Tax Insights
from State and Local Tax Services
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New York City issues Statement of
Audit Procedure on application of
IRC Sections 734 and 743 under the
Unincorporated Business Tax
May 16, 2017
In brief
The New York City Department of Finance (Department) recently issued a Statement of Audit Procedure
(SAP) addressing the application of Internal Revenue Code (IRC) sections 734 and 743 to the New York
City Unincorporated Business Tax (UBT). The SAPs are used by Department audit staff for guidance on
various audit-related matters and may be useful in understanding the audit process.
In the SAP, the Department concluded that the UBT incorporates IRC section 734 basis adjustments into
the computation of unincorporated business taxable income. However, unincorporated business taxable
income may not change in connection with an IRC section 743(b) adjustment where the taxpayer is not
the transferee of a partnership interest since the adjustment only affects a transferee���s income, gain, loss,
and deduction. [Statement of Audit Procedure UBT-2017-1, New York City Department of Finance, May
5, 2017]

In detail
Generally, this SAP states that
for federal and UBT purposes a
partnership cannot adjust the
basis of its assets following (1) a
distribution of property to a
partner or (2) a transfer of a
partnership interest. An election
under IRC section 754, however,
allows such adjustments under
either IRC section 734(b), where
the basis of the partnership
property shall be adjusted in the
case of a distribution of
property, or IRC section 743(b),
in the case of a transfer of a
partnership interest. The UBT
does not include any specific
statutory modification to the
federal calculation of basis.
Because the UBT starts with
federal gross income and
deductions, the SAP reasons
that a change in basis at the
federal level in certain cases
results in a corresponding
change to basis at the City UBT
level.
IRC Section 734(b) Basis
Adjustments
IRC section 734 provides the
conditions for an adjustment to
the basis of undistributed
partnership property after a
partnership distributes property
to a partner. In such cases, the
partnership adjusts its common
basis in its undistributed
property, and does not make
adjustments that apply
separately to any particular
partner as detailed in Treasury
Regulation § 1.734-1.
In the SAP, the Department
notes that an IRC section 734(b)
basis adjustment affects the
partnership’s subsequent
calculations of federal income,
gain, loss, and deduction, which
then flow through to its

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New York City unincorporated
business taxable income. Therefore,
for UBT purposes, IRC 734(b) basis
adjustments are incorporated in the
computation of unincorporated
business taxable income.
IRC Section 743(b) Basis
Adjustments
IRC section 743 provides the
conditions for an adjustment to the
basis of partnership property
following the transfer of an interest in
a partnership. In such cases, the
partnership makes an adjustment to
basis with respect to the transferee
partner only, and does not adjust the
common basis of its property as
detailed in Treasury Regulation §
1.743-1(j). A separate distributive
share calculation must then be made
to reflect the effects of the IRC section
743(b) adjustment that applies to the
transferee’s distributive share of
income, gain, loss, and deduction.
The Department observes that IRC
section 743 basis adjustments do not
affect the partnership’s subsequent
calculations of income, gain, loss, or
deduction because they only affect the
transferee’s income, gain, loss and
deduction. Therefore, a basis
adjustment in connection with IRC
section 743 does not flow through to
the partnership’s unincorporated
business taxable income.
The SAP provides examples of how
both IRC sections 734(b) and 743(b)
affect UBT, including sales of
partnership interests and liquidating
distributions.
Other issues
The Department notes that in
analyzing transfers of partnership
interests and assets, New York City
conforms to IRC sections 707(a)(2)(B)
and 755, as well as the applicable
treasury regulations, legislative
history, and case law. The Department
also follows Revenue Ruling 99-5
(1999-1 C.B. 434) and Revenue Ruling
99-6 (1999-1 C.B. 432) to determine
the consequences of transfers of
partnership interests that result in the
formation and dissolution of
partnerships for tax purposes.
The SAP provides examples pertaining
to the Department’s conformity to
Revenue Ruling 99-5 and Revenue
Ruling 99-6, including a partial sale of
interest in a disregarded entity (DRE),
a contribution to a DRE, or a sale of
interest resulting in a DRE.
The takeaway
Taxpayers in New York City finally
have guidance regarding how the New
York City Department of Finance will
seek to apply IRC sections 734 and
743 to the UBT. Taxpayers with IRC
section 734 or 743 adjustments should
take this opportunity to evaluate the
treatment of these adjustments on
their UBT returns. Since the
Department now accepts that IRC
section 734 basis adjustments are
incorporated in the computation of
unincorporated business taxable
income, care should be taken when
determining whether a basis
adjustment is pursuant to IRC section
734 or 743. To the extent that there is
a basis adjustment pursuant to IRC
section 743, taxpayers should keep in
mind that SAPs merely reflect the
Department’s interpretation of the law
and do not have the force and effect of
laws or regulations.


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For more information on the New York City Statement of Audit Procedure, please contact:
State and Local Tax Services—Asset and Wealth Management
Brian Rebhun
Principal, New York
+1 (646) 471-4024
brian.rebhun@pwc.com
Carolyn Makuen
Managing Director, New York
+1 (646) 471-7942
carolyn.makuen@pwc.com
Jonathan Robin
Director, New York
+1 (646) 313-3939
jonathan.robin@pwc.com
Michael Zargari
Director, New York
+1 (646) 471-3708
michael.zargari@pwc.com
Michael Fogel
Director, New York
+1 (646) 471-5357
michael.fogel@pwc.com

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