This memorandum explores the complex interplay between the partnership income tax rules of IRC Section 754 governing inside basis adjustments to partnership assets upon the sale of a partnership interest to an irrevocable non-grantor trust in exchange for an installment promissory note governed by IRC Section 453. If structured properly, such a transaction has the potential to allow families to immediately convert substantially appreciated assets to cash or other diversified assets while deferring income taxes over a long period of time. This type of planning also may produce significant estate planning benefits by removing post-transfer appreciation from the selling partner’s taxable estate.
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