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Assumption of liability. Generally, a partner

will be reflected in the partnership books, the

extent that any partner or a related person, de-

adjusted basis of Enzo’s interest is only $400

or related person is considered to assume a

fined earlier, has an economic risk of loss for

and the adjusted basis of his partner’s interest is

partnership liability only to the extent that:

that liability. A partner’s share of a recourse

$1,000.

liability equals his or her economic risk of loss for

1. He or she is personally liable for it,

that liability. A partner has an economic risk of

When determined. The adjusted basis of a

loss if that partner or a related person would be

2. The creditor knows that the liability was

partner’s partnership interest is ordinarily deter-

assumed by the partner or related person,

obligated (whether by agreement or law) to

mined at the end of the partnership’s tax year.

make a net payment to the creditor or a contribu-

However, if there has been a sale or exchange

3. The creditor can demand payment from

tion to the partnership with respect to the liability

of all or part of the partner’s interest or a liquida-

the partner or related person, and

if the partnership were constructively liquidated.

tion of his or her entire interest in a partnership,

4. No other partner or person related to an-

A partner who is the creditor for a liability that

the adjusted basis is determined on the date of

other partner will bear the economic risk of

would otherwise be a nonrecourse liability of the

sale, exchange, or liquidation.

loss on that liability immediately after the

partnership has an economic risk of loss in that

Alternative rule for figuring adjusted basis.

assumption.

liability.

In certain cases, the adjusted basis of a partner-

Constructive liquidation. Generally, in a

Related person. Related persons, for these

ship interest can be figured by using the part-

constructive liquidation, the following events are

purposes, includes all the following.

ner’s share of the adjusted basis of partnership

treated as occurring at the same time.

property that would be distributed if the partner-

•

An individual and his or her spouse, an-

ship terminated.

•

All partnership liabilities become payable

cestors, and lineal descendants.

This alternative rule can be used in either of

in full.

•

An individual and a corporation if the indi-

the following situations.

•

All of the partnership’s assets have a

vidual directly or indirectly owns 80% or

•

The circumstances are such that the part-

value of zero, except for property contrib-

more in value of the outstanding stock of

ner cannot practicably apply the general

uted to secure a liability.

the corporation.

basis rules.

•

All property is disposed of by the partner-

Two corporations that are members of the

•

It is, in the opinion of the IRS, reasonable

ship in a fully taxable transaction for no

same controlled group.

to conclude that the result produced will

consideration except relief from liabilities

•

A grantor and a fiduciary of any trust.

not vary substantially from the result under

for which the creditor’s right to reimburse-

the general basis rules.

•

Fiduciaries of two separate trusts if the

ment is limited solely to one or more as-

same person is a grantor of both trusts.

sets of the partnership.

Adjustments may be necessary in figuring the

•

A fiduciary and a beneficiary of the same

adjusted basis of a partnership interest under

All items of income, gain, loss, or deduc-

trust.

the alternative rule. For example, adjustments

tion are allocated to the partners.

would be required to include in the partner’s

•

A fiduciary and a beneficiary of two sepa-

The partnership liquidates.

share of the adjusted basis of partnership prop-

rate trusts if the same person is a grantor

erty any significant discrepancies that resulted

of both trusts.

Example. Juan and Teresa form a cash ba-

from contributed property, transfers of partner-

•

A fiduciary of a trust and a corporation if

ship interests, or distributions of property to the

sis general partnership with cash contributions

the trust or the grantor of the trust directly

partners.

of $20,000 each. Under the partnership agree-

or indirectly owns 80% or more in value of

ment, they share all partnership profits and

Effect of Partnership

the outstanding stock of the corporation.

losses equally. The partnership borrows

Liabilities

$60,000 and purchases depreciable business

•

A person and a tax-exempt educational or

equipment. This debt is included in the partners’

charitable organization controlled directly

basis in the partnership because incurring it cre-

A partner’s basis in a partnership interest in-

or indirectly by the person or by members

ates an additional $60,000 of basis in the part-

cludes the partner’s share of a partnership liabil-

of the person’s family.

nership’s depreciable property.

ity only if, and to the extent that, the liability:

•

A corporation and a partnership if the

If neither partner has an economic risk of

same persons own 80% or more in value

1. Creates or increases the partnership’s ba-

loss in the liability, it is a nonrecourse liability.

of the outstanding stock of the corporation

sis in any of its assets,

Each partner’s basis would include his or her

and 80% or more of the capital or profits

2. Gives rise to a current deduction to the

share of the liability, $30,000.

interest in the partnership.

partnership, or

If Teresa is required to pay the creditor if the

•

Two S corporations or an S corporation

partnership defaults, she has an economic risk

3. Is a nondeductible, noncapital expense of

and a C corporation if the same persons

of loss in the liability. Her basis in the partnership

the partnership.

own 80% or more in value of the outstand-

would be $80,000 ($20,000 + $60,000), while

ing stock of each corporation.

The term “assets” in (1) includes capitalized

Juan’s basis would be $20,000.

items allocable to future periods, such as organi-

•

An executor and a beneficiary of an es-

Limited partner. A limited partner generally

zation expenses.

tate.

has no obligation to contribute additional capital

A partner’s share of accrued but unpaid ex-

•

to the partnership and therefore does not have

A partnership and a person owning, di-

penses or accounts payable of a cash basis

an economic risk of loss in partnership recourse

rectly or indirectly, 80% or more of the

partnership are not included in the adjusted ba-

capital or profits interest in the partnership.

liabilities. Thus, absent some other factor, such

sis of the partner’s interest in the partnership.

as the guarantee of a partnership liability by the

•

Two partnerships if the same persons di-

Partner’s basis increased. If a partner’s

limited partner or the limited partner making the

rectly or indirectly own 80% or more of the

share of partnership liabilities increases, or a

loan to the partnership, a limited partner gener-

capital or profits interests.

partner’s individual liabilities increase because

ally does not have a share of partnership re-

he or she assumes partnership liabilities, this

course liabilities.

Property subject to a liability. If property

increase is treated as a contribution of money by

contributed to a partnership by a partner or dis-

the partner to the partnership.

Partner’s share of nonrecourse liabilities.

tributed by the partnership to a partner is subject

A partnership liability is a nonrecourse liability if

Partner’s basis decreased. If a partner’s

to a liability, the transferee is treated as having

no partner or related person has an economic

share of partnership liabilities decreases, or a

assumed the liability to the extent it does not

risk of loss for that liability. A partner’s share of

partner’s individual liabilities decrease because

exceed the fair market value of the property.

nonrecourse liabilities is generally proportionate

the partnership assumes his or her individual

liabilities, this decrease is treated as a distribu-

Partner’s share of recourse liabilities. A

to his or her share of partnership profits. How-

tion of money to the partner by the partnership.

partnership liability is a recourse liability to the

ever, this rule may not apply if the partnership

Publication 541 (December 2010)

Page 10

Form 541 - Partnerships - Department Of The Treasury - Internal Revenue Service - 2010 Page 10

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