Code Section 754 Election - PLEASE HELP!

[Hamacher]

I have a client that is a partnership with a book value of $200,000 and FMV of $475,000 (the difference in value is $275,000 in Goodwill). A new partner is going to contribute $47,500 for a 10% interest in the partnership. If the partnership makes a Section 754 election what is the entry? Would the entry be the same for book and tax? Do the existing partners have a tax consequence for the deemed sale?

I was originally thinking the entry would be:

$475,000 cash (debit)
$475,000 equity to new partner (credit)

$275,000 goodwill (debit)
$275,000 equity allocated to original partners (credit)

Depreciation of Goodwill to be specifically allocated to new partner.

Thanks in advance for your help!

[mastertaxguy]

Partnership Basis Elections

You may want to look at Regulations on this, particularly 1.754-1 and 1.755-1 (and the examples provided).

As usually, our friendly TTB, Pp. 20-10/20-11 has a good example which may be helpful. Basically, as your phrase the question, the other partners are "selling" a portion of their respective interest to equal 10% of the partnership. Watch out for some related party rules, and possible state tax attribution of income rules for various business taxes (if applicable).

There may be some gain to be recognized on the part of the original partners.

[Hamacher]

Examples

You may want to look at Regulations on this, particularly 1.754-1 and 1.755-1 (and the examples provided).

As usually, our friendly TTB, Pp. 20-10/20-11 has a good example which may be helpful. Basically, as your phrase the question, the other partners are "selling" a portion of their respective interest to equal 10% of the partnership. Watch out for some related party rules, and possible state tax attribution of income rules for various business taxes (if applicable).

There may be some gain to be recognized on the part of the original partners.

I did look at the TTB and some resources online but all of the examples start out with Partner 1 agrees to sell to Partner 6... Partner 1 in this example is receiving nothing. Is there still a recognized gain the transaction to Partner 1? If so, is it something I will need to report on the K1? If so, where?

[Hamacher]

Follow up

I read the regs and it still isn't clear. Anyone else have any thoughts?