Question

1. Describe the rules concerning the basis of property distributed to a partner. How does the concept of basis-in, basis-out apply to partnership distributions?
2.Elaborate on the term basis-in,basis - out. What does that phrase mean in the context of a partnership formation?
3. Why must some income and gain items be separately stated in a partnership?

Answer 1

1 Basis of property distributed - As deined in Section 732

(1) General rule -

(i) Unrealized receivables and inventory items. The basis to be allocated to properties distributed to a partner is allocated first to any unrealized receivables in an amount equal to the adjusted basis of each such property to the partnership immediately before the distribution. If the basis to be allocated is less than the sum of the adjusted bases to the partnership of the distributed unrealized receivables and inventory items, the adjusted basis of the distributed property must be decreased in long-term contract accounted for under a long-term contract method of accounting.

(ii) Other distributed property. Any basis not allocated to unrealized receivables or inventory items or to stock of persons that control the corporate partner or to the corporate partner's stock under paragraph (c)(1)(iii) of this section is allocated to any other property distributed to the partner in the same transaction by assigning to each distributed property an amount equal to the adjusted basis of the property to the partnership immediately before the distribution.

2 Concept of basis-in, basis-out in context of partnership formation

The basis in is the partnership's tax basis in the individual assets. The basis out is the tax basis of each individual partner's interest in the partnership. When a partner contributes property to the partnership, the partnership's basis in the contributed property is equal to its fair market value (FMV). However, the outside basis of the partner increases only by the amount of the basis that the partner had in the property.

3 Income and gain items be separately stated in a partnership

Each partners distributive share of the partnership's income must be reported. Code Section 702 establishes a list of items that must be separately stated at the partnership level so that their character can remain intact as the income and losses are passed through and reported at the partner level. Section 702(a) lists the following items that must be stated:

• Net short-term capital gains and losses.
• Net long-term capital gains and losses
• Section 1231 gains and losses
• Charitable contributions
• Dividends eligible for a dividends-received deduction.
• Taxes paid to a foreign country or to a U.S. possession.
• Any other items provided by the Regulations.