Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

3. The creditor can demand payment from

if the partnership were constructively liquidated.

Disposition of

the partner or related person, and

A partner who is the creditor for a liability that

would otherwise be a nonrecourse liability of the

4. No other partner or person related to an-

Partner’s Interest

partnership has an economic risk of loss in that

other partner will bear the economic risk of

liability.

loss on that liability immediately after the

The following discussions explain the treatment

assumption.

Constructive liquidation. Generally, in a

of gain or loss from the disposition of an interest

constructive liquidation, the following events are

in a partnership.

Related person. Related persons, for these

treated as occurring at the same time.

purposes, includes all the following.

Abandoned or worthless partnership

•

All partnership liabilities become payable

interest. A loss incurred from the abandon-

•

An individual and his or her spouse, an-

in full.

ment or worthlessness of a partnership interest

cestors, and lineal descendants.

•

is an ordinary loss only if both of the following

All of the partnership’s assets have a

•

tests are met.

An individual and a corporation if the indi-

value of zero, except for property contrib-

vidual directly or indirectly owns 80% or

•

uted to secure a liability.

The transaction is not a sale or exchange.

more in value of the outstanding stock of

•

The partner has not received an actual or

All property is disposed of by the partner-

the corporation.

deemed distribution from the partnership.

ship in a fully taxable transaction for no

•

Two corporations that are members of the

consideration (except relief from liabilities

If the partner receives even a de minimis actual

same controlled group.

for which the creditor’s right to reimburse-

or deemed distribution, the entire loss generally

•

A grantor and a fiduciary of any trust.

ment is limited solely to one or more as-

is a capital loss. However, see Payments for

•

sets of the partnership).

Unrealized Receivables and Inventory Items,

Fiduciaries of two separate trusts if the

•

later.

same person is a grantor of both trusts.

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

•

tion are allocated to the partners.

A fiduciary and a beneficiary of the same

Partnership election to adjust basis of part-

•

trust.

The partnership liquidates.

nership property. Generally, a partnership’s

•

basis in its assets is not affected by a transfer of

A fiduciary and a beneficiary of two sepa-

an interest in the partnership, whether by sale or

rate trusts if the same person is a grantor

Example. Ted and Jane form a cash basis

exchange or because of the death of a partner.

of both trusts.

general partnership with cash contributions of

However, the partnership can elect to make an

•

$20,000 each. Under the partnership agree-

A fiduciary of a trust and a corporation if

optional adjustment to basis in the year of trans-

ment, they share all partnership profits and

the trust or the grantor of the trust directly

fer.

losses equally. They borrow $60,000 and

or indirectly owns 80% or more in value of

purchase depreciable business equipment. This

the outstanding stock of the corporation.

Sale, Exchange,

debt is included in the partners’ basis in the

•

or Other Transfer

A person and a tax-exempt educational or

partnership because incurring it creates an addi-

charitable organization controlled directly

tional $60,000 of basis in the partnership’s

or indirectly by the person or by members

The sale or exchange of a partner’s interest in a

depreciable property.

of the person’s family.

partnership usually results in capital gain or loss.

If neither partner has an economic risk of

•

However, see Payments for Unrealized Receiv-

A corporation and a partnership if the

loss in the liability, it is a nonrecourse liability.

ables and Inventory Items, later, for certain ex-

same persons own 80% or more in value

Each partner’s basis would include his or her

ceptions. Gain or loss is the difference between

of the outstanding stock of the corporation

share of the liability, $30,000.

the amount realized and the adjusted basis of

and 80% or more of the capital or profits

If Jane is required to pay the creditor if the

the partner’s interest in the partnership. If the

interest in the partnership.

partnership defaults, she has an economic risk

selling partner is relieved of any partnership

•

Two S corporations or an S corporation

liabilities, that partner must include the liability

of loss in the liability. Her basis in the partnership

and a C corporation if the same persons

relief as part of the amount realized for his or her

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

own 80% or more in value of the outstand-

interest.

Ted’s basis would be $20,000.

ing stock of each corporation.

Limited partner. A limited partner generally

Example 1. Fred became a limited partner

•

An executor and a beneficiary of an es-

has no obligation to contribute additional capital

in the ABC Partnership by contributing $10,000

tate.

to the partnership and therefore does not have

in cash on the formation of the partnership. The

•

an economic risk of loss in partnership recourse

A partnership and a person owning, di-

adjusted basis of his partnership interest at the

liabilities. Thus, absent some other factor, such

end of the current year is $20,000, which in-

rectly or indirectly, 80% or more of the

as the guarantee of a partnership liability by the

cludes his $15,000 share of partnership liabili-

capital or profits interest in the partnership.

limited partner or the limited partner making the

ties. The partnership has no unrealized

•

Two partnerships if the same persons di-

loan to the partnership, a limited partner gener-

receivables or inventory items. Fred sells his

rectly or indirectly own 80% or more of the

ally does not have a share of partnership re-

interest in the partnership for $10,000 in cash.

capital or profits interests.

course liabilities.

He had been paid his share of the partnership

income for the tax year.

Property subject to a liability. If property

Fred realizes $25,000 from the sale of his

contributed to a partnership by a partner or dis-

Partner’s share of nonrecourse liabilities.

partnership interest ($10,000 cash payment +

tributed by the partnership to a partner is subject

A partnership liability is a nonrecourse liability if

$15,000 liability relief). He reports $5,000

to a liability, the transferee is treated as having

no partner or related person has an economic

($25,000 realized − $20,000 basis) as a capital

assumed the liability to the extent it does not

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

gain.

exceed the fair market value of the property.

nonrecourse liabilities is generally proportionate

to his or her share of partnership profits. How-

Example 2. The facts are the same as in

Partner’s share of recourse liabilities. A

ever, this rule may not apply if the partnership

Example 1, except that Fred withdraws from the

partnership liability is a recourse liability to the

has taken deductions attributable to nonre-

partnership when the adjusted basis of his inter-

extent that any partner or a related person, de-

course liabilities or the partnership holds prop-

est in the partnership is zero. He is considered to

fined earlier, has an economic risk of loss for

erty that was contributed by a partner.

have received a distribution of $15,000, his relief

that liability. A partner’s share of a recourse

of liability. He reports a capital gain of $15,000.

liability equals his or her economic risk of loss for

More information. For more information on

that liability. A partner has an economic risk of

Exchange of partnership interests. An ex-

the effect of partnership liabilities, including

loss if that partner or a related person would be

change of partnership interests generally does

rules for limited partners and examples, see

obligated (whether by agreement or law) to

not qualify as a nontaxable exchange of

make a net payment to the creditor or a contribu-

sections 1.752-1 through 1.752-5 of the regula-

like-kind property. This applies regardless of

tion to the partnership with respect to the liability

tions.

whether they are general or limited partnership

Page 10

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2006 Page 10

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