Two brothers inherited a partnership consisting og one building. The 754 election was not made. In 2005 the building sold. The partnership return indicated that each brother had 30k of inside basis. The Date of death basis was $140,000 so to me the outsdie basis was $110,000.. The partnership was not terminated until 2006. In 2005 we decided that we would argue that the taxpayers could use the outside basis ($110,000) in 2005 due to economic reality. But please don't fixate on this call. Now in 2006 the other brother's CPA is taking an additional deduction of $70,000 basis. They are doing this by ignoring a negative $40,000 capital account, kind of zeroing it out and adding and subtracting incomes and distributions to generate $30,000 of other loss. I can't see how if the date of death basis was $140,000 you can have basis in excess of $140,000. Any thoughts?
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The most complicated form of business is...
a partnership of course. None the less, let's try this. For simplicity, assume the only asset is the building.
First, they inherited the PARTNERSHIP. So, the basis of $140K is for the partnership interests, in other words the outside basis. So $70K each which is probably where that figure came from.
Now, within the partnership, the building was sold, probably low or zero basis, net gain of $60K. Split two ways, $30K CAPITAL accounts. Income flows through and adds to basis, now we have $100k each in basis. So now we have a partnership with $60K Cash sitting there till 2006. (I'm ignoring the other activity that apparently generated some income and distributions for simplicity)
Now we liquidate. $30K in cash goes to each partner. $70K was original basis plus the $30K of pass through income from sale of the building = $100K current basis. $100K basis - $30K distribution = $70K capital loss.
Does this pretty much map out the trail?
Doug
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Doug
First all numbers I provided were for each of the brothers.
You say
First, they inherited the PARTNERSHIP. So, the basis of $140K is for the partnership interests, in other words the outside basis.
The deceased filed a Federal Estate tax return. The $140k basis per brother comes from that return. Are you saying that this only represents the outside basis? To me the $140k would be the value of the partnership interest on the date of death and would include both inside and outside basis.Comment
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Look at it this way...
we've got to be careful about the difference between a ownership interest in the partnership and a ownership of the partnership assets. When they inherited the partnership, nothing changed inside the partnership. The building has the same basis as before. And it sounds like business when on as before, more or less.
Now it's true enough that the estate looked at the assets inside to figure a FMV of the partnership interest, but that only means we are calculating some value of the partnership interest by reference to what the partnership owns.
Incidentally, this is a bit of a trap on small family limited partnerships: no step up of the underlying assets.
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To OUTWEST
I can't tell if you are agreeing with me or not. If the estate valued the partnership per brother at $140k and there is a discernable adjusted inside basis of 30k what to you in the outside basis, $140k or $110k?Comment
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There you go again..
asking for a straight answer.
Outside basis = $140K at date of death.
$140K + income - losses + contributions - distributions = outside basis today.
Sorry for the roundabout answers earlier.
DougComment
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