8th Lecture Basis of Partnership Interest.docx - Pass Thru...

This preview shows page 1 - 2 out of 11 pages.

Pass Thru Entities ACCT 6260 Operations & Basis Module 4 th Lecture DETERMINATION OF BASIS OF PARTNERS INTEREST Readings: IRC § 705 & 752 Reg. § 1.705-1 and 2; Reg. § 1.752-1-4 and 7 1. Introduction: Each partner has a basis in his partnership interest. It is commonly referred to as the outside basis. A partner’s outside basis is important for determining: The tax treatment of partnership distributions, The deductibility of partnership losses, and The gain or loss on a taxable disposition of a partnership interest. The partnership is not responsible for tracking outside basis. Outside basis cannot be found on a Schedule K-1. Each partner needs to maintain records of his own outside basis. Outside basis is determined without regard to the equity or capital reported by the partnership for book purposes. For example, assume A contributes land with a FMV of $1,000 and a basis of $400 and B contributes cash of $1,000. The equity or capital account on the partnership books will record that each has a balance of $1,000. However, for tax purposes A’s outside basis is $400 and B’s outside basis is $1,000. Each reporting a substituted basis pursuant to IRC section 722. As shown in the above example, initially, outside basis may equal the inside tax basis of partnership assets as determined pursuant to IRC section 723 carryover basis. However, certain transactions will cause a disparity between the two. Therefore, outside basis is determined by a partner’s original basis in his partnership interest and increased or decreased by operations and liabilities of the partnership. 2. When to determine outside basis: a. General rule: Normally, outside basis is not needed until the end of the partnership’s tax year after all transactions for the year have been recorded. So, outside basis must be determined at the end of the partnership tax year. For example, it is at year end when a partner receives a distributive share of losses. The partner must determine how much of the loss is deductible on the partner’s personal tax return. A partner can only deduct a partnership loss to the extent of the partner’s outside basis. Therefore outside basis must be determined at year end to ascertain deductibility of the pass thru loss. b. Exceptions: If a partner sales or exchanges all or a part of a partnership interest prior to the close of the partnership tax year, then outside basis must be determined at the time of this sale or exchange in order to determine taxation of the transaction. Similarly, if a partner’s interest is completely liquidated prior to year end, then the partner’s outside basis must be determined at that time. 1

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture