen can have a material impact on how partners share in taxable income/loss and the partnership is permitted to utilize different methods for each layer. Tax practitioners working with partnerships need to understand the practical impacts of IRC Section 704(c) that occur as a result of revaluing the Section 704(b) capital accounts.

Listen as our panel examines common events triggering partnership revaluations and discuss how to maintain and report Section 704(c) layers. Our panel of partnership transaction experts will walk practitioners through common scenarios requiring book-ups and book-downs and offer advice on facilitating tracking each partners' share of Section 704(c).