Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

Distributions before August 6, 1997. For

entire interest received cash of $1,500, inven-

Transactions Between

property distributed before August 6, 1997, allo-

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

cate the basis using the following rules.

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

Partnership and

value of the inventory received was 25% of the

1. Allocate the basis first to unrealized receiv-

value of all partnership inventory. (It is immate-

Partners

ables and inventory items included in the

rial whether the inventory he received was on

distribution to the extent of the

hand when he acquired his interest.)

partnership’s adjusted basis in those

For certain transactions between a partner and

Since the partnership from which Bob with-

items. If the partnership’s adjusted basis in

his or her partnership, the partner is treated as

drew did not make the optional adjustment to

those items exceeded the allocable basis,

not being a member of the partnership. These

basis, he chose to adjust the basis of the inven-

allocate the basis among the items in pro-

transactions include the following.

tory received. His share of the partnership’s ba-

portion to their adjusted bases to the part-

sis for the inventory is increased by $500 (25%

nership.

1. Performing services for or transferring

of the $2,000 difference between the $16,000

property to a partnership if —

2. Allocate any remaining basis to other dis-

fair market value of the inventory and its $14,000

tributed properties in proportion to their ad-

a. There is a related allocation and distri-

basis to the partnership at the time he acquired

justed bases to the partnership.

bution to a partner, and

his interest). The adjustment applies only for

purposes of determining his new basis in the

b. The entire transaction, when viewed to-

Partner’s interest more than partnership

inventory, and not for purposes of partnership

gether, is properly characterized as oc-

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

gain or loss on disposition.

curring between the partnership and a

divided in a complete liquidation of the partner’s

The total to be allocated among the proper-

partner not acting in the capacity of a

interest is more than the partnership’s adjusted

ties Bob received in the distribution is $15,500

partner.

basis for the unrealized receivables and inven-

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

tory items distributed, and if no other property is

received). His basis in the inventory items is

2. Transferring money or other property to a

distributed to which the partner can apply the

partnership if —

$4,000 ($3,500 partnership basis + $500 special

remaining basis, the partner has a capital loss to

adjustment). The remaining $11,500 is allocated

the extent of the remaining basis of the partner-

a. There is a related transfer of money or

to his new basis for the other property he re-

ship interest.

other property by the partnership to the

ceived.

contributing partner or another partner,

Special adjustment to basis. A partner who

Mandatory adjustment. A partner does not

and

acquired any part of his or her partnership inter-

always have a choice of making this special

est in a sale or exchange or upon the death of

b. The transfers together are properly

adjustment to basis. The special adjustment to

another partner may be able to choose a special

characterized as a sale or exchange of

basis must be made for a distribution of prop-

basis adjustment for property distributed by the

property.

partnership. To choose the special adjustment,

erty, (whether or not within 2 years after the

the partner must have received the distribution

partnership interest was acquired) if all the fol-

Payments by accrual basis partnership to

within 2 years after acquiring the partnership

lowing conditions existed when the partner re-

cash basis partner. A partnership that uses

interest. Also, the partnership must not have

ceived the partnership interest.

an accrual method of accounting cannot deduct

chosen the optional adjustment to basis when

•

The fair market value of all partnership

any business expense owed to a cash basis

the partner acquired the partnership interest.

property (other than money) was more

partner until the amount is paid. However, this

If a partner chooses this special basis adjust-

than 110% of its adjusted basis to the

rule does not apply to guaranteed payments

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

partnership.

made to a partner, which are generally deducti-

uted is the same as it would have been if the

•

ble when accrued.

partnership had chosen the optional adjustment

If there had been a liquidation of the

to basis. However, this assigned basis is not

partner’s interest immediately after it was

Guaranteed Payments

reduced by any depletion or depreciation that

acquired, an allocation of the basis of that

would have been allowed or allowable if the

interest under the general rules (discussed

partnership had previously chosen the optional

Guaranteed payments are those made by a

earlier under Basis divided among proper-

partnership to a partner that are determined

adjustment.

ties) would have decreased the basis of

without regard to the partnership’s income. A

The choice must be made with the partner’s

property that could not be depreciated, de-

partnership treats guaranteed payments for

tax return for the year of the distribution if the

pleted, or amortized and increased the ba-

services, or for the use of capital, as if they were

distribution includes any property subject to de-

sis of property that could be.

made to a person who is not a partner. This

preciation, depletion, or amortization. If the

•

The optional basis adjustment, if it had

treatment is for purposes of determining gross

choice does not have to be made for the distribu-

income and deductible business expenses only.

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

been chosen by the partnership, would

For other tax purposes, guaranteed payments

first year in which the basis of the distributed

have changed the partner’s basis for the

are treated as a partner’s distributive share of

property is pertinent in determining the partner’s

property actually distributed.

income tax.

ordinary income. Guaranteed payments are not

subject to income tax withholding.

A partner choosing this special basis adjust-

Required statement. Generally, if a partner

The partnership generally deducts guaran-

ment must attach a statement to his or her tax

chooses a special basis adjustment and notifies

return that the partner chooses under section

teed payments on line 10 of Form 1065 as a

the partnership, or if the partnership makes a

business expense. They are also listed on

732(d) of the Internal Revenue Code to adjust

distribution for which the special basis adjust-

Schedules K and K-1 of the partnership return.

the basis of property received in a distribution.

ment is mandatory, the partnership must provide

The individual partner reports guaranteed pay-

The statement must show the computation of

a statement to the partner. The statement must

ments on Schedule E (Form 1040) as ordinary

the special basis adjustment for the property

provide information necessary for the partner to

income, along with his or her distributive share

distributed and list the properties to which the

compute the special basis adjustment.

of the partnership’s other ordinary income.

adjustment has been allocated.

Guaranteed payments made to partners for

Marketable securities. A partner’s basis in

Example. Bob purchased a 25% interest in

organizing the partnership or syndicating inter-

marketable securities received in a partnership

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

ests in the partnership are capital expenses.

distribution, as determined in the preceding dis-

the purchase, the partnership owned inventory

Generally, organizational and syndication ex-

cussions, is increased by any gain recognized

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

penses are not deductible by the partnership.

by treating the securities as money. See Market-

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

However, a partnership can elect to deduct a

able securities treated as money under

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

portion of its organizational expenses and amor-

Partner’s Gain or Loss, earlier. The basis in-

of inventory with a basis to the partnership of

tize the remaining expenses (see Business

crease is allocated among the securities in pro-

$3,500.

start-up and organizational costs in the instruc-

portion to their respective amounts of unrealized

Within 2 years after acquiring his interest,

tions for Form 1065). Organizational expenses

Bob withdrew from the partnership and for his

appreciation before the basis increase.

(if the election is not made) and syndication

Page 6

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2006 Page 6

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