Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

between the properties based on their fair mar-

basis adjustment for property distributed by the

adjustment to basis. The special adjustment to

partnership. To choose the special adjustment,

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

basis must be made for a distribution of prop-

the partner must have received the distribution

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

erty, (whether or not within 2 years after the

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

within 2 years after acquiring the partnership

partnership interest was acquired) if all the fol-

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

interest. Also, the partnership must not have

lowing conditions existed when the partner re-

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

chosen the optional adjustment to basis when

ceived the partnership interest.

the partner acquired the partnership interest.

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

•

The fair market value of all partnership

If a partner chooses this special basis adjust-

Allocating a basis decrease. Use the fol-

property (other than money) was more

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

lowing rules to allocate any basis decrease re-

than 110% of its adjusted basis to the

uted is the same as it would have been if the

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

partnership.

partnership had chosen the optional adjustment

•

to basis. However, this assigned basis is not

If there had been a liquidation of the part-

1. Allocate the basis decrease first to items

reduced by any depletion or depreciation that

ner’s interest immediately after it was ac-

with unrealized depreciation to the extent

would have been allowed or allowable if the

quired, an allocation of the basis of that

of the unrealized depreciation. If the basis

partnership had previously chosen the optional

interest under the general rules (discussed

decrease is less than the total unrealized

adjustment.

earlier under Basis divided among proper-

depreciation, allocate it among those items

ties) would have decreased the basis of

The choice must be made with the partner’s

in proportion to their respective amounts of

property that could not be depreciated, de-

tax return for the year of the distribution if the

unrealized depreciation.

pleted, or amortized and increased the ba-

distribution includes any property subject to de-

2. Allocate any remaining basis decrease

preciation, depletion, or amortization. If the

sis of property that could be.

among all the items in proportion to their

choice does not have to be made for the distribu-

•

The optional basis adjustment, if it had

respective assigned basis amounts (as de-

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

been chosen by the partnership, would

creased in (1)).

first year in which the basis of the distributed

have changed the partner’s basis for the

property is pertinent in determining the partner’s

property actually distributed.

income tax.

Example. Armando’s basis in his partner-

A partner choosing this special basis adjust-

ship interest is $20,000. In a distribution in liqui-

Required statement. Generally, if a partner

ment must attach a statement to his or her tax

dation of his entire interest, he receives

chooses a special basis adjustment and notifies

return that the partner chooses under section

properties C and D, neither of which is inventory

the partnership, or if the partnership makes a

732(d) of the Internal Revenue Code to adjust

or unrealized receivables. Property C has an

distribution for which the special basis adjust-

the basis of property received in a distribution.

adjusted basis to the partnership of $15,000 and

ment is mandatory, the partnership must provide

The statement must show the computation of

a fair market value of $15,000. Property D has

a statement to the partner. The statement must

the special basis adjustment for the property

an adjusted basis to the partnership of $15,000

provide information necessary for the partner to

distributed and list the properties to which the

and a fair market value of $5,000.

compute the special basis adjustment.

adjustment has been allocated.

To figure his basis in each property, Ar-

mando first assigns bases of $15,000 to prop-

Example. Chin Ho purchased a 25% inter-

Marketable securities. A partner’s basis in

erty C and $15,000 to property D (their adjusted

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

marketable securities received in a partnership

bases to the partnership). This leaves a $10,000

of the purchase, the partnership owned inven-

distribution, as determined in the preceding dis-

basis decrease (the $30,000 total of the as-

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

cussions, is increased by any gain recognized

signed bases minus the $20,000 allocable ba-

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

by treating the securities as money. See Market-

sis). He allocates the entire $10,000 to property

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

able securities treated as money under Part-

D (its unrealized depreciation). Armando’s basis

share of inventory with a basis to the partnership

ner’s Gain or Loss, earlier. The basis increase is

in property C is $15,000 and his basis in prop-

erty D is $5,000 ($15,000 − $10,000).

of $3,500.

allocated among the securities in proportion to

their respective amounts of unrealized apprecia-

Within 2 years after acquiring his interest,

Distributions before August 6, 1997. For

tion before the basis increase.

Chin Ho withdrew from the partnership and for

property distributed before August 6, 1997, allo-

his entire interest received cash of $1,500, in-

cate the basis using the following rules.

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

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

1. Allocate the basis first to unrealized receiv-

Transactions Between

value of the inventory received was 25% of the

ables and inventory items included in the

value of all partnership inventory. (It is immate-

distribution to the extent of the partner-

Partnership and

rial whether the inventory he received was on

ship’s adjusted basis in those items. If the

hand when he acquired his interest.)

partnership’s adjusted basis in those items

Partners

Since the partnership from which Chin Ho

exceeded the allocable basis, allocate the

withdrew did not make the optional adjustment

basis among the items in proportion to

For certain transactions between a partner and

to basis, he chose to adjust the basis of the

their adjusted bases to the partnership.

his or her partnership, the partner is treated as

inventory received. His share of the partner-

2. Allocate any remaining basis to other dis-

not being a member of the partnership. These

ship’s basis for the inventory is increased by

tributed properties in proportion to their ad-

transactions include the following.

$500 (25% of the $2,000 difference between the

justed bases to the partnership.

$16,000 fair market value of the inventory and its

1. Performing services for, or transferring

$14,000 basis to the partnership at the time he

property to, a partnership if:

Partner’s interest more than partnership

acquired his interest). The adjustment applies

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

only for purposes of determining his new basis in

a. There is a related allocation and distri-

divided in a complete liquidation of the partner’s

the inventory, and not for purposes of partner-

bution to a partner, and

interest is more than the partnership’s adjusted

ship gain or loss on disposition.

basis for the unrealized receivables and inven-

b. The entire transaction, when viewed to-

The total to be allocated among the proper-

tory items distributed, and if no other property is

gether, is properly characterized as oc-

ties Chin Ho received in the distribution is

distributed to which the partner can apply the

curring between the partnership and a

$15,500 ($17,000 basis of his interest − $1,500

remaining basis, the partner has a capital loss to

partner not acting in the capacity of a

cash received). His basis in the inventory items

the extent of the remaining basis of the partner-

partner.

is $4,000 ($3,500 partnership basis + $500 spe-

ship interest.

cial adjustment). The remaining $11,500 is allo-

2. Transferring money or other property to a

cated to his new basis for the other property he

Special adjustment to basis. A partner who

partnership if:

received.

acquired any part of his or her partnership inter-

est in a sale or exchange or upon the death of

Mandatory adjustment. A partner does not

a. There is a related transfer of money or

another partner may be able to choose a special

always have a choice of making this special

other property by the partnership to the

Page 6

Publication 541 (April 2008)

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2008 Page 6

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