Question

Greg owns a 50 percent share of the Rich and Greg RG law firm partnership. Both partners and the entity are on the calendar year for tax purposes. Greg’s basis in the partnership interest at the beginning of the year is $300,000. The partnership’s relevant data for year 1 includes the following:

• Partnership ordinary income $500,000
• Partnership municipal bond interest $100,000
• Greg capital; account withdrawals $250,000
• December 31st (end of year) cash distribution to the partners $150,000
• December 31st (end of year) property distribution to Greg: fair-market value $30,000
• Basis $25,000
• Partnership’s liabilities January 1st (beginning of year) $20,000
• Partnership’s liabilities December 31st (end of year) $100,000

Tasks:

1. What is Greg’s basis in the partnership before the December 31st distributions?
2. What is Greg’s basis in the property distributed?

Answer 1

Assumption

Liabilities are not contributed by partnerships.

1. Basis of partnership before distribution.

Beginning basis + % of income ( taxable or non taxable) + increase in liabilities.

$300,000 + 50% of 600,000 + $80,000 ($100,000-20,000)

$680,000.

Withdrawal will not reduce risk at partnerships i.e. partnership basis.

2. Property distribution

In case of non- liquidation distribution basis of property would lower of inside and outside basis.

As inside baiss of property $25,000 and outside basis before distribution $ 680,000.

Property base will be $ 25,000.

In case of partnership property distribution FMV needs to be ignored