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difference between the property’s basis and its

The fair market value of an interest in part-

the basis of the depletable property, un-

fair market value at the time of contribution. The

nership capital transferred to a partner as pay-

less the property is oil or gas wells whose

character of the gain or loss will be the same as

ment for services to the partnership is a

basis has been allocated to partners.

the character of the gain or loss that would have

guaranteed payment, discussed earlier.

resulted if the partnership had sold the property

Decreases. The partner’s basis is decreased

to the distributee partner. Appropriate adjust-

Profits interest. A profits interest is a partner-

(but never below zero) by the following items.

ments must be made to the adjusted basis of the

ship interest other than a capital interest. If a

•

The money (including a decreased share

contributing partner’s partnership interest and to

person receives a profits interest for providing

of partnership liabilities or an assumption

the adjusted basis of the property distributed to

services to, or for the benefit of, a partnership in

of the partner’s individual liabilities by the

reflect the recognized gain or loss.

a partner capacity or in anticipation of being a

partnership) and adjusted basis of prop-

partner, the receipt of such an interest is not a

Disposition of certain contributed property.

erty distributed to the partner by the part-

taxable event for the partner or the partnership.

The following rules determine the character of

nership.

However, this does not apply in the following

the partnership’s gain or loss on a disposition of

situations.

•

The partner’s distributive share of the part-

certain types of contributed property.

•

nership losses (including capital losses).

The profits interest relates to a substan-

tially certain and predictable stream of in-

1. Unrealized receivables. If the property

•

The partner’s distributive share of nonde-

come from partnership assets, such as

was an unrealized receivable in the hands

ductible partnership expenses that are not

income from high-quality debt securities or

of the contributing partner, any gain or loss

capital expenditures. This includes the

a high-quality net lease.

on its disposition by the partnership is ordi-

partner’s share of any section 179 ex-

nary income or loss. Unrealized receiv-

•

penses, even if the partner cannot deduct

Within 2 years of receipt, the partner dis-

ables are defined later under Payments for

the entire amount on his or her individual

poses of the profits interest.

Unrealized Receivables and Inventory

income tax return.

•

The profits interest is a limited partnership

Items. When reading the definition, substi-

•

The partner’s deduction for depletion for

interest in a publicly traded partnership.

tute “partner” for “partnership.”

any partnership oil and gas wells, up to

2. Inventory items. If the property was an

the proportionate share of the adjusted ba-

A profits interest transferred as compensation

inventory item in the hands of the contrib-

sis of the wells allocated to the partner.

for services is not subject to the rules for re-

uting partner, any gain or loss on its dispo-

stricted property that apply to capital interests.

sition by the partnership within 5 years

Partner’s liabilities assumed by partner-

after the contribution is ordinary income or

ship. If contributed property is subject to a

loss. Inventory items are defined later in

debt or if a partner’s liabilities are assumed by

Basis of Partner’s

Payments for Unrealized Receivables and

the partnership, the basis of that partner’s inter-

Inventory Items.

est is reduced (but not below zero) by the liability

Interest

assumed by the other partners. This partner

3. Capital loss property. If the property was

must reduce his or her basis because the as-

a capital asset in the contributing partner’s

sumption of the liability is treated as a distribu-

The basis of a partnership interest is the money

hands, any loss on its disposition by the

tion of money to that partner. The other partners’

plus the adjusted basis of any property the part-

partnership within 5 years after the contri-

assumption of the liability is treated as a contri-

ner contributed. If the partner must recognize

bution is a capital loss. The capital loss is

bution by them of money to the partnership. See

gain as a result of the contribution, this gain is

limited to the amount by which the part-

Effect of Partnership Liabilities, later.

included in the basis of his or her interest. Any

ner’s adjusted basis for the property ex-

increase in a partner’s individual liabilities be-

ceeded the property’s fair market value

Example 1. Ivan acquired a 20% interest in

cause of an assumption of partnership liabilities

immediately before the contribution.

a partnership by contributing property that had

is considered a contribution of money to the

an adjusted basis to him of $8,000 and a $4,000

4. Substituted basis property. If the dispo-

partnership by the partner.

mortgage. The partnership assumed payment of

sition of any of the property listed in (1),

the mortgage. The basis of Ivan’s interest is:

(2), or (3) is a nonrecognition transaction,

Interest acquired by gift, etc. If a partner

these rules apply when the recipient of the

acquires an interest in a partnership by gift,

Adjusted basis of contributed property

$8,000

property disposes of any substituted basis

inheritance, or under any circumstance other

property (other than certain corporate

Minus: Part of mortgage assumed by

than by a contribution of money or property to

stock) resulting from the transaction.

other partners (80% × $4,000) . . . . . .

3,200

the partnership, the partner’s basis must be de-

termined using the basis rules described in Pub-

Basis of Ivan’s partnership interest . . . $4,800

lication 551.

Contribution of Services

Example 2. If, in Example 1, the contributed

Adjusted Basis

A partner can acquire an interest in partnership

property had a $12,000 mortgage, the basis of

capital or profits as compensation for services

Ivan’s partnership interest would be zero. The

performed or to be performed.

There is a worksheet for adjusting the

$1,600 difference between the mortgage as-

basis of a partner’s interest in the part-

TIP

sumed by the other partners, $9,600 (80% ×

Capital interest. A capital interest is an inter-

nership in the Partner’s Instructions for

$12,000), and his basis of $8,000 would be

est that would give the holder a share of the

Schedule K-1 (Form 1065).

treated as capital gain from the sale or exchange

proceeds if the partnership’s assets were sold at

of a partnership interest. However, this gain

The basis of an interest in a partnership is

fair market value and the proceeds were distrib-

increased or decreased by certain items.

would not increase the basis of his partnership

uted in a complete liquidation of the partnership.

interest.

This determination generally is made at the time

Increases. A partner’s basis is increased by

of receipt of the partnership interest. The fair

Book value of partner’s interest. The ad-

the following items.

market value of such an interest received by a

justed basis of a partner’s interest is determined

•

partner as compensation for services must gen-

The partner’s additional contributions to

without considering any amount shown in the

erally be included in the partner’s gross income

the partnership, including an increased

partnership books as a capital, equity, or similar

in the first tax year in which the partner can

share of, or assumption of, partnership lia-

account.

transfer the interest or the interest is not subject

bilities.

to a substantial risk of forfeiture. The capital

Example. Enzo contributes to his partner-

•

The partner’s distributive share of taxable

interest transferred as compensation for serv-

ship property that has an adjusted basis of $400

and nontaxable partnership income.

ices is subject to the rules for restricted property

and a fair market value of $1,000. His partner

•

discussed in Publication 525 under Employee

The partner’s distributive share of the ex-

contributes $1,000 cash. While each partner has

Compensation.

cess of the deductions for depletion over

increased his capital account by $1,000, which

Publication 541 (December 2010)

Page 9

Form 541 - Partnerships - Department Of The Treasury - Internal Revenue Service - 2010 Page 9

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