Under the 752 Treasury Regulations, if through a single transaction, a partner incurs both an increase and a decrease in the partner’s share of the partnership liabilities, only the net increase is treated as a contribution of money and only the net decrease is treated as a distribution of from the partnership. Below is an example of netting the increase and/or decrease in a partner’s share of liability when property that is contributed to a partnership is subject to a liability.
Example: Jeff contributes property with an adjusted basis of $50,000 to a general partnership in exchange for a one quarter (1/4) interest in the general partnership. At the time Jeff contributes the property, the partnership does not have liabilities outstanding and the property is subject to a recourse debt of $25,000. The fair market value of the property is in excess of the $25,000 recourse debt. After the contribution, Jeff remains personally liable to the creditor, Bank of Colorado and none of the other partners bear any of the economic risk for the $25,000 liability under state law or otherwise. The partnership is treated as having assumed the $25,000 liability and as a result, Jeff’s individual liabilities have decreased by $25,000. At the same time, Jeff’s share of the partnership liabilities has increased by $25,000. Only the net increase or decrease in Jeff’s share of the partnership liabilities and Jeff’s individual liabilities are taken into account when applying Internal Revenue Code Section 752. Thus, there is no net change for Jeff, and Jeff is not treated as contributing money to the partnership or receiving a distribution of property from the partnership. Thus, Jeff’s basis in his partnership interest would be $50,000, which is the adjusted basis of the property Jeff contributed.
If you are partner in a partnership it is very important to have a general understanding of how contributions of property increase your partnership basis and how distributions of property decrease your partnership basis. Moreover, it is very important to properly track your partnership basis from year to year and through certain transactions as they may occur in your business. Your basis in the partnership can dictate the amount of gain (or loss) you may realize on the transfer or sale of your partnership interest or through the sale of the partnership. Furthermore, your partnership basis allows you to pass through partnership losses. Thus, your basis in the partnership must be tracked and should be considered and accounted for as you make certain business decisions.
You can speak with a tax attorney or business attorney at The McGuire Law Firm if you have questions related to your business. A free consultation is offered to all potential clients, and The McGuire Law Firm has offices located in Denver, Colorado and Golden, Colorado.