Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

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Adjusted basis of contributed property

$8,000

A corporation and a partnership if the

1) Creates or increases the partnership’s ba-

same persons own 80% or more in value

Minus: Part of mortgage assumed by

sis in any of its assets,

of the outstanding stock of the corporation

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

3,200

and 80% or more of the capital or profits

2) Gives rise to a current deduction to the

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

interest in the partnership.

partnership, or

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Two S corporations or an S corporation

3) Is a nondeductible, noncapital expense of

Example 2. If, in Example 1, the contributed

and a C corporation if the same persons

the partnership.

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

own 80% or more in value of the outstand-

John’s partnership interest would be zero. The

The term “assets” in (1) includes capitalized

ing stock of each corporation.

$1,600 difference between the mortgage as-

items allocable to future periods, such as organi-

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

An executor and a beneficiary of an es-

zation expenses.

tate.

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

A partner’s share of accrued but unpaid ex-

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treated as capital gain from the sale or exchange

penses or accounts payable of a cash basis

A partnership and a person owning, di-

of a partnership interest. However, this gain

partnership are not included in the adjusted ba-

rectly or indirectly, 80% or more of the

would not increase the basis of his partnership

sis of the partner’s interest in the partnership.

capital or profits interest in the partnership.

interest.

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Two partnerships if the same persons di-

Partner’s basis increased. If a partner’s

rectly or indirectly own 80% or more of the

share of partnership liabilities increases, or a

Book value of partner’s interest. The ad-

capital or profits interests.

partner’s individual liabilities increase because

justed basis of a partner’s interest is determined

without considering any amount shown in the

he or she assumes partnership liabilities, this

Property subject to a liability. If property

partnership books as a capital, equity, or similar

increase is treated as a contribution of money by

contributed to a partnership by a partner or dis-

account.

the partner to the partnership.

tributed by the partnership to a partner is subject

to a liability, the transferee is treated as having

Partner’s basis decreased. If a partner’s

Example. Sam contributes to his partner-

assumed the liability to the extent it does not

share of partnership liabilities decreases, or a

ship property that has an adjusted basis of $400

exceed the fair market value of the property.

partner’s individual liabilities decrease because

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

the partnership assumes his or her individual

contributes $1,000 cash. While each partner has

Partner’s share of recourse liabilities. A

liabilities, this decrease is treated as a distribu-

increased his capital account by $1,000, which

partnership liability is a recourse liability to the

tion of money to the partner by the partnership.

will be reflected in the partnership books, the

extent that any partner or a related person, de-

adjusted basis of Sam’s interest is only $400

fined earlier, has an economic risk of loss for

Assumption of liability. A partner or related

and the adjusted basis of his partner’s interest is

that liability. A partner’s share of a recourse

person is considered to assume a partnership

$1,000.

liability equals his or her economic risk of loss for

liability only to the extent that:

that liability. A partner has an economic risk of

When determined. The adjusted basis of a

loss if that partner or a related person would be

1) He or she is personally liable for it,

partner’s partnership interest is ordinarily deter-

obligated (whether by agreement or law) to

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

2) The creditor knows that the liability was

make a net payment to the creditor or a contribu-

However, if there has been a sale or exchange

assumed by the partner or related person,

tion to the partnership with respect to the liability

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

if the partnership were constructively liquidated.

3) The creditor can demand payment from

tion of his or her entire interest in a partnership,

A partner who is the creditor for a liability that

the partner or related person, and

the adjusted basis is determined on the date of

would otherwise be a nonrecourse liability of the

sale, exchange, or liquidation.

4) No other partner or person related to an-

partnership has an economic risk of loss in that

other partner will bear the economic risk of

liability.

Alternative rule for figuring adjusted basis.

loss on that liability immediately after the

Constructive liquidation. Generally, in a

In certain cases, the adjusted basis of a partner-

assumption.

constructive liquidation, the following events are

ship interest can be figured by using the

treated as occurring at the same time.

partner’s share of the adjusted basis of partner-

Related person. Related persons, for these

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ship property that would be distributed if the

purposes, includes all the following.

All partnership liabilities become payable

partnership terminated.

in full.

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An individual and his or her spouse, an-

This alternative rule can be used in either of

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cestors, and lineal descendants.

All of the partnership’s assets have a

the following situations.

value of zero, except for property contrib-

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An individual and a corporation if the indi-

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uted to secure a liability.

The circumstances are such that the part-

vidual directly or indirectly owns 80% or

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ner cannot practicably apply the general

more in value of the outstanding stock of

All property is disposed of by the partner-

basis rules.

the corporation.

ship in a fully taxable transaction for no

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consideration (except relief from liabilities

It is, in the opinion of the IRS, reasonable

Two corporations that are members of the

for which the creditor’s right to reimburse-

to conclude that the result produced will

same controlled group.

ment is limited solely to one or more as-

not vary substantially from the result under

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A grantor and a fiduciary of any trust.

sets of the partnership).

the general basis rules.

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Fiduciaries of two separate trusts if the

All items of income, gain, loss, or deduc-

Adjustments may be necessary in figuring the

same person is a grantor of both trusts.

tion are allocated to the partners.

adjusted basis of a partnership interest under

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A fiduciary and a beneficiary of the same

The partnership liquidates.

the alternative rule. For example, adjustments

trust.

would be required to include in the partner’s

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share of the adjusted basis of partnership prop-

A fiduciary and a beneficiary of two sepa-

Example. Ted and Jane form a cash basis

erty any significant discrepancies that resulted

rate trusts if the same person is a grantor

general partnership with cash contributions of

from contributed property, transfers of partner-

of both trusts.

$20,000 each. Under the partnership agree-

ship interests, or distributions of property to the

ment, they share all partnership profits and

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A fiduciary of a trust and a corporation if

partners.

losses equally. They borrow $60,000 and

the trust or the grantor of the trust directly

purchase depreciable business equipment. This

or indirectly owns 80% or more in value of

Effect of Partnership

debt is included in the partners’ basis in the

the outstanding stock of the corporation.

Liabilities

partnership because incurring it creates an addi-

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A person and a tax-exempt educational or

tional $60,000 of basis in the partnership’s

A partner’s basis in a partnership interest in-

charitable organization controlled directly

depreciable property.

cludes the partner’s share of a partnership liabil-

or indirectly by the person or by members

If neither partner has an economic risk of

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

of the person’s family.

loss in the liability, it is a nonrecourse liability.

Page 15

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2002 Page 15

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