Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

Profits interest. A profits interest is a partner-

However, if there has been a sale or exchange

•

The money (including a decreased share

ship interest other than a capital interest. If a

of all or part of the partner’s interest or a liquida-

of partnership liabilities or an assumption

tion of his or her entire interest in a partnership,

person receives a profits interest for providing

of the partner’s individual liabilities by the

the adjusted basis is determined on the date of

services to or for the benefit of a partnership in a

partnership) and adjusted basis of prop-

partner capacity or in anticipation of being a

sale, exchange, or liquidation.

erty distributed to the partner by the part-

partner, the receipt of such an interest is not a

nership.

Alternative rule for figuring adjusted basis.

taxable event for the partner or the partnership.

•

In certain cases, the adjusted basis of a partner-

The partner’s distributive share of the part-

However, this does not apply in the following

ship interest can be figured by using the

nership losses (including capital losses).

situations.

partner’s share of the adjusted basis of partner-

•

The partner’s distributive share of nonde-

The profits interest relates to a substan-

ship property that would be distributed if the

ductible partnership expenses that are not

tially certain and predictable stream of in-

partnership terminated.

capital expenditures. This includes the

come from partnership assets, such as

This alternative rule can be used in either of

partner’s share of any section 179 ex-

income from high-quality debt securities or

the following situations.

penses, even if the partner cannot deduct

a high-quality net lease.

•

the entire amount on his or her individual

The circumstances are such that the part-

•

Within 2 years of receipt, the partner dis-

income tax return.

ner cannot practicably apply the general

poses of the profits interest.

basis rules.

•

The partner’s deduction for depletion for

•

The profits interest is a limited partnership

any partnership oil and gas wells, up to

It is, in the opinion of the IRS, reasonable

interest in a publicly traded partnership.

the proportionate share of the adjusted ba-

to conclude that the result produced will

sis of the wells allocated to the partner.

not vary substantially from the result under

A profits interest transferred as compensation

the general basis rules.

for services is not subject to the rules for re-

P a r t n e r ’ s l i a b i l i t i e s a s s u m e d b y

stricted property that apply to capital interests.

partnership. If contributed property is subject

Adjustments may be necessary in figuring the

to a debt or if a partner’s liabilities are assumed

adjusted basis of a partnership interest under

by the partnership, the basis of that partner’s

the alternative rule. For example, adjustments

interest is reduced (but not below zero) by the

would be required to include in the partner’s

Basis of Partner’s

liability assumed by the other partners. This

share of the adjusted basis of partnership prop-

partner must reduce his or her basis because

erty any significant discrepancies that resulted

Interest

the assumption of the liability is treated as a

from contributed property, transfers of partner-

distribution of money to that partner. The other

ship interests, or distributions of property to the

The basis of a partnership interest is the money

partners’ assumption of the liability is treated as

partners.

plus the adjusted basis of any property the part-

a contribution by them of money to the partner-

ner contributed. If the partner must recognize

ship. See Effect of Partnership Liabilities, later.

Effect of Partnership

gain as a result of the contribution, this gain is

Liabilities

Example 1. John acquired a 20% interest in

included in the basis of his or her interest. Any

a partnership by contributing property that had

increase in a partner’s individual liabilities be-

A partner’s basis in a partnership interest in-

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

cause of an assumption of partnership liabilities

cludes the partner’s share of a partnership liabil-

mortgage. The partnership assumed payment of

is considered a contribution of money to the

ity only if, and to the extent that, the liability:

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

partnership by the partner.

1. Creates or increases the partnership’s ba-

Adjusted basis of contributed property

$8,000

Interest acquired by gift, etc. If a partner

sis in any of its assets,

acquires an interest in a partnership by gift,

Minus: Part of mortgage assumed by

2. Gives rise to a current deduction to the

inheritance, or under any circumstance other

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

3,200

partnership, or

than by a contribution of money or property to

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

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

3. Is a nondeductible, noncapital expense of

termined using the basis rules described in Pub-

the partnership.

lication 551.

Example 2. If, in Example 1, the contributed

The term “assets” in (1) includes capitalized

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

items allocable to future periods, such as organi-

Adjusted Basis

John’s partnership interest would be zero. The

zation expenses.

$1,600 difference between the mortgage as-

A partner’s share of accrued but unpaid ex-

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

There is a worksheet for adjusting the

penses or accounts payable of a cash basis

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

TIP

basis of a partner’s interest in the

partnership are not included in the adjusted ba-

treated as capital gain from the sale or exchange

partnership in the Partner’s Instruc-

sis of the partner’s interest in the partnership.

of a partnership interest. However, this gain

tions for Schedule K-1 (Form 1065).

would not increase the basis of his partnership

Partner’s basis increased. If a partner’s

The basis of an interest in a partnership is

interest.

share of partnership liabilities increases, or a

increased or decreased by certain items.

partner’s individual liabilities increase because

Book value of partner’s interest. The ad-

Increases. A partner’s basis is increased by

he or she assumes partnership liabilities, this

justed basis of a partner’s interest is determined

the following items.

increase is treated as a contribution of money by

without considering any amount shown in the

the partner to the partnership.

•

partnership books as a capital, equity, or similar

The partner’s additional contributions to

account.

the partnership, including an increased

Partner’s basis decreased. If a partner’s

share of or assumption of partnership lia-

share of partnership liabilities decreases, or a

Example. Sam contributes to his partner-

bilities.

partner’s individual liabilities decrease because

ship property that has an adjusted basis of $400

•

the partnership assumes his or her individual

The partner’s distributive share of taxable

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

liabilities, this decrease is treated as a distribu-

and nontaxable partnership income.

contributes $1,000 cash. While each partner has

tion of money to the partner by the partnership.

•

increased his capital account by $1,000, which

The partner’s distributive share of the ex-

will be reflected in the partnership books, the

cess of the deductions for depletion over

Assumption of liability. A partner or related

adjusted basis of Sam’s interest is only $400

the basis of the depletable property, un-

person is considered to assume a partnership

and the adjusted basis of his partner’s interest is

less the property is oil or gas wells whose

liability only to the extent that:

$1,000.

basis has been allocated to partners.

1. He or she is personally liable for it,

When determined. The adjusted basis of a

Decreases. The partner’s basis is decreased

partner’s partnership interest is ordinarily deter-

2. The creditor knows that the liability was

(but never below zero) by the following items.

mined at the end of the partnership’s tax year.

assumed by the partner or related person,

Page 9

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2006 Page 9

Related Articles

Related forms

Related Categories