purposes for determining a partner's basis in a partnership
partner's basis is used to measure the gain or loss from
a sale or taxable exchange of a partner's interest in the
partnership or the liquidation of a partner's interest in
the partnership (§§741 and 731),
partner's basis is used in determining the basis of partnership
property (other than money) received in liquidation of the
partner's interest in the partnership (§732(b)),
partner's basis is important because it is used to limit
the deductibility of a partner's share of partnership losses.
Versus "Inside" Basis -Why Is it Differenct?
times, a partner's basis for his or her partnership interest
("outside" basis) does not equal the partnership's basis
for its assets ("inside" basis). This
inequality may occur, for example, as a result of the
acquisition of a partnership interest through purchase
partnership interest is acquired from an existing partner,
the purchasing partner will take a cost basis in the partnership
interest, which may be higher or lower than the basis of the
partnership interest in the hands of the selling partner.
As a result, the purchasing partner's basis in the partnership
interest will differ from his (or her) share of the basis
of the partnership's assets.
To equalize the inside and outside bases, the partnership
may elect to adjust the basis of its assets. §743(b).
P owns a one-third interest in the PQR
partnership that has assets with a FMV of $30,000
and an inside basis of $24,000. Further assume
that P has an outside basis of $8,000 which
is equal to his share of inside basis (1/3
of $24,000). If P sells his interest to S for
its value $10,000, S will now have an outside
basis of $10,000 (what he paid for it) but his
share of inside basis will still remain at $8,000
(1/3 of $24,000).
that this disparity can be remedied with a §754
election discussed later in the course.
The basis of the partnership interest received by the contributing
The amount of any cash contribution;
adjusted basis of any property contributed; plus
amount, if any, of gain recognized under §721(b).
to the basis amount above may be required when property subject
to a liability is contributed to the partnership, or when
the partnership assumes a liability from any partner.
partnership interest is acquired other than as a result of
a contribution of property (e.g., by purchase of an existing
partner's interest or acquisition of a partnership interest
from a decedent), the partner's basis is determined under
the general basis rules of §§1011, 1012, 1014, 1015, etc.
a result of the operations, the basis that a partner has
in his or her partnership interest will fluctuate throughout
the term of the partner's ownership. The basis of a partner's
interest in the partnership will either increase or decrease
by the following: §705.
The basis of a partnership interest is increased
Additional contributions to the partnership or
other forms of acquisition (e.g., purchases),
The partner's share of partnership taxable income, tax-exempt
Depletion deductions in excess of the basis of the
property subject to depletion , and
An increase in the partner's share of partnership
liabilities (including partnership liabilities assumed
by the partner).
A partner's basis is decreased by:
a. Distributions of money or other property from
b. The partner's share of partnership losses
and nondeductible, noncapitalized expenditures,
including the partner's share of disallowed partnership
losses if such losses reduce the basis of partnership
assets without a corresponding effect on its income.
Rev. Rul. 96-10, 1996-1 C.B. 138 and §705(a)(2).
Any reduction in a partner's allocable share of
partnership liabilities. In Rev. Rul. 94-4, 1994-1
C.B. 195, the IRS stated that a reduction in a partner's
share of partnership debt is treated as an advance
of cash to the partner and is taken into account
at the end of the partnership year. This ruling
formalized existing IRS policy that the decrease
in basis occurs on the last day of the year and
not on the mid-year date when the partner's share
of debt declines. §752(b)
The partner's deduction for depletion with respect
to certain oil and gas property of the partnership
(but not in excess of the partner's proportionate
share of adjusted basis of such property). §705(a)(3)
Rule for Basis Determination
Section 705(b) allows the Commissioner to prescribe rules
by which the adjusted basis of a partner's interest may be
determined by reference to the share of the adjusted basis
of partnership property which would be distributable upon
the termination of the partnership. This alternative rule
is available where it is not practical to apply the §705(a)
general rule or where it is reasonable to conclude that the
result will not vary substantially from that which would be
obtained under the general rule. In practice, the IRS will
often accept a taxpayer's "good faith effort" to compute basis
must be taken into account when a partner's basis in a partnership
is being computed.
Negative Basis: The basis of a partner's interest in
a partnership cannot be reduced below zero. This situation
has a potential to occur when a partner receives a distribution
from the partnership or has a loss in excess of their outside
basis. §705(a)(2)&(3).Thus, instead of reducing basis
below zero, a partner is fully taxed on distributions of
cash in excess of basis and then takes a zero basis in any
noncash property distributions.
Income: Tax-exempt income that increases basis should
include only that income which is permanently tax-exempt.
Income that is tax-deferred rather than exempt (such as
a nonrecognized gain on a like-kind exchange) should not
trigger a basis increase. For example, in Rev. Rul. 96-10,
1996-1 C.B. 138, a sale of property between two related
partnerships for which a loss was disallowed under §707(b)(1)
was followed by the sale of the property to an unrelated
party for which gain was not recognized under §267(d). The
IRS held that the partners decreased the bases of their
partnership interests for their shares of the partnership's
disallowed loss and increased the bases of their interests
for their shares of the gain that was not recognized.
of Basis Adjustments: In determining a partner's basis
for purposes of the limitation of §704(d), a partner's basis
is first increased for his or her distributive share of
partnership income items under §705(a)(1), and decreased
by distributions and other items under §705(a)(2) except
for losses. The partner's basis thus determined serves as
the limitation on the deduction of partnership losses. Treas.
Rul. 66-94, 1966-1 C.B. 166, illustrates the ordering
rules for determining a partner's basis for partnership
loss purposes. Contributions to a partnership and distributions
from a partnership (including cash distributions) reduce
a partner's basis before partnership losses are taken
into account. c. Losses suspended on pro rata basis. If
losses exceed the partner's basis, the deductible losses
are deemed to consist of a pro rata share of each type
of loss (e.g., ordinary and capital loss). Treas.
in computing the partner's basis for purposes of calculating
gain on a cash distribution, the partner's basis must
be determined through the date of the distribution. However,
advances or draws against a partner's distributive share
of partnership income and reductions in a partner's share
of partnership liabilities are treated as made on the
last day of the year. Treas. Reg. §1.731-1(a)(1)(ii)
and Rev. Rul. 94-4.
Charitable Contributions: A
partner's share of partnership charitable contributions
is not subject to the basis limitation. See Treas. Reg.
§1.704-1(d)(2) and also, PLR 8753015. If a partnership makes
a charitable contribution of property, the partners' bases
in their partnership interests are decreased (but not below
zero) by their shares of the partnership's basis in the
contributed property. Rev. Rul. 96-11,
1996-1 C.B. 140.
Interests: A partner holding both a general and limited
interest in the same partnership is treated as having a
single (combined) basis for both interests. Rev. Rul. 84-53,
1984-1 C.B. 159. (A similar rule applies to combine a partner's
multiple interests for capital accounting purposes. Treas.
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