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IRS Seeks to Regulate Partnership Basis Adjustments
In many simple cases, a partner's tax basis in their partnership interest (so-called "outside basis") will equal his pro rata share of the partnership's tax basis in its assets (so-called "inside basis"). However, there are various transactions that may cause a disparity between inside basis and outside basis to occur.
For example, if a person purchases a partnership interest at a valuation that is higher than the partnership's inside basis, the purchaser's outside basis will be greater than his share of the partnership's inside basis.
In such a situation, if the partnership sells an asset and allocates the gain pro rata to its partners, the purchaser would be allocated too much tax gain compared to his economic profit. To ameliorate this result, the tax code allows a partnership to make an election (a so-called "section 754 election") to increase the tax basis of its assets with respect to the purchaser in an amount equal to the difference between the purchaser's outside basis in the partnership and his share of the partnership's inside basis in its assets (a so-called "section 743 adjustment").
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