Basis of a Partner's Partnership Interest

Code References: 702(a), 703(a), 704(d),

705(a), 733, 752(a), and 752(b).

See briefly: 109, 264, 1019,

and 1031(a)

Regulations: 1.704-1(d), 1.731-1(a)(1)(ii),

1.752-2(a), 1.752-2(b), 1.752-

2(f) examples (1), (3), and (4),

and 1.752-3

QUESTIONS

1.) A and B are partners in an equal general partnership. A has a basis of $30,000

in his partnership interest. B has a basis of $10,000 in her partnership interest.

What is the effect of each of the following events on the basis of each partner's

partnership interest? When is the effect taken into account?

a. The partnership makes a charitable contribution of $5,000.

b. Each partner's distributive share of partnership taxable income is $10,000,

c. The partnership has $8,000 in interest income from tax exempt municipal

bonds.

d. The partnership makes a cash distribution of $10,000 to each partner.

e. The partnership exchanged rental real estate with a fair market value of

$100,000 and an adjusted basis of $30,000 for other real estate worth

$100,000 in a 1031 exchange.

f. The partnership received $5,000 for granting an option on a building it

owns, which is worth $1 million.

g. During the year, a lease was terminated. The partnership's lessee expend-

ed $30,000 in improvements which were not substitutes for rent during

the lease period. The fair market value of the improvements was $50,000

on the date the partnership took possession of the leased premises.

h. The partnership paid $2,000 in life insurance premiums to insure the lives

of key employees, with the partnership named as beneficiary.

2.) Same as question 1 above, except that item (b) is a distributive share of part-

nership loss (instead of gain) in the amount of $10,000 to each partner. If all

of the loss is not allowed to a partner, what is the character of the disallowed

loss?

3.) Using the facts of question 2 above, assume that on January 1 of the next year,

B sold her partnership interest to C for $10,000. Assume that the AC partner-

ship has no income or deductions for that year. Does C succeed to B's car-

ryover loss? What if B in the following year repurchases the partnership interest from C?

4.) AB, an equal cash method partnership with cash method partners, ordered stationery and other secretarial supplies in the amount of $300. Before payment

but after transfer of title, is there any effect on the tax basis of each partner's

partnership interest? What if the liability were for services already performed

but not yet paid?

5.) A and B form the equal AB partnership which has no realty activities. Each

contributed $10,000 to the capital the partnership. The partnership pur-

chased personal property for $20,000 cash, subject to an $80,000 recourse

mortgage which is a general obligation of the partnership. The partnership suf-

fered a $30,000 loss attributable exclusively to depreciation on the personal

property in its first year of operation.

What are the partners' bases for their partnership interests? How much of the

partnership loss may each partner deduct? What if instead the partnership liability is nonrecourse?

a. Assume that the partnership liability is recourse and A and B share profits

on a 40:60 ratio and losses on a 70:30 ratio. What result? What if instead

the liability is nonrecourse?

b. Assume that the partnership is a limited partnership with B as the limited

partner. Furthermore, assume that the partnership agreement provides that

all loss will be allocated to the general partner once the limited partner's

capital account is reduced to zero. What if B is obligated under the part-

nership agreement to contribute to an additional $30,000?

c. What if B agreed to pay A up to $40,000 if A actually pays off the mort-

gage from his personal funds?

d. What if B agreed to guarantee $40,000 of the mortgage obligation directly

to the partnership's creditor?