Publication 541 |
2000 Tax Year |
Adjusting the Basis of Partnership Property
Generally, a partnership cannot adjust the basis of its property
because of a distribution of property to a partner or because of a
transfer of an interest in the partnership, whether by sale or
exchange or because of the death of a partner. The partnership can
adjust the basis only if it files an election to make an optional
adjustment to the basis of its property upon all distributions and
transfers. A partnership does not adjust the basis of partnership
property for a contribution of property, including money, to the
partnership.
Distributions.
When there is a distribution of partnership property to a partner,
the partnership makes the optional adjustment by:
- Increasing the adjusted basis of the retained partnership
property by:
- Any gain recognized by the distributee partner on the
distribution, plus
- The excess, if any, of the partnership's adjusted basis for
the distributed property (immediately before the distribution) over
the basis of the property to the distributee, or
- Decreasing the adjusted basis of the retained partnership
property by:
- Any loss recognized by the distributee partner on the
distribution, plus
- The excess, if any, of the distributee partner's basis for
the distributed property over the partnership's adjusted basis for the
property (immediately before the distribution).
Timing of adjustment.
If a partnership completely liquidates the interest of a partner by
making a series of cash payments treated as distributions of the
partner's interest in partnership property, the basis adjustments to
partnership property must correspond in timing and amount with the
recognition of gain or loss by the retiring partner, or a deceased
partner's successor in interest, with respect to those payments.
Example.
Alan owns a one-third interest in the partnership Sylvan
Associates. Sylvan has an optional adjustment to basis election in
effect. When Alan retires, Sylvan continues without dissolution and
agrees to liquidate Alan's one-third interest in the partnership
property by making a series of cash payments to Alan that are treated
as distributions. The total amount of payments Alan will receive is
fixed and exceeds the adjusted basis of Alan's interest in the
partnership.
Sylvan increases the adjusted basis of its property by Alan's
recognized gain in each partnership tax year during which Alan
recognizes gain with respect to the payments.
Transfers.
When there is a transfer of a partnership interest because of a
sale or exchange or a partner's death, the partnership makes the
optional adjustment by:
- Increasing the adjusted basis of the partnership property by
the excess of:
- The transferee's basis for his or her partnership interest,
over
- The transferee's share of the adjusted basis of all
partnership property, or
- Decreasing the adjusted basis of partnership property by the
excess of:
- The transferee's share of the adjusted basis of all
partnership property, over
- The transferee's basis for his or her partnership
interest.
These adjustments affect the basis of partnership property for the
transferee partner only. They become part of his or her share of the
common partnership basis.
Making the election.
The optional adjustment to basis is made by filing a written
statement with Form 1065 for the tax year in which the distribution or
transfer occurs. For the election to be valid, the return must be
filed on time, including extensions. The statement must include the
name and address of the partnership, be signed by one of the partners,
and state that the partnership elects under section 754 to apply
sections 734(b) and 743(b) of the Internal Revenue Code. Once a valid
election has been made, it applies in succeeding years until it is
revoked.
If the election cannot be made with the return, a partner or the
partnership can request an automatic extension of 12 months to make
the election. See section 301.9100-2 of the regulations for more
information.
Revoking the election.
Generally, the election can be revoked only with the approval of
the IRS. An application to revoke the election must be filed with the
IRS director for your area. This application must be filed within 30
days after the close of the partnership tax year for which the change
is to be effective. The application must be signed by one of the
partners and state why the partnership wishes to revoke the election.
Examples of sufficient grounds for approving the application
include the following.
- A change in the nature of the business.
- A substantial increase in assets.
- A change in the character of the assets.
- An increased frequency of retirements or shifts of
partnership interests.
However, the IRS will not approve an application to revoke the
election if its primary purpose is to avoid decreasing the basis of
partnership assets upon a transfer or distribution.
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