'Partnership Revaluations : Book-Ups Are Your Friends (Usually)'—Planning with Revaluations and Their Interplay with Section 704(c)

The procedure provided in the section 704(b) regulations known as “re-valuation and book-up” (sometimes called simply “book-up”) of a partnership’s assets and capital accounts is available and often used when a new partner enters an existing partnership and acquires a partnership interest in exchange for cash or property. The procedure is also available for use when the new partner obtains a partnership interest for services and when an existing partner’s interest is reduced by a nonproportionate distribution or increased by a nonproportionate contribution. The revaluation and book-up process seeks to avoid the possibility and danger of a shift in the tax incidence when a partnership sells property acquired before the event giving rise to the book-up opportunity and, often more important, the inadvertent shift in economic benefits among partners when a new partner enters a partnership whose allocations are governed by the substantial economic effect safe harbor provisions that are common in modern partnership agreements. Revaluations and book-ups create a process by which allocations of “built-in” gains (or losses) (i.e., gains (or losses) that have arisen but have not yet been realized by the partnership prior to the entry of the new partner (or other transaction that gives rise to the book-up)) are allocated automatically to the existing partners when realized by the partnership in the amount of the built-in gain (or loss). This Article deals with the book-up procedure generally, its consequences, planning involving book-ups, alternatives to book-ups, and other allocation procedures in lieu of the book-up procedure. The Article deals extensively with section 704(c) because section 704(c) provides the foundation for book-ups. It then discusses book-ups in a number of situations involving a new partner entering an existing partnership as well as book-ups in the context of a reduction of a partner’s partnership interest upon the liquidation of all or a portion of that partner’s interest in a partnership. The Article concludes with a number of policy recommendations