Elementary Question

[Snaggletooth]

...about partnership basis.

Pete and Repete form a partnership (a real one, Armando) and contribute absolutely zero cash and nothing else either. However, Greedy Bank makes a loan TO THE PARTNERSHIP for $200,000. Pete and Repete both co-sign the loan. What is the basis for Pete and Repete? Is it 0 and 0? Or is it $100,000 and $100,000?

Second question, same facts as above, except Greedy Bank makes a loan directly to Pete and Repete. What is the basis for Pete and Repete?

Showing my ignorance, I suppose, by asking this simple question, but the "at risk" discussion below has confused me. I realize that the bank has recourse, so under either scenario above both partners are at risk.

[Bees Knees]

Pete and Repete have basis because it is a partnership and they are at risk for repaying the loan.

If this were an S corp, they would not have basis, even though they were "at-risk" for repayment of the loan through their personal guarantee, because in the general basis rules for S corps, the loan has to be directly between the shareholder and the corporation.

[dsi]

I believe you would look to the partnership agreement to determine how much basis each partner would get.

[Snaggletooth]

Capital Accounts

Good catch, Stottlemeyer, and welcome to the board! I did fail to mention that these are 50-50 partners.

This question is not quite so elementary as it may appear. For GAAP purposes, if Pete and Repete are shown with capital accounts of $50,000 apiece, then it would be impossible for the partnership books to show a liability for this loan. If the partnership books the loan of $100,000 as a liability, then the capital accounts are $0.

From what BeesKnees says (and he's usually right), they both have a $50K basis. If their capital accounts are then $0, there will be a permanent difference between their basis and the amount shown as their capital accounts on the balance sheet. This is not the only scenario where this can happen, but one reason why partnership tax accounting is so difficult.

Mr. Stottlemeyer, please visit often!