Question

Assume your colleague asked you to purchase an interest in an existing partnership. The colleague sold you 40% of the partnership for $100,000 and you assumed $100,000 in liabilities. Please explain the difference in the tax basis of the purchased partnership interest and the tax basis of your interest resulting from the formation of a partnership with your colleague

Answer 1

Difference Between Outside Basis and Inside Basis Tax Basis

Purchased Interest in Existing Partnership

40% of Partnership = $ 100000

Assumed Liabilities = $ 100000

Since the colleague has purchased 40% of the partnership for $100000 and assumed $100000 in liabilities falls under "outside Basis" Category and is determined under sec 752.

The Purchasing Partner's outside basis is equal to the price paid for the partnership interest plus the purchasing partner's share of the partnership's liabilities.The purchasing partner's share of liabilities ($100000) may not equal the selling partner's share of those liabilities.

For Example, According to a loan agreement if the creditor has rights against the individual partner's , the purchasing partner will bear no individual responsibility for repayment of loan unless the purchasing partner specifically agrees to such asume such responsibility ,usually by making amendment in loan agreement.

On the other hand, tax basis of interest resulting from the formation of a partnership with colleague falls under"Inside Basis" Category.

Inside Basis is usually money contributed to the partnership and outside Basis is usually bais because an ownership interest was purchased from someone who already owned an interest in the partnership.

The inside Basis is the Partnership's tax basis in the individual assets.The outside basis is the tax basis of each individual partner's interest in the partnership.

Difference in calculation of partner's Tax Basis :- When individual contribute assets to form a partnership they must calculate each partner's basis in the partnership using two seperate methods :-

Outside basis or Book basis, Tracks each partner's capital based on generally accepted accounting principles.

On the other hand,Inside basis or tax basis ,Tracks each partner's capital account based on how items are recognised on the parnership tax return as defined by internal revenue code.