Internal Revenue Service
Revenue Ruling
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smRev. Rul. 79-84
1979-1 C.B. 223
Section 676
Section 677
Section 743
Section 754
IRS Headnote
Adjustment to partnership basis; grantor trust; death of grantor-partner. A partnership interest contributed to a grantor trust, prior to the death of the grantor-partner in 1976, is considered to have been owned by the partner until death, at which time the partnership interest is considered to have been transferred by the partnership to the trust. The partnership, which made an election under section 754 of the Code, must adjust its basis in partnership property pursuant to section 743(b) at the time of the grantor-partner's death when the interest is considered transferred.
Full Text
Rev. Rul. 79-84
ISSUE
Does the death of an individual who has previously contributed a partnership interest to a grantor trust require the partnership to adjust its basis in partnership property pursuant to the optional adjustment to basis provisions of section 743(b) of the Internal Revenue Code of 1954 under the circumstances described below?
FACTS
A, an individual, created T, a revocable trust. All trust income was currently distributable to A for life, and A had the power to revoke T during A's lifetime. Upon A's death the trust became irrevocable, and A's spouse became its beneficiary. Among the assets transferred by A to T was A's partnership interest in ABC, a general partnership. When A died in 1976, ABC had a section 754 election in effect.
LAW AND ANALYSIS
The applicable provisions of the Code are subpart E of part I of subchapter J, (sections 671-679), relating to grantors and others treated as substantial owners of trusts, and sections 743(b) and 754, relating to optional adjustments to basis of partnership property.
Subpart E of the Code provides that if the grantor of a trust has certain powers over or interests in that trust, the grantor shall be considered the owner of that trust [hereinafter such trusts will be referred to as grantor trusts].
Section 676(a) of the Code provides that the grantor shall be treated as the owner of any portion of a trust if at any time the power to revest in the grantor title to that portion is exercisable by the grantor.
Section 677(a) of the Code provides that the grantor shall be treated as the owner of any portion of a trust whose income without the approval or consent of any adverse party, or in the discretion of the grantor or a non-adverse party, or both, may be distributed to the grantor.
Section 754 of the Code provides that if a partnership interest is transferred in a taxable year for which the partnership has a section 754 election in effect, the basis of partnership property shall be adjusted in a manner described in section 743.
Section 743(b) of the Code provides that "[i]n the case of a transfer of an interest in a partnership . . . upon the death of a partner," a parnership that has elected under section 754 shall adjust its basis in partnership property by (1) increasing the adjusted basis of the partnership property by the excess of the basis to the transferee partner of the transferee partner's interest in the partnership over the transferee partner's proportionate share of the adjusted basis of the partnership property, or (2) decreasing the adjusted basis of the partnership property by the excess of the transferee partner's proportionate share of the adjusted basis of the partnership property over the basis of the transferee partner's interest in the partnership.
Rev. Rul. 77-402, 1977-2 C.B. 222, discusses whether gain or loss is recognized to a taxpayer upon the taxpayer's renunciation of powers over a trust. In that revenue ruling the taxpayer created a trust and retained powers of the kind described in subpart E of part I of subchapter J of the Code. The trust then purchased an interest in a partnership engaged in investing in real property. After deductible losses had flowed from the partnership through the trust to the taxpayer, the taxpayer renounced the above-described powers.
Rev. Rul. 77-402 concludes that because the taxpayer retained the above-described powers, the trust was a grantor trust for the period between the trust's creation and the taxpayer's renunciation. For that period the taxpayer is therefore considered the owner of the entire trust and thus the owner of all the trust property (including the partnership interest) for federal income tax purposes. Therefore, for that period the taxpayer rather than the trust is considered to have been the partner. After the taxpayer's renunciation, however, the taxpayer no longer held the above-described powers, and the trust no longer qualified as a grantor trust. The taxpayer thus was no longer the owner of the trust and trust property for federal income tax purposes. The Revenue Ruling concludes that the taxpayer is considered to have transferred the partnership interest to the trust at the time of the renunciation.
Under Rev. Rul. 77-402, if a grantor trust holds a partnership interest, for federal income tax purposes the grantor rather than the trust is considered the partner. Additionally, when the trust ceases to be a grantor trust, the partnership interest is deemed to be transferred from the grantor to the trust.
Before A's death, A had powers over T of the types described in sections 676 and 677 of the Code, and T was therefore a grantor trust. Additionally, T held a partnership interest. Under the principles of Rev. Rul. 77-402, A is considered to have been the partner during this period for federal income tax purposes. Further, at the time of A's death T ceased to be a grantor trust. The partnership interest is thus considered to have been transferred from A to T at that time. As a result, a transfer of a partnership interest occurred upon the death of a partner.
HOLDING
Because ABC has elected under section 754 of the Code and because an interest in ABC was transferred upon the death of a partner, ABC must adjust its basis in partnership property pursuant to section 743(b).