MODULE 35 TAXES: PARTNERSHIPS 529

(4) Any increase in a partner's individual liability by reason of the assumption by the partner of
partnership liabilities is considered to be a contribution of money to the partnership
by the
partner. Thus, the partner's basis is increased.
 EXAMPLE Distribution of warehouse -120,000
partn Partner's share of decrease in partnership's liabilities - 30.000
war Basis after distribution $~
adjust
EXAMPLE: Assume in the example above that one of the other one-third partners had a basis of'$75,000 im-
$120,000 sub
mediately before the distribution. What would the partner's basis be immediately after the distribution to
mort-
Partner X? $45,000 (i.e., $75,000 less 1/3 of the $90,000 decrease in partnership liabilities).
gage
Par 5. A partner's basis for the partnership is adjusted in the following order: (1) increased for all income
three e items (including tax-exempt income); (2) decreased for distributions; and (3) decreased by deduc-
has
partn
tions and losses (including nondeductible items not charged to capital).
$75,000 EXAMPLE: A partner with a basis of $50 for his partnership interest at the beginning of the partnership year re-
If the partn ceives a $30 cash distribution during the year and is allocated a $60 distributive share of partnership ordinary
tran loss, and an $8 distributive share of capital gain. In determining the extent to which the ordinary loss is deductible
warehou by the partner, the partner's partnership basis of $50 is first increased by the $8 of capital gain and reduced by the
mort $30 cash distribution to $28, so that his deductible ordinary loss is limited to his remaining basis of $28.
as a c
distr 6. Transactions with Controlled Partnerships
for
his partn
7. If a person engages in a transaction with a partnership other than as a member of such partnership,
inte any
follo resulting gain or loss is generally recognized. However, if the transaction involves a more than 50%
distribution owned partnership, one of three special rules may apply. Constructive ownership rules [page 498,
$15
follows:
Sections 7.a.(4)(a) and (b)] apply in determining whether a transaction involves a more than 50%
owned partnership.
Be 8. No losses are deductible from sales or exchanges of property between a partnership and a person
owning (directly or indirectly) more than 50% of the capital or profits interests in such partner-
gin
ship, or between two partnerships in which the same persons own (directly or indirectly) more
nin
than 50% of the capital or profits interests. A gain later realized on a subsequent sale by the trans-
g feree will n01 be recognized to the extent of the disallowed loss.
ba EXAMPLE: Partnership X is owned by three equal partners, A, B, and C, who are brothers. Partnership X sells
sis property at a loss of $5,000 to C. Since C owns a more than 50% interest in the partnership (i.e., C constructively
owns his brothers' partnership interests), the $5,000 loss is disallowed to Partnership X.
$
EXAMPLE: Ass,ume the same facts as in the above example. C later resells the property to Z, an unrelated tax-
75,
payer, at a gain of $6,000. C's realized gain of $6,000 will not be recognized to the extent of the $5,000 disallowed
00 loss to the Partnership X. .
0 9. If a person related to a partner does not indirectly own a more than 50% partnership interest, a
transaction between the related person and the partnership is treated as occurring between the re-
In
div lated person and the partners individually.
idu EXAMPLE: X owns 100% of X Corp. and also owns a 25% interest in WXYZ Partnership. X Corp. sells property
al at a $1,200 loss to the WXYZ Partnership. Since X Corp. is related to partner X (i.e., X owns more than 50% of X
ass Corp.), the transaction is treated as if it occurred between X Corp. and partners W, X, Y, and Z individually.
um Therefore, the loss disallowed to X Corp. is $1,200 x 25% = $300.
pti
on 10. A gain recognized on a sale or exchange of property between a partnership and a person owning
of (directly or indirectly) more than 50% of the capital or profits interests in such partnership, or
mo between two partnerships in which the same persons own (directly or indirectly) more than 50% of
rtg
ag
the capital or profits interests, will be treated as ordinary income if the property is not a capital
e asset in the hands of the transferee.
+ EXAMPLE: Assume the same facts as in the preceding example. Further assume that F is the father ofl¥, y, and
90. Z. F sells investment property to Partnership WXYZ at a gain of $10,000. If the property will not be a capital asset
00 to Partnership WXYZ, F must report the $10,000 gain as ordinary income because F constructively owns a more
0 than 50% partnership interest (i.e., F ponstructively owns his children's partnership interests).
$165