ACCOUNTING

Running head: ACCOUNTING
Basis adjustment under section 734(b)
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Basis adjustment under section 734(b)
Introduction
A policy of maximum recognition is pursued by the partnership tax contribution and distribution rules. When people enter into a partnership, there is very little tax disincentive involved when property is moved in and out of the partnership by the partners. The importance of this policy is that it ensures efficient formation of the partnership as well as making operation decisions. However, Osofsky (2006) says that partners are allowed by the nonrecognition of rules to shift and defer gains. Therefore, tax revenues are threatened and businesses can take advantage of inefficient transactions can be encouraged.
There are some contribution and distribution rules provided under Subchapter K which curb shifting and deferral of gains and act as a backstop to the nonrecognition regime. Section 734(b) is an example of such a rule. The aim of section 734(b) is to preserve the correct amount of income after distribution (Osofsky, 2006). To be more specific, this section requires that when loss or gain is recognized by the distributee partner, there has to be basis adjustment inside the partnership. Second, the same will apply after the distributee partner changes the basis of assets in his or her hands upon distribution.
Potential challenges
Subchapter K of the Internal Revenue Code provides some efficient partnership tax provisions. The provisions may face some challenging tasks since they have to establish a sensible mechanism for tax arrangements between partners which can at times be difficult to calculate. According to Abrams (n.d), when two partners contribute equally to start a business where revenues from the investment will be shared equally, it should not be challenging when it comes to taxing the individuals.
However, problems will arise during taxation when one of the partners requests for a bigger share of initial receipts and lower share of back-end receipts. When the amount they have contributed to start the partnership are unequal, a mechanism will be establish to account for the difference and that structure will be used during taxation (Cartono, 2008). Scholars believe that a partnership is a very flexible type of business and this flexibility is captured well by the rules of Subchapter K.
Tax transparency is the core paradigm which best describes Subchapter K. This implies that a partnership is supposed to be all but invisible when it comes to the taxing system. Specifically, transactions carried out between a partner of the partnership should as mush as possible be free from taxation (Abrams, n.d). However, when partners of the partnership enter into deals with third-parties, the activities they engage in are taxable. Therefore, many contributions and distributions are not taxed but when interests and partnership assets are transferred to non-partners, the activities will be liable to taxation. There are some simple examples which are helpful in elucidating the role of section 734(b).
Adjusting an asset’s basis upon distribution
To start with, the right amount of partnership income is preserved by section 734(b) if the partner w...