New Partner Purchase into Existing Partnership

[Outlook]

A new partner puchases a partnership interest directly from existing partners (cash went to partners, not to the partnership). The new partner purchases a 12.5% interest from each of the two existing two partners - resulting in a total 25% interest. 20% of the purchase price was for equipment/supplies and 80% was for intangible assets (patient records & goodwill). Of course, the new partner's outside basis will be tracked in the partnership financial records, K-1 Stmnts, etc My question is this: Because the purchase took place outside of the partnership, can the new partner claim any deductions on their personal tax return relating to their purchased investment in the partnership (tangible/intangible assets)? Or, is the only vehicle for tracking the new partners investment the partners adjusted basis tracking and the resulting gain or loss upon sale of that interest?

[Roland Slugg]

The partnership should make an election under Code §754 and record the new partner's additional basis on its books. There have been other posts about this very subject on this Board recently. If you do a search, you should be able to find them.

[Lion]

The new partner purchased an interest in a partnership from existing partners. He did not buy any assets from the partnership. A bit like buying shares of stock in a corporation directly from a stockholder or on the open market. He owns stock and not any of the assets owned by the corporation.

He or his tax preparer will track his own outside basis. The partnership will track his inside basis or his capital account or both and generally report at least one of those with his K-1.

He has no deductions from a purchase. If the partnership sells an asset, the results will pass through on his K-1; in fact, most income and expense items will pass through on his K-1. When he sells his interest in the partnership, he will have a capital gain or loss.

[Roland Slugg]

The new partner purchased an interest in a partnership from existing partners. He did not buy any assets from the partnership. A bit like buying shares of stock in a corporation directly from a stockholder or on the open market. He owns stock and not any of the assets owned by the corporation.

Purchasing (or inheriting) an interest in a partnership is not even remotely similar to buying shares of stock of a corporation.

He has no deductions from a purchase.

You, too, may wish to learn about Code §754. I assure you it will be an illuminating experience.

[Lion]

A new partner bought an investment in the partnership for $X. He has nothing to deduct re that purchase/transaction, no brokerage fees or legal fees or whatever, per the OP. Later, he will receive a K-1 with income/loss and deductions. And, he can request the partnership adjust his inside basis. Although, the OP made it sound as if the percentages he bought equal the value in the old partners' hands & the value of the tangible and intangible assets to the partnership, so there may be no adjustment to make with Code Sec. 743.

I have not had an outsider buy into an existing partnership, so I haven't researched this for a specific client just the academic info we all get from our continuing ed. I prepare a few partnerships and have done a dissolution, so I imagine someday I will have to research this. But for now, I just have textbook knowledge:

26,030.10Sale of Partnership Interest and Inside Basis

If a partner acquires a partnership interest by purchasing it from another partner, the new partner's basis in the partnership interest is the purchase price of the partnership interest (see 26,020). Nothing has happened within the partnership, and the partnership's basis in its assets does not change ( Code Sec. 743(a)).

If the inside and outside basis were the same before the sale, but the sale price of the partnership interest is not equal to the partner's basis in partnership interest, the new outside basis in the partnership interest is different from the partnership's basis in partnership assets.

Example
Adam, Blanche, and Carl contribute assets to Partnership ABC. While the fair market value of each piece of property is $10,000, the adjusted basis of each property is different. Adam's property has an adjusted basis of $10,000, Blanche's property has an adjusted basis of $8,000, and Carl's property has an adjusted basis of $15,000. The combined bases of Adam, Blanche, and Carl in their partnership interests are $33,000. The basis of ABC partnership in its assets is $33,000, regardless of the actual asset value of $30,000. If Carl sells his partnership interest to Debra for its value of $10,000, Debra's basis in the partnership interest is $10,000, the purchase price of the partnership interest. The total of the partners' bases (outside basis) is now $28,000. ABC's inside basis remains $33,000.

Practice Tip
In the above example, Debra may want the partnership to make a special election under Code Sec. 754 to adjust the basis of its assets to reflect the purchase price. If such election is made, Debra's share of the partnership assets will receive an inside basis step-up to reflect the purchase price. For a discussion of the Section 754 election and the procedures for making the election, see 26,035).