Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

basis of the partner’s interest in the partnership

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

chosen the optional adjustment to basis, dis-

reduced by any money distributed to the partner

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

cussed later under Adjusting the Basis of Part-

in the same transaction.

nership Property, when the partner acquired the

Allocating a basis decrease. Use the fol-

partnership interest.

lowing rules to allocate any basis decrease re-

If a partner chooses this special basis adjust-

Partner’s holding period. A partner’s holding

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

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

period for property distributed to the partner in-

uted is the same as it would have been if the

cludes the period the property was held by the

1) Allocate the basis decrease first to items

partnership had chosen the optional adjustment

partnership. If the property was contributed to

with unrealized depreciation to the extent

to basis. However, this assigned basis is not

the partnership by a partner, then the period it

of the unrealized depreciation. (If the basis

reduced by any depletion or depreciation that

was held by that partner is also included.

decrease is less than the total unrealized

would have been allowed or allowable if the

depreciation, allocate it among those items

partnership had previously chosen the optional

Basis divided among properties. If the basis

in proportion to their respective amounts of

adjustment.

of property received is the adjusted basis of the

unrealized depreciation.)

The choice must be made with the partner’s

partner’s interest in the partnership (reduced by

2) Allocate any remaining basis decrease

tax return for the year of the distribution if the

money received in the same transaction), it must

among all the items in proportion to their

distribution includes any property subject to de-

be divided among the properties distributed to

respective assigned basis amounts (as de-

preciation, depletion, or amortization. If the

the partner. For property distributed after August

creased in (1)).

choice does not have to be made for the distribu-

5, 1997, allocate the basis using the following

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

rules.

first year in which the basis of the distributed

Example. Tom’s basis in his partnership in-

property is pertinent in determining the partner’s

1) Allocate the basis first to unrealized receiv-

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

of his entire interest, he receives properties C

income tax.

ables and inventory items included in the

and D, neither of which is inventory or unrealized

distribution by assigning a basis to each

A partner choosing this special basis adjust-

receivables. Property C has an adjusted basis to

item equal to the partnership’s adjusted

ment must attach a statement to his or her tax

the partnership of $15,000 and a fair market

return that the partner chooses under section

basis in the item immediately before the

distribution. If the total of these assigned

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

732(d) of the Internal Revenue Code to adjust

bases exceeds the allocable basis, de-

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

the basis of property received in a distribution.

crease the assigned bases by the amount

market value of $5,000.

The statement must show the computation of

of the excess.

To figure his basis in each property, Tom first

the special basis adjustment for the property

assigns bases of $15,000 to property C and

distributed and list the properties to which the

2) Allocate any remaining basis to properties

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

adjustment has been allocated.

other than unrealized receivables and in-

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

ventory items by assigning a basis to each

Example. Bob purchased a 25% interest in

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

property equal to the partnership’s ad-

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

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

justed basis in the property immediately

the purchase, the partnership owned inventory

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

before the distribution. If the allocable ba-

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

unrealized depreciation). Tom’s basis in prop-

sis exceeds the total of these assigned

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

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

bases, increase the assigned bases by the

$5,000 ($15,000 − $10,000).

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

amount of the excess. If the total of these

of inventory with a basis to the partnership of

assigned bases exceeds the allocable ba-

Distributions before August 6, 1997. For

$3,500.

sis, decrease the assigned bases by the

property distributed before August 6, 1997, allo-

Within 2 years after acquiring his interest,

amount of the excess.

cate the basis using the following rules.

Bob withdrew from the partnership and for his

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

1) Allocate the basis first to unrealized receiv-

Allocating a basis increase. Allocate any

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

ables and inventory items included in the

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

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

distribution to the extent of the

properties with unrealized appreciation to the

value of the inventory received was 25% of the

partnership’s adjusted basis in those

extent of the unrealized appreciation. (If the ba-

value of all partnership inventory. (It is immate-

items. If the partnership’s adjusted basis in

sis increase is less than the total unrealized

rial whether the inventory he received was on

those items exceeded the allocable basis,

appreciation, allocate it among those properties

hand when he acquired his interest.)

allocate the basis among the items in pro-

in proportion to their respective amounts of un-

Since the partnership from which Bob with-

portion to their adjusted bases to the part-

realized appreciation.) Allocate any remaining

drew did not make the optional adjustment to

nership.

basis increase among all the properties in pro-

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

portion to their respective fair market values.

2) Allocate any remaining basis to other dis-

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

tributed properties in proportion to their ad-

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

Example. Julie’s basis in her partnership in-

justed bases to the partnership.

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

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

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

of her entire interest, she receives properties A

Partner’s interest more than partnership

basis to the partnership at the time he acquired

and B, neither of which is inventory or unrealized

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

his interest). The adjustment applies only for

receivables. Property A has an adjusted basis to

divided in a complete liquidation of the partner’s

purposes of determining his new basis in the

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

interest is more than the partnership’s adjusted

inventory, and not for purposes of partnership

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

basis for the unrealized receivables and inven-

gain or loss on disposition.

the partnership of $10,000 and a fair market

tory items distributed, and if no other property is

The total to be allocated among the proper-

value of $10,000.

distributed to which the partner can apply the

ties Bob received in the distribution is $15,500

To figure her basis in each property, Julie

remaining basis, the partner has a capital loss to

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

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

the extent of the remaining basis of the partner-

received). His basis in the inventory items is

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

ship interest.

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

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

adjustment). The remaining $11,500 is allocated

increase (the $55,000 allocable basis minus the

Special adjustment to basis. A partner who

to his new basis for the other property he re-

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

acquired any part of his or her partnership inter-

ceived.

allocates $35,000 to property A (its unrealized

est in a sale or exchange or upon the death of

appreciation). The remaining $5,000 is allocated

another partner may be able to choose a special

Mandatory adjustment. A partner does not

between the properties based on their fair mar-

basis adjustment for property distributed by the

always have a choice of making this special

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

partnership. To choose the special adjustment,

adjustment to basis. The special adjustment to

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

the partner must have received the distribution

basis must be made for a distribution of prop-

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

within 2 years after acquiring the partnership

erty, (whether or not within 2 years after the

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

interest. Also, the partnership must not have

partnership interest was acquired) if all the fol-

Page 11

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2002 Page 11

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