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Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 2574
Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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Can you give some practical advise and steps on how to help

Customer Question

quot;FOR LANE" Can you give some practical advise and steps on how to help a determine basis in a partnership if they come to us for the first time after the the partnership has been in existance for several years?
Submitted: 11 months ago.
Category: Finance
Expert:  Lane replied 11 months ago.

Hi,

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Sorry ... had client meetings this afternoon

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I'm going to paste in here something from CCH - they do an excellent job of reducing the IRS publication stuff to something that's readable

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First - since you're looking back ... the items that either increase or decrease basis:

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Possible Increases in a Partner’s Basis:

  • Additional contributions of cash or property to the partnership
  • Increases in the partner’s share of liabilities of the partnership
  • Partner’s assumption of individual liabilities of the partnership
  • Partner’s distributive share of taxable income
  • Partner’s distributive share of nontaxable income
  • Partner’s distributive share of excess of depletion deductions over basis of property (unless property is oil or gas well whose basis has been allocated to partners)

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3. Possible Decreases in a Partner’s Basis:

  • Cash and adjusted basis of any property distributed to the partner
  • Decreases in the partner’s share of liabilities of the partnership
  • Partnership assumption of individual liabilities of the partner
  • Partner’s distributive share of losses of the partnership (including capital losses)
  • Partner’s distributive share of nondeductible partnership expenses that are not capital expenditures (including any Sec. 179 deduction that cannot be used by the partner)
  • 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

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4. A note on liabilities – The pro rata share of liabilities increase a partner’s adjusted basis only if the liability either (1) creates or increases the partnership’s basis in any of its assets, (2) gives rise to a current deduction to the partnership, or (3) is a nondeductible, noncapital expense of the partnership. Also, recall from the earlier discussion that if only one partner is required to pay the liability in the event of a default by the partnership, only that partner may increase basis for that liability.

Expert:  Lane replied 11 months ago.

Now, this is an overview of how the INITIAL contributions work (when there are no liabilities)

Expert:  Lane replied 11 months ago.

1. Contribution of Property - In general, Sec. 721 provides that no gain or loss is recognized by a partnership or a contributing partner who transfers property to a partnership solely in exchange for a partnership interest (capital and/or profits). There is no 80% ownership test (as is true with corporations under Sec. 351, discussed later), and there are no limits on the type of property contributed. These rules apply to any partnership contributions, not just those in forming the partnership.

Example – Allen Ford contributes property with an adjusted basis of $20,000 and a fair market value of $30,000 to a ABCD partnership for a 25% partnership interest. Allen recognizes no gain on the transfer, Allen’s basis in the partnership interest is $20,000, and the partnership’s basis in the property is $20,000. Note the parallels to the like-kind exchange rules discussed earlier.

The partner’s basis in the partnership interest will equal the basis of the property contributed, and the property will have the same tax basis to the partnership. As was true with corporations, holding periods generally tack.

2. Contribution of Services - The contribution of services to a partnership is a taxable event, and the contributing partner will be taxed on the value of the interest received. This in turn provides a basis of the partnership interest equal to the services income recognized.

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Example – Sue Clark contributes services worth $30,000 to the ABCD partnership in exchange for a 25% partnership interest. Sue must report the $30,000 as compensation income, and the basis of her partnership interest is $30,000. The partnership also has a basis of $30,000 to either deduct as compensation or capitalize and possibly amortize as an organization cost.

Expert:  Lane replied 11 months ago.

And finally INITIAL contributions WITH liabilities

Expert:  Lane replied 11 months ago.

1. Liabilities Assumed by the Partnership — As is true for corporations discussed later, liabilities assumed by the partnership are not treated as boot received for purposes of determining gain to the contributing partner (however, such liabilities do affect the basis of the partnership interest (see below).

2. The liabilities are treated as assumed by the partnership, but only to the extent that they do not exceed the fair market value of the property. See the examples later.

3. Gain is recognized to the extent that the liabilities assumed by the otherpartners exceed the basis of the property contributed. And as discussed in the next section, the basis of the partnership interest in such a case will always be $0.

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Example - D contributes property with an adjusted basis of $23,000 and liabilities outstanding of $40,000 for a 25% interest in the ABCD Partnership. Since partners A, B, and C will assume 75% of these liabilities, or $30,000, D must report a gain of $7,000 on the contribution of property ($30,000 - $23,000). This prevents a negative basis problem, as D’s basis will be $0 (see the discussion below).

Expert:  Lane replied 11 months ago.

I know this is not me talking here, but I completely agree agree and they, again, do excellent job of articulating what's really important without the convoluted level of detail we see by strictly quoting code OR even worse IRS' publications (almost written to confuse, it seems sometimes)

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Let me know if this helps ... I think it's concise but detailed enough to give you a foundation for going back and building (re-building) basis

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