Nothing upsets tax practitioners more than the fear that a simple situation may be subject to an unanticipated tax liability. A recent administrative law judge (ALJ) determination1 demonstrates how the New York Personal Income Tax can adversely affect a straightforward transaction.
Craig Olsheim was a non-resident of New York who owned a limited liability company (LLC) interest, referred to as Fifth Avenue, which owned one asset, an office building in New York City. The LLC was taxed as a partnership and is referred to in the determination (and here) as the partnership. Olsheim inherited the interest in 2004 as a 50 percent beneficiary of a trust established by his father. By reason of the "step up in basis on death" rules of IRC section 1014, Olsheim had a tax basis in his interest that was substantially greater than his allocable share of the partnership’s tax basis in the Fifth Avenue property. The partnership refused to make an election under IRC section 754 to increase its basis in the property. Many widely held partnerships do not allow section 754 elections, primarily because it can significantly increase accounting costs.
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