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increase among all the properties in proportion

exceeded the allocable basis, allocate the

value of all partnership inventory. (It is immate-

to their respective fair market values.

basis among the items in proportion to

rial whether the inventory he received was on

their adjusted bases to the partnership.

hand when he acquired his interest.)

Example. Eun’s basis in her partnership in-

Since the partnership from which Chin Ho

2. Allocate any remaining basis to other dis-

terest is $55,000. In a distribution in liquidation

withdrew did not make the optional adjustment

tributed properties in proportion to their ad-

of her entire interest, she receives properties A

to basis, he chose to adjust the basis of the

justed bases to the partnership.

and B, neither of which is inventory or unrealized

inventory received. His share of the partner-

receivables. Property A has an adjusted basis to

ship’s basis for the inventory is increased by

Partner’s interest more than partnership

the partnership of $5,000 and a fair market value

$500 (25% of the $2,000 difference between the

basis. If the basis of a partner’s interest to be

of $40,000. Property B has an adjusted basis to

$16,000 fair market value of the inventory and its

divided in a complete liquidation of the partner’s

the partnership of $10,000 and a fair market

$14,000 basis to the partnership at the time he

interest is more than the partnership’s adjusted

value of $10,000.

acquired his interest). The adjustment applies

basis for the unrealized receivables and inven-

To figure her basis in each property, Eun first

tory items distributed, and if no other property is

only for purposes of determining his new basis in

assigns bases of $5,000 to property A and

distributed to which the partner can apply the

the inventory, and not for purposes of partner-

$10,000 to property B (their adjusted bases to

remaining basis, the partner has a capital loss to

ship gain or loss on disposition.

the partnership). This leaves a $40,000 basis

the extent of the remaining basis of the partner-

The total to be allocated among the proper-

increase (the $55,000 allocable basis minus the

ship interest.

ties Chin Ho received in the distribution is

$15,000 total of the assigned bases). She first

$15,500 ($17,000 basis of his interest − $1,500

allocates $35,000 to property A (its unrealized

Special adjustment to basis. A partner who

cash received). His basis in the inventory items

appreciation). The remaining $5,000 is allocated

acquired any part of his or her partnership inter-

is $4,000 ($3,500 partnership basis + $500 spe-

between the properties based on their fair mar-

est in a sale or exchange or upon the death of

cial adjustment). The remaining $11,500 is allo-

ket values. $4,000 ($40,000/$50,000) is allo-

another partner may be able to choose a special

cated to property A and $1,000 ($10,000/

cated to his new basis for the other property he

basis adjustment for property distributed by the

$50,000) is allocated to property B. Eun’s basis

received.

partnership. To choose the special adjustment,

in property A is $44,000 ($5,000 + $35,000 +

Mandatory adjustment. A partner does not

the partner must have received the distribution

$4,000) and her basis in property B is $11,000

always have a choice of making this special

within 2 years after acquiring the partnership

($10,000 + $1,000).

adjustment to basis. The special adjustment to

interest. Also, the partnership must not have

Allocating a basis decrease. Use the fol-

basis must be made for a distribution of prop-

chosen the optional adjustment to basis when

lowing rules to allocate any basis decrease re-

erty, (whether or not within 2 years after the

the partner acquired the partnership interest.

quired in rule (1) or rule (2), earlier.

partnership interest was acquired) if all the fol-

If a partner chooses this special basis adjust-

lowing conditions existed when the partner re-

ment, the partner’s basis for the property distrib-

1. Allocate the basis decrease first to items

ceived the partnership interest.

uted is the same as it would have been if the

with unrealized depreciation to the extent

partnership had chosen the optional adjustment

•

of the unrealized depreciation. If the basis

The fair market value of all partnership

to basis. However, this assigned basis is not

decrease is less than the total unrealized

property (other than money) was more

reduced by any depletion or depreciation that

depreciation, allocate it among those items

than 110% of its adjusted basis to the

would have been allowed or allowable if the

in proportion to their respective amounts of

partnership.

partnership had previously chosen the optional

unrealized depreciation.

•

If there had been a liquidation of the part-

adjustment.

2. Allocate any remaining basis decrease

ner’s interest immediately after it was ac-

The choice must be made with the partner’s

among all the items in proportion to their

quired, an allocation of the basis of that

tax return for the year of the distribution if the

respective assigned basis amounts (as de-

interest under the general rules (discussed

distribution includes any property subject to de-

creased in (1)).

earlier under Basis divided among proper-

preciation, depletion, or amortization. If the

ties) would have decreased the basis of

choice does not have to be made for the distribu-

property that could not be depreciated, de-

Example. Armando’s basis in his partner-

tion year, it must be made with the return for the

pleted, or amortized and increased the ba-

first year in which the basis of the distributed

ship interest is $20,000. In a distribution in liqui-

sis of property that could be.

property is pertinent in determining the partner’s

dation of his entire interest, he receives

income tax.

properties C and D, neither of which is inventory

•

The optional basis adjustment, if it had

or unrealized receivables. Property C has an

A partner choosing this special basis adjust-

been chosen by the partnership, would

adjusted basis to the partnership of $15,000 and

ment must attach a statement to his or her tax

have changed the partner’s basis for the

a fair market value of $15,000. Property D has

return that the partner chooses under section

property actually distributed.

an adjusted basis to the partnership of $15,000

732(d) of the Internal Revenue Code to adjust

and a fair market value of $5,000.

the basis of property received in a distribution.

Required statement. Generally, if a partner

To figure his basis in each property, Ar-

The statement must show the computation of

chooses a special basis adjustment and notifies

mando first assigns bases of $15,000 to prop-

the special basis adjustment for the property

the partnership, or if the partnership makes a

erty C and $15,000 to property D (their adjusted

distributed and list the properties to which the

distribution for which the special basis adjust-

bases to the partnership). This leaves a $10,000

adjustment has been allocated.

ment is mandatory, the partnership must provide

basis decrease (the $30,000 total of the as-

a statement to the partner. The statement must

signed bases minus the $20,000 allocable ba-

Example. Chin Ho purchased a 25% inter-

provide information necessary for the partner to

sis). He allocates the entire $10,000 to property

est in X partnership for $17,000 cash. At the time

compute the special basis adjustment.

D (its unrealized depreciation). Armando’s basis

of the purchase, the partnership owned inven-

in property C is $15,000 and his basis in prop-

tory having a basis to the partnership of $14,000

erty D is $5,000 ($15,000 − $10,000).

Marketable securities. A partner’s basis in

and a fair market value of $16,000. Thus, $4,000

of the $17,000 he paid was attributable to his

marketable securities received in a partnership

Distributions before August 6, 1997. For

share of inventory with a basis to the partnership

distribution, as determined in the preceding dis-

property distributed before August 6, 1997, allo-

of $3,500.

cussions, is increased by any gain recognized

cate the basis using the following rules.

by treating the securities as money. See Market-

Within 2 years after acquiring his interest,

able securities treated as money under Part-

1. Allocate the basis first to unrealized receiv-

Chin Ho withdrew from the partnership and for

ner’s Gain or Loss, earlier. The basis increase is

ables and inventory items included in the

his entire interest received cash of $1,500, in-

allocated among the securities in proportion to

distribution to the extent of the partner-

ventory with a basis to the partnership of $3,500,

their respective amounts of unrealized apprecia-

ship’s adjusted basis in those items. If the

and other property with a basis of $6,000. The

partnership’s adjusted basis in those items

value of the inventory received was 25% of the

tion before the basis increase.

Publication 541 (December 2010)

Page 6

Form 541 - Partnerships - Department Of The Treasury - Internal Revenue Service - 2010 Page 6

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