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In Letter Ruling 21-06 (6/10/21), the Tennessee Department of Revenue addressed the franchise and excise tax implications when a partnership makes an IRC Sec. 754 election to step up the adjusted basis of its assets for federal income tax purposes,  and the partnership elects to “push down” the purchase accounting adjustments resulting from the purchase that gave rise to the IRC Sec. 754 election.  

The Department opined that for franchise tax purposes, the taxpayer must calculate its taxable net worth using the fair market value adjustments that resulted from the push-down election.  

For excise tax purposes, the Department opined that the taxpayer must exclude from its net earnings the basis adjustments and associated amortization and depreciation deductions that resulted from the IRC Sec. 754 election.

The takeaway: The ruling discusses the excise tax ramifications of the IRC Sec. 754 election.  Because Tennessee taxes the partnership itself, the question frequently arises whether the partnership can claim the benefit of the stepped-up basis when reporting its net earnings.  As the ruling opines, for federal income tax purposes, the election does not affect the taxable income of the partnership itself, but rather is only taken into consideration when determining the partner’s taxable income from the partnership.