Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

Similarly, a deduction may be available to a

property does not include a contributed interest

amount of the excess. If the total of these

corporate partner if the fair market value of the

in an entity to the extent its value is due to

assigned bases exceeds the allocable ba-

debt at the time of distribution exceeds its ad-

property contributed to the entity after the inter-

sis, decrease the assigned bases by the

justed issue price.

est was contributed to the partnership.

amount of the excess.

Recognition of gain under this rule also does

Net precontribution gain. A partner gener-

not apply to a distribution of unrealized receiv-

Allocating a basis increase. Allocate any

ally must recognize gain on the distribution of

ables or substantially appreciated inventory

basis increase required in rule (2), above, first to

property (other than money) if the partner con-

items if the distribution is treated as a sale or

properties with unrealized appreciation to the

tributed appreciated property to the partnership

extent of the unrealized appreciation. (If the ba-

exchange, as discussed earlier.

during the 7-year period before the distribution.

sis increase is less than the total unrealized

Partner’s Basis for

appreciation, allocate it among those properties

A 5-year period applies to property

in proportion to their respective amounts of un-

contributed before June 9, 1997, or

Distributed Property

realized appreciation.) Allocate any remaining

under a written binding contract:

CAUTION

basis increase among all the properties in pro-

Unless there is a complete liquidation of a

portion to their respective fair market values.

partner’s interest, the basis of property (other

1. That was in effect on June 8, 1997,

than money) distributed to the partner by a part-

and at all times thereafter before the

Example. Julie’s basis in her partnership in-

nership is its adjusted basis to the partnership

contribution, and

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

immediately before the distribution. However,

2. That provides for the contribution of a

of her entire interest, she receives properties A

the basis of the property to the partner cannot be

fixed amount of property.

and B, neither of which is inventory or unrealized

more than the adjusted basis of his or her inter-

receivables. Property A has an adjusted basis to

est in the partnership reduced by any money

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

received in the same transaction.

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

The gain recognized is the lesser of the fol-

the partnership of $10,000 and a fair market

lowing amounts.

Example 1. The adjusted basis of Beth’s

value of $10,000.

partnership interest is $30,000. She receives a

1. The excess of:

To figure her basis in each property, Julie

distribution of property that has an adjusted ba-

first assigns bases of $5,000 to property A and

sis of $20,000 to the partnership and $4,000 in

a. The fair market value of the property

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

cash. Her basis for the property is $20,000.

received in the distribution, over

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

increase (the $55,000 allocable basis minus the

b. The adjusted basis of the partner’s in-

Example 2. The adjusted basis of Mike’s

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

terest in the partnership immediately

partnership interest is $10,000. He receives a

allocates $35,000 to property A (its unrealized

before the distribution, reduced (but not

distribution of $4,000 cash and property that has

appreciation). The remaining $5,000 is allocated

below zero) by any money received in

an adjusted basis to the partnership of $8,000.

between the properties based on their fair mar-

the distribution.

His basis for the distributed property is limited to

$6,000 ($10,000 − $4,000, the cash he re-

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

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

2. The “net precontribution gain” of the part-

ceives).

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

ner. This is the net gain the partner would

Complete liquidation of partner’s interest.

recognize if all the property contributed by

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

The basis of property received in complete liqui-

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

the partner within 7 years (5 years for

dation of a partner’s interest is the adjusted

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

property contributed before June 9, 1997)

basis of the partner’s interest in the partnership

of the distribution, and held by the partner-

Allocating a basis decrease. Use the fol-

reduced by any money distributed to the partner

ship immediately before the distribution,

lowing rules to allocate any basis decrease re-

in the same transaction.

were distributed to another partner, other

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

than a partner who owns more than 50%

Partner’s holding period. A partner’s holding

of the partnership. For information about

1. Allocate the basis decrease first to items

period for property distributed to the partner in-

the distribution of contributed property to

with unrealized depreciation to the extent

cludes the period the property was held by the

another partner, see Contribution of Prop-

of the unrealized depreciation. (If the basis

partnership. If the property was contributed to

erty, under Transactions Between Partner-

decrease is less than the total unrealized

the partnership by a partner, then the period it

ship and Partners, later.

depreciation, allocate it among those items

was held by that partner is also included.

in proportion to their respective amounts of

The character of the gain is determined by

Basis divided among properties. If the basis

unrealized depreciation.)

reference to the character of the net precontribu-

of property received is the adjusted basis of the

tion gain. This gain is in addition to any gain the

2. Allocate any remaining basis decrease

partner’s interest in the partnership (reduced by

partner must recognize if the money distributed

among all the items in proportion to their

money received in the same transaction), it must

is more than his or her basis in the partnership.

respective assigned basis amounts (as de-

be divided among the properties distributed to

For these rules, the term “money” includes

creased in (1)).

the partner. For property distributed after August

marketable securities treated as money, as dis-

5, 1997, allocate the basis using the following

cussed earlier.

rules.

Example. Tom’s basis in his partnership in-

Effect on basis. The adjusted basis of the

terest is $20,000. In a distribution in liquidation

partner’s interest in the partnership is increased

1. Allocate the basis first to unrealized receiv-

of his entire interest, he receives properties C

by any net precontribution gain recognized by

ables and inventory items included in the

and D, neither of which is inventory or unrealized

the partner. Other than for purposes of deter-

distribution by assigning a basis to each

receivables. Property C has an adjusted basis to

mining the gain, the increase is treated as occur-

item equal to the partnership’s adjusted

the partnership of $15,000 and a fair market

ring immediately before the distribution. See

basis in the item immediately before the

value of $15,000. Property D has an adjusted

Basis of Partner’s Interest, later.

distribution. If the total of these assigned

basis to the partnership of $15,000 and a fair

The partnership must adjust its basis in any

bases exceeds the allocable basis, de-

market value of $5,000.

property the partner contributed within 7 years

crease the assigned bases by the amount

To figure his basis in each property, Tom first

(5 years for property contributed before June 9,

of the excess.

assigns bases of $15,000 to property C and

1997) of the distribution to reflect any gain that

2. Allocate any remaining basis to properties

$15,000 to property D (their adjusted bases to

partner recognizes under this rule.

other than unrealized receivables and in-

the partnership). This leaves a $10,000 basis

Exceptions. Any part of a distribution that is

ventory items by assigning a basis to each

decrease (the $30,000 total of the assigned ba-

property the partner previously contributed to

property equal to the partnership’s ad-

ses minus the $20,000 allocable basis). He allo-

the partnership is not taken into account in de-

justed basis in the property immediately

cates the entire $10,000 to property D (its

termining the amount of the excess distribution

before the distribution. If the allocable ba-

unrealized depreciation). Tom’s basis in prop-

or the partner’s net precontribution gain. For this

sis exceeds the total of these assigned ba-

erty C is $15,000 and his basis in property D is

$5,000 ($15,000 − $10,000).

purpose, the partner’s previously contributed

ses, increase the assigned bases by the

Page 5

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2006 Page 5

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