Wednesday, February 9, 2022

Last Week's Partnership Question - What is The Answer?

In general, when a partner receives property in a complete liquidation of his partnership interest, it is not a taxable event; his basis in the property is his outside basis (adjusted basis) in the partnership.  However, as has been said so many times and in so many situations, the devil is in the details!


In our example from last week, Jeff received $5,000 in cash.  §732(b) provides that any money distributed (i.e. cash) is applied to reduce the partner’s adjusted basis in the property.  So, now we reduce $185,000 (adjusted basis before distributions) to $180,000 (adjusted basis after money distributions). 


But, we are asked for Jeff’s basis in the building only, not his adjusted basis in all of the property distributed, so we need to do an allocation and split up the $180,000.  §732(c) to the rescue, but easy it is not…


(c)(1)(A)(i)(ii) do not apply so we move on to (c)(1)(B)(i) and assign basis to the building and the land in accordance with inside basis (partnership’s basis).   $100,000 + $50,000 = $150,000, which is short of $180,000 by $30,000.  When we have unallocated basis (i.e. $30,000) we then look to (c)(1)(B)(ii) which tells us to defer to either (c)(2) or (c)(3), “whichever is appropriate.”  To avoid making matters more complicated than needed to throw you all off (including, alas, your Editor), it turns out that (c)(2)(A) applies (since both properties have appreciated in value) and we never get to (c)(2)(B) (thank God for little favors).


(c)(2)(A) requires us to allocate the $30,000 proportionate to FMV ($100,000 + $50,000 = $150,000) FMV…


Building $100,000/$150,000 x $30,000 = $20,000

Land $50,000/$150,000 x $30,000 = $10,000


To the answer:


Building - $100,000 + $20,000 = $120,000 (answer 4 to last week’s question)

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