Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

Book value of partner's interest. The adjus

Partner's basis increased. If a partner's

Property subject to a liability. If property

ted basis of a partner's interest is determined

share of partnership liabilities increases, or a

contributed to a partnership by a partner or dis

without considering any amount shown in the

partner's individual liabilities increase because

tributed by the partnership to a partner is sub

partnership books as a capital, equity, or similar

he or she assumes partnership liabilities, this in

ject to a liability, the transferee is treated as

crease is treated as a contribution of money by

having assumed the liability to the extent it does

account.

the partner to the partnership.

not exceed the fair market value of the property.

Example. Enzo contributes to his partner

Partner's basis decreased. If a partner's

Partner's share of recourse liabilities. A

ship property that has an adjusted basis of $400

share of partnership liabilities decreases, or a

partnership liability is a recourse liability to the

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

partner's individual liabilities decrease because

extent that any partner or a related person, de

contributes $1,000 cash. While each partner

the partnership assumes his or her individual li

fined earlier, has an economic risk of loss for

has increased his capital account by $1,000,

abilities, this decrease is treated as a distribu

that liability. A partner's share of a recourse lia

which will be reflected in the partnership books,

tion of money to the partner by the partnership.

bility equals his or her economic risk of loss for

the adjusted basis of Enzo's interest is only

that liability. A partner has an economic risk of

$400 and the adjusted basis of his partner's in

Assumption of liability. Generally, a partner

loss if that partner or a related person would be

terest is $1,000.

or related person is considered to assume a

obligated (whether by agreement or law) to

partnership liability only to the extent that:

make a net payment to the creditor or a contri

When determined. The adjusted basis of a

bution to the partnership with respect to the lia

partner's partnership interest is ordinarily deter

1. He or she is personally liable for it,

bility if the partnership were constructively liqui

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

2. The creditor knows that the liability was

dated. A partner who is the creditor for a liability

However, if there has been a sale or exchange

assumed by the partner or related person,

that would otherwise be a nonrecourse liability

of all or part of the partner's interest or a liquida

of the partnership has an economic risk of loss

tion of his or her entire interest in a partnership,

3. The creditor can demand payment from

in that liability.

the adjusted basis is determined on the date of

the partner or related person, and

sale, exchange, or liquidation.

Constructive liquidation. Generally, in a

4. No other partner or person related to an

constructive liquidation, the following events are

other partner will bear the economic risk of

Alternative rule for figuring adjusted basis.

treated as occurring at the same time.

loss on that liability immediately after the

In certain cases, the adjusted basis of a part

All partnership liabilities become payable

assumption.

nership interest can be figured by using the

in full.

partner's share of the adjusted basis of partner

person. Related

persons,

for

All of the partnership's assets have a value

ship property that would be distributed if the

these purposes, includes all the following.

of zero, except for property contributed to

partnership terminated.

An individual and his or her spouse, ances

secure a liability.

This alternative rule can be used in either of

tors, and lineal descendants.

All property is disposed of by the partner

the following situations.

An individual and a corporation if the indi

ship in a fully taxable transaction for no

The circumstances are such that the part

vidual directly or indirectly owns 80% or

consideration except relief from liabilities

ner cannot practicably apply the general

more in value of the outstanding stock of

for which the creditor's right to reimburse

basis rules.

the corporation.

ment is limited solely to one or more assets

It is, in the opinion of the IRS, reasonable

Two corporations that are members of the

of the partnership.

to conclude that the result produced will

same controlled group.

All items of income, gain, loss, or deduc

not vary substantially from the result under

A grantor and a fiduciary of any trust.

tion are allocated to the partners.

the general basis rules.

The partnership liquidates.

Fiduciaries of two separate trusts if the

Adjustments may be necessary in figuring

same person is a grantor of both trusts.

the adjusted basis of a partnership interest un

Example. Juan and Teresa form a cash ba

A fiduciary and a beneficiary of the same

der the alternative rule. For example, adjust

sis general partnership with cash contributions

trust.

ments would be required to include in the part

of $20,000 each. Under the partnership agree

A fiduciary and a beneficiary of two sepa

ner's share of the adjusted basis of partnership

ment, they share all partnership profits and los

rate trusts if the same person is a grantor

property any significant discrepancies that re

ses equally. The partnership borrows $60,000

of both trusts.

sulted from contributed property, transfers of

and purchases depreciable business equip

A fiduciary of a trust and a corporation if

partnership interests, or distributions of property

ment. This debt is included in the partners' ba

the trust or the grantor of the trust directly

to the partners.

or indirectly owns 80% or more in value of

sis in the partnership because incurring it cre

the outstanding stock of the corporation.

ates an additional $60,000 of basis in the

Effect of Partnership

A person and a taxexempt educational or

partnership's depreciable property.

charitable organization controlled directly

If neither partner has an economic risk of

Liabilities

or indirectly by the person or by members

loss in the liability, it is a nonrecourse liability.

of the person's family.

Each partner's basis would include his or her

A partner's basis in a partnership interest in

A corporation and a partnership if the

share of the liability, $30,000.

same persons own 80% or more in value

If Teresa is required to pay the creditor if the

cludes the partner's share of a partnership lia

of the outstanding stock of the corporation

partnership defaults, she has an economic risk

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

and 80% or more of the capital or profits in

of loss in the liability. Her basis in the partner

1. Creates or increases the partnership's ba

terest in the partnership.

ship would be $80,000 ($20,000 + $60,000),

sis in any of its assets,

Two S corporations or an S corporation

while Juan's basis would be $20,000.

and a C corporation if the same persons

2. Gives rise to a current deduction to the

Limited partner. A limited partner gener

own 80% or more in value of the outstand

partnership, or

ally has no obligation to contribute additional

ing stock of each corporation.

3. Is a nondeductible, noncapital expense of

capital to the partnership and therefore does

An executor and a beneficiary of an estate.

the partnership.

not have an economic risk of loss in partnership

A partnership and a person owning, di

recourse liabilities. Thus, absent some other

The term “assets” in (1) includes capitalized

rectly or indirectly, 80% or more of the cap

factor, such as the guarantee of a partnership li

items allocable to future periods, such as or

ital or profits interest in the partnership.

ability by the limited partner or the limited part

ganization expenses.

Two partnerships if the same persons di

ner making the loan to the partnership, a limited

rectly or indirectly own 80% or more of the

partner generally does not have a share of part

A partner's share of accrued but unpaid ex

capital or profits interests.

nership recourse liabilities.

penses or accounts payable of a cash basis

partnership are not included in the adjusted ba

sis of the partner's interest in the partnership.

Page 10

Publication 541 (December 2013)

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2013 Page 10

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