Unitizing basis when a selling or liquidating partner owns both limited and general partnership interests.

• Author: Ellentuck, Albert B.

Facts: Kramer has a 50% interest as a general partner and a 25% interest as a limited partner in the Viking Development Company. Kramer desires to sell his entire limited partnership interest to Grant for $100,000; he would like to retain his general partnership interest. His combined general and limited partnership interests have a $300,000 net fair market value (FMV) just prior to sale. * Kramer initially contributed $160,000 for his general partnership interest and $20,000 for his limited partnership interest. Because of losses in previous years, the basis of his general partnership interest is $80,000, and the basis of his limited partnership interest is $10,000 just prior to the sale. (These basis amounts include Kramer's share of partnership liabilities.) * Kramer's total share of partnership debt (all nonrecourse) is $50,000. Issue: What is Kramer's basis for determining gain, and how much gain will he recognize on the sale of his limited partnership interest?

Analysis

A partner is treated as having a unitary basis in a partnership even if he is both a limited and general partner. This "unitary" concept is different from the "separate lot" approach for shares in a corporation. The portion of a partner's unitary basis allocated to the transferred interest is based on the ratio of the FMV of the transferred interest to the FMV of the entire interest.

The situation gets more complicated when the partner's unitary basis in the partnership interest includes a share of partnership liabilities. In such event, a preliminary step in the calculation is to determine the transferor's "residual basis." The residual basis of a partner's interest excludes his share of liabilities. The calculation of unitized basis differs, depending on whether the residual basis is positive or negative. If the residual basis after stripping out basis from partnership liabilities is positive, the basis allocated to the transferred interest is the sum of the following:

1. FMV of partnership interest transferred/ FMV of combined partnership interest

   x

   Total residual basis of combined partnership interests

   plus

2. The share of partnership liabilities treated as realized by the seller under Sec. 752(d) as a consequence of the transfer.

   Following the method prescribed by the regulations, and expanded on by Rev. Rul. 84-53, the tax adviser computes Kramer's basis and gain as follows:

   Cash sales price $100,000 Share of liabilities discharged 16,667 Amount realized $116,667...