Publication 541 |
2000 Tax Year |
Basis of Partner's Interest
The basis of a partnership interest is the money plus the adjusted
basis of any property the partner contributed. If the partner must
recognize gain as a result of the contribution, this gain is included
in the basis of his or her interest. Any increase in a partner's
individual liabilities because of an assumption of partnership
liabilities is considered a contribution of money to the partnership
by the partner.
Interest acquired by gift, etc.
If a partner acquires an interest in a partnership by gift,
inheritance, or under any circumstance other than by a contribution of
money or property to the partnership, the partner's basis must be
determined using the basis rules described in Publication 551.
Adjusted Basis
The basis of an interest in a partnership is increased or decreased
by certain items.
Increases.
A partner's basis is increased by the following items.
- The partner's additional contributions to the partnership,
including an increased share of or assumption of partnership
liabilities.
- The partner's distributive share of taxable and nontaxable
partnership income.
- The partner's distributive share of the excess of the
deductions for depletion over the basis of the depletable property,
unless the property is oil or gas wells whose basis has been allocated
to partners.
Decreases.
The partner's basis is decreased (but never below zero) by the
following items.
- The money (including a decreased share of partnership
liabilities or an assumption of the partner's individual liabilities
by the partnership) and adjusted basis of property distributed to the
partner by the partnership.
- The partner's distributive share of the partnership losses
(including capital losses).
- The partner's distributive share of nondeductible
partnership expenses that are not capital expenditures. This includes
the partner's share of any section 179 expenses, even if the partner
cannot deduct the entire amount on his or her individual income tax
return.
- The partner's deduction for depletion for any partnership
oil and gas wells, up to the proportionate share of the adjusted basis
of the wells allocated to the partner.
Partner's liabilities assumed by partnership.
If contributed property is subject to a debt or if a partner's
liabilities are assumed by the partnership, the basis of that
partner's interest is reduced (but not below zero) by the liability
assumed by the other partners. This partner must reduce his or her
basis because the assumption of the liability is treated as a
distribution of money to that partner. The other partners' assumption
of the liability is treated as a contribution by them of money to the
partnership. See Effect of Partnership Liabilities, later.
Example 1.
John acquired a 20% interest in a partnership by contributing
property that had an adjusted basis to him of $8,000 and a $4,000
mortgage. The partnership assumed payment of the mortgage. The basis
of John's interest is:
Adjusted basis of contributed property |
$8,000 |
Minus: Part of mortgage assumed by other
partners (80% x $4,000) |
3,200 |
Basis of John's partnership interest |
$4,800 |
Example 2.
If, in Example 1, the contributed property had a $12,000 mortgage,
the basis of John's partnership interest would be zero. The $1,600
difference between the mortgage assumed by the other partners, $9,600
(80% x $12,000), and his basis of $8,000 would be treated as
capital gain from the sale or exchange of a partnership interest.
However, this gain would not increase the basis of his
partnership interest.
Book value of partner's interest.
The adjusted basis of a partner's interest is determined without
considering any amount shown in the partnership books as a capital,
equity, or similar account.
Example.
Sam contributes to his partnership property that has an adjusted
basis of $400 and a fair market value of $1,000. His partner
contributes $1,000 cash. While each partner has increased his capital
account by $1,000, which will be reflected in the partnership books,
the adjusted basis of Sam's interest is only $400 and the adjusted
basis of his partner's interest is $1,000.
When determined.
The adjusted basis of a partner's partnership interest is
ordinarily determined at the end of the partnership's tax year.
However, if there has been a sale or exchange of all or part of the
partner's interest or a liquidation of his or her entire interest in a
partnership, the adjusted basis is determined on the date of sale,
exchange, or liquidation.
Alternative rule for figuring adjusted basis.
In certain cases, the adjusted basis of a partnership interest can
be figured by using the partner's share of the adjusted basis of
partnership property that would be distributed if the partnership
terminated.
This alternative rule can be used in either of the following
situations.
- The circumstances are such that the partner cannot
practicably apply the general basis rules.
- It is, in the opinion of the IRS, reasonable to conclude
that the result produced will not vary substantially from the result
under the general basis rules.
Adjustments may be necessary in figuring the adjusted basis of a
partnership interest under the alternative rule. For example,
adjustments would be required to include in the partner's share of the
adjusted basis of partnership property any significant discrepancies
that resulted from contributed property, transfers of partnership
interests, or distributions of property to the partners.
Effect of Partnership Liabilities
A partner's basis in a partnership interest includes the partner's
share of a partnership liability only if, and to the extent that, the
liability:
- Creates or increases the partnership's basis in any of its
assets,
- Gives rise to a current deduction to the partnership,
or
- Is a nondeductible, noncapital expense of the
partnership.
The term "assets" in (1) includes capitalized items
allocable to future periods, such as organization expenses.
A partner's share of accrued but unpaid expenses or accounts
payable of a cash basis partnership are not included in the adjusted
basis of the partner's interest in the partnership.
Partner's basis increased.
If a partner's share of partnership liabilities increases, or a
partner's individual liabilities increase because he or she assumes
partnership liabilities, this increase is treated as a contribution of
money by the partner to the partnership.
Partner's basis decreased.
If a partner's share of partnership liabilities decreases, or a
partner's individual liabilities decrease because the partnership
assumes his or her individual liabilities, this decrease is treated as
a distribution of money to the partner by the partnership.
Assumption of liability.
A partner or related person is considered to assume a partnership
liability only to the extent that:
- He or she is personally liable for it,
- The creditor knows that the liability was assumed by the
partner or related person,
- The creditor can demand payment from the partner or related
person, and
- No other partner or person related to another partner will
bear the economic risk of loss on that liability immediately after the
assumption.
Related person.
Related persons, for these purposes, includes all of the following.
- An individual and his or her spouse, ancestors, and lineal
descendants.
- An individual and a corporation if the individual directly
or indirectly owns 80% or more in value of the outstanding stock of
the corporation.
- Two corporations that are members of the same controlled
group.
- A grantor and a fiduciary of any trust.
- Fiduciaries of two separate trusts if the same person is a
grantor of both trusts.
- A fiduciary and a beneficiary of the same trust.
- A fiduciary and a beneficiary of two separate trusts if the
same person is a grantor of both trusts.
- A fiduciary of a trust and a corporation if the trust or the
grantor of the trust directly or indirectly owns 80% or more in value
of the outstanding stock of the corporation.
- A person and a tax-exempt educational or charitable
organization controlled directly or indirectly by the person or by
members of the person's family.
- A corporation and a partnership if the same persons own 80%
or more in value of the outstanding stock of the corporation and 80%
or more of the capital or profits interest in the partnership.
- Two S corporations or an S corporation and a C corporation
if the same persons own 80% or more in value of the outstanding stock
of each corporation.
- An executor and a beneficiary of an estate.
- A partnership and a person owning, directly or indirectly,
80% or more of the capital or profits interest in the
partnership.
- Two partnerships if the same persons directly or indirectly
own 80% or more of the capital or profits interests.
Property subject to a liability.
If property contributed to a partnership by a partner or
distributed by the partnership to a partner is subject to a liability,
the transferee is treated as having assumed the liability to the
extent it does not exceed the fair market value of the property.
Partner's share of recourse liabilities.
A partnership liability is a recourse liability to the extent that
any partner or a related person, defined earlier, has an economic risk
of loss for that liability. A partner's share of a recourse liability
equals his or her economic risk of loss for that liability. A partner
has an economic risk of loss if that partner or a related person would
be obligated (whether by agreement or law) to make a net payment to
the creditor or a contribution to the partnership with respect to the
liability if the partnership were constructively liquidated. A partner
who is the creditor for a liability that would otherwise be a
nonrecourse liability of the partnership has an economic risk of loss
in that liability.
Constructive liquidation.
Generally, in a constructive liquidation, the following events are
treated as occurring at the same time.
- All partnership liabilities become payable in full.
- All of the partnership's assets have a value of zero, except
for property contributed to secure a liability.
- All property is disposed of by the partnership in a fully
taxable transaction for no consideration (except relief from
liabilities for which the creditor's right to reimbursement is limited
solely to one or more assets of the partnership).
- All items of income, gain, loss, or deduction are allocated
to the partners.
- The partnership liquidates.
Example.
Ted and Jane form a cash basis general partnership with cash
contributions of $20,000 each. Under the partnership agreement, they
share all partnership profits and losses equally. They borrow $60,000
and purchase depreciable business equipment. This debt is included in
the partners' basis in the partnership because incurring it creates an
additional $60,000 of basis in the partnership's depreciable property.
If neither partner has an economic risk of loss in the liability,
it is a nonrecourse liability. Each partner's basis would include his
or her share of the liability, $30,000.
If Jane is required to pay the creditor if the partnership
defaults, she has an economic risk of loss in the liability. Her basis
in the partnership would be $80,000 ($20,000 + $60,000), while Ted's
basis would be $20,000.
Limited partner.
A limited partner generally has no obligation to contribute
additional capital to the partnership and therefore does not have an
economic risk of loss in partnership recourse liabilities. Thus,
absent some other factor, such as the guarantee of a partnership
liability by the limited partner or the limited partner making the
loan to the partnership, a limited partner generally does not have a
share of partnership recourse liabilities.
Partner's share of nonrecourse liabilities.
A partnership liability is a nonrecourse liability if no partner or
related person has an economic risk of loss for that liability. A
partner's share of nonrecourse liabilities is generally proportionate
to his or her share of partnership profits. However, this rule may not
apply if the partnership has taken deductions attributable to
nonrecourse liabilities or the partnership holds property that was
contributed by a partner.
More information.
For more information on the effect of partnership liabilities,
including rules for limited partners and examples, see sections
1.752-1 through 1.752-5 of the regulations.
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