Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

to properties with unrealized appreciation to the

1. Allocate the basis first to unrealized re

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

extent of the unrealized appreciation. If the ba

ceivables and inventory items included in

ventory with a basis to the partnership of

sis increase is less than the total unrealized ap

the distribution to the extent of the partner

$3,500, and other property with a basis of

preciation, allocate it among those properties in

$6,000. The value of the inventory received was

ship's adjusted basis in those items. If the

proportion to their respective amounts of unre

25% of the value of all partnership inventory. (It

partnership's adjusted basis in those items

alized appreciation. Allocate any remaining ba

is immaterial whether the inventory he received

exceeded the allocable basis, allocate the

sis increase among all the properties in propor

was on hand when he acquired his interest.)

basis among the items in proportion to

tion to their respective fair market values.

Since the partnership from which Chin Ho

their adjusted bases to the partnership.

withdrew did not make the optional adjustment

2. Allocate any remaining basis to other dis

Example. Eun's basis in her partnership in

to basis, he chose to adjust the basis of the in

tributed properties in proportion to their

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

ventory received. His share of the partnership's

adjusted bases to the partnership.

of her entire interest, she receives properties A

basis for the inventory is increased by $500

and B, neither of which is inventory or unreal

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

Partner's interest more than partnership

ized receivables. Property A has an adjusted

$16,000 fair market value of the inventory and

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

basis to the partnership of $5,000 and a fair

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

divided in a complete liquidation of the partner's

market value of $40,000. Property B has an ad

he acquired his interest). The adjustment ap

interest is more than the partnership's adjusted

justed basis to the partnership of $10,000 and a

plies only for purposes of determining his new

basis for the unrealized receivables and inven

fair market value of $10,000.

basis in the inventory, and not for purposes of

tory items distributed, and if no other property is

To figure her basis in each property, Eun

partnership gain or loss on disposition.

distributed to which the partner can apply the

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

The total to be allocated among the proper

remaining basis, the partner has a capital loss

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

ties Chin Ho received in the distribution is

to the extent of the remaining basis of the part

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

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

nership interest.

increase (the $55,000 allocable basis minus the

cash received). His basis in the inventory items

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

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

Special adjustment to basis. A partner who

allocates $35,000 to property A (its unrealized

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

acquired any part of his or her partnership inter

appreciation). The remaining $5,000 is alloca

cated to his new basis for the other property he

est in a sale or exchange or upon the death of

ted between the properties based on their fair

received.

another partner may be able to choose a spe

market values. $4,000 ($40,000/$50,000) is al

cial basis adjustment for property distributed by

Mandatory adjustment. A partner does

located

property

and

$1,000

the partnership. To choose the special adjust

not always have a choice of making this special

($10,000/$50,000) is allocated to property B.

ment, the partner must have received the distri

adjustment to basis. The special adjustment to

Eun's basis in property A is $44,000 ($5,000 +

bution within 2 years after acquiring the partner

basis must be made for a distribution of prop

$35,000 + $4,000) and her basis in property B

ship interest. Also, the partnership must not

erty (whether or not within 2 years after the part

is $11,000 ($10,000 + $1,000).

have chosen the optional adjustment to basis

nership interest was acquired) if all the following

when the partner acquired the partnership inter

Allocating a basis decrease. Use the fol

conditions existed when the partner received

est.

lowing rules to allocate any basis decrease re

the partnership interest.

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

If a partner chooses this special basis ad

The fair market value of all partnership

justment, the partner's basis for the property

property (other than money) was more

1. Allocate the basis decrease first to items

distributed is the same as it would have been if

than 110% of its adjusted basis to the part

with unrealized depreciation to the extent

the partnership had chosen the optional adjust

nership.

of the unrealized depreciation. If the basis

ment to basis. However, this assigned basis is

If there had been a liquidation of the part

decrease is less than the total unrealized

not reduced by any depletion or depreciation

ner's interest immediately after it was ac

depreciation, allocate it among those

that would have been allowed or allowable if the

quired, an allocation of the basis of that in

items in proportion to their respective

partnership had previously chosen the optional

terest under the general rules (discussed

amounts of unrealized depreciation.

adjustment.

earlier under Basis divided among proper-

2. Allocate any remaining basis decrease

ties) would have decreased the basis of

The choice must be made with the partner's

among all the items in proportion to their

property that could not be depreciated, de

tax return for the year of the distribution if the

respective assigned basis amounts (as

pleted, or amortized and increased the ba

distribution includes any property subject to de

decreased in (1)).

sis of property that could be.

preciation, depletion, or amortization. If the

The optional basis adjustment, if it had

choice does not have to be made for the distri

Example. Armando's basis in his partner

been chosen by the partnership, would

bution year, it must be made with the return for

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

have changed the partner's basis for the

the first year in which the basis of the distributed

dation of his entire interest, he receives proper

property actually distributed.

property is pertinent in determining the partner's

ties C and D, neither of which is inventory or

income tax.

unrealized receivables. Property C has an ad

Required statement. Generally, if a partner

A partner choosing this special basis adjust

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

chooses a special basis adjustment and notifies

ment must attach a statement to his or her tax

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

the partnership, or if the partnership makes a

return that the partner chooses under section

adjusted basis to the partnership of $15,000

distribution for which the special basis adjust

732(d) of the Internal Revenue Code to adjust

and a fair market value of $5,000.

ment is mandatory, the partnership must pro

the basis of property received in a distribution.

To figure his basis in each property, Ar

vide a statement to the partner. The statement

The statement must show the computation of

mando first assigns bases of $15,000 to prop

must provide information necessary for the part

the special basis adjustment for the property

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

ner to compute the special basis adjustment.

distributed and list the properties to which the

bases to the partnership). This leaves a

adjustment has been allocated.

$10,000 basis decrease (the $30,000 total of

Marketable securities. A partner's basis in

the assigned bases minus the $20,000 alloca

marketable securities received in a partnership

Example. Chin Ho purchased a 25% inter

ble basis). He allocates the entire $10,000 to

distribution, as determined in the preceding dis

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

property D (its unrealized depreciation). Arman

cussions, is increased by any gain recognized

time of the purchase, the partnership owned in

do's basis in property C is $15,000 and his ba

by treating the securities as money. See

Mar-

ventory having a basis to the partnership of

sis in property D is $5,000 ($15,000 − $10,000).

ketable securities treated as money

under Part-

$14,000 and a fair market value of $16,000.

ner's Gain or Loss, earlier. The basis increase

Thus, $4,000 of the $17,000 he paid was attrib

Distributions before August 6, 1997. For

is allocated among the securities in proportion

utable to his share of inventory with a basis to

property distributed before August 6, 1997, allo

to their respective amounts of unrealized appre

the partnership of $3,500.

cate the basis using the following rules.

ciation before the basis increase.

Within 2 years after acquiring his interest,

Chin Ho withdrew from the partnership and for

Page 6

Publication 541 (December 2013)

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2013 Page 6

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