Allocation of basis among properties distributed by partnerships.

• Author: Keller, Brian E.

Partnership distributions are generally tax-free to the partners. In a nonliquidating distribution, the distributee partner's property basis is equal to the partnership's adjusted property basis immediately before the distribution, but cannot exceed the partner's adjusted basis in the partner's partnership interest (reduced by any money distributed in the same transaction). In a liquidating distribution, the total basis of all property distributed is equal to the distributee partner's adjusted basis in the partner's partnership interest immediately before the distribution (reduced by any money distributed in the same transaction). When multiple properties are distributed in a liquidating distribution or when the total carryover basis of the distributed properties exceeds the partner's basis in his partnership interest, an allocation provision is needed to assign a portion of the partner's basis in the partner's partnership interest to each distributed asset.

Prior to the Taxpayer Relief Act of 1997 (TRA `97), a partner's basis was allocated first to unrealized receivables and inventory items (as defined in Sec. 751) up to their bases in the partnership's hands (in proportion to the partnership's bases in these assets). Any excess was allocated among other properties in proportion to their adjusted bases to the partnership (former Sec. 732(c)).

Example 1--Unrealized Appreciation (Pre-TRA '97): A partner with a basis of $190,000 in his partnership interest receives a distribution from the partnership in liquidation of that interest consisting of investment property X, with a basis in the partnership's hands of $20,000 and a fair market value (FMV) of $80,000, and investment property 15, with a basis in the partnership's hands of $90,000 and an FMV of $100,000. Neither asset consists of inventory or unrealized receivables. The basis allocation would be made as follows:

X Y Adjusted basis in the partnership's hands $ 20,000 $ 90,000 Ratio 18.18% 81.82% Partner's basis in his partnership interest $ 190,000 $ 190,000 Basis in distribu- tee's hands $ 34,545 $ 155,455 Proceeds from immediate sale at FMV $ 80,000 $ 100,000 Gain/ (loss) $ 45,455 ($ 55,455) Example 2--Unrealized Depreciation (Pre-TRA '97): A partner with a basis of $2,000 in his partnership interest receives a distribution from the partnership in liquidation of his interest consisting of property X, with a basis in the partnership's hands of $1,500 and an FMV of $1,500, and property...