I do the taxes for a partnership in New York. The p-ship has an operating lease for ground floor space in New York. In turn, it sub-leases the space to a restaurant. Basically, it operates by paying rent for the main lease, collecting rent on the sub-lease, and distributing all the net income to the partners at the end of the year. This has been a profitable arrangement for the p-ship, but like any other rental operation it faces the usual risks in the future. It was intended that the p-ship would terminate when the main lease ends in about 10-years, however, one of the partners died and his executor has told the GP that he wants a Section 754 selection declared in the p-ships tax return to take advantage of the stepped-up basis. I've started to puzzle over the mechanics. The only asset is the main lease, but the p-ship hasn't been keeping it on its books. I could do a net PV of the lease to get an idea of its value, but I'm unsure of what to do with it other than giving it to the executor. My first question: in general, when should operating leases appear on an entity's books?
