What's the difference between a Partner's Tax Capital Account Basis and Outside Basis?

Discussion in 'Tax' started by e patashnikov, Jul 21, 2004.

  1. There's a close relationship between the two, but I'm not sure where
    the two concepts differ. Shouldn't a partner's basis in his/her
    partnership interest equal his/her equity?

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    e patashnikov, Jul 21, 2004
    #1
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  2. Re: What's the difference between a Partner's Tax Capital Account

    e patashnikov" <> wrote:

    > There's a close relationship between the two, but I'm not sure where
    > the two concepts differ. Shouldn't a partner's basis in his/her
    > partnership interest equal his/her equity?


    here are three items. Partner's capital, basis, and at
    risk. They are NOT the same. Without spending all week
    writing about it, your capital is your share of your net
    partnership contributions, distributions, and items of
    income and loss. Basis MAY start with capital (and it might
    not) but will also include a partner's share of partnership
    liabilities, and at risk is generally adjusted to include a
    share of non-recourse liabilities. This is far from a
    complete explanation and I'm sure I may have mixed up basis
    and at risk, but I hope you see that capital is not
    necessarily basis.

    --
    David M. Woods, EA, ChFC, CLU
    Woods Financial Services
    Norwood, MA 02062
    www.woods-financial.com

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    David Woods, EA, ChFC, CLU, Jul 23, 2004
    #2
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  3. e patashnikov

    A Guest

    "e patashnikov" <> wrote:

    > There's a close relationship between the two, but I'm not sure where
    > the two concepts differ. Shouldn't a partner's basis in his/her
    > partnership interest equal his/her equity?


    Usually upon formation the two are the same, but if a
    partner sells his interest to an outside party the new
    partner would have a basis in his partnership interest
    (outside basis) of the price he paid. However, his basis in
    the partnership assets (inside basis) would be the same as
    the seller's share was.

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    A, Jul 23, 2004
    #3
  4. e patashnikov

    Brian Guest

    "A" <> wrote:
    > "e patashnikov" <> wrote:


    >> Shouldn't a partner's basis in his/her
    >> partnership interest equal his/her equity?


    > Usually upon formation the two are the same, but if a
    > partner sells his interest to an outside party the new
    > partner would have a basis in his partnership interest
    > (outside basis) of the price he paid.


    I would differ with your statement. I have numerous
    partnerships that involve contributed property. Typically a
    partner that contributes property other than cash has a
    capital account that is credited with the value of that
    property, not the tax basis. If A and B form a partnership
    with A contributing land with basis of $100 and value of
    $1,000 and B contributing cash of $1,000, they will each be
    credited with $1,000 in their capital account. While A's
    capital account would be $1,000 his basis is only $100.

    Brian Bivona

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    Brian, Jul 26, 2004
    #4
  5. e patashnikov

    A Guest

    "Brian" <> wrote:
    > "A" <> wrote:
    >> "e patashnikov" <> wrote:


    >>> Shouldn't a partner's basis in his/her
    >>> partnership interest equal his/her equity?


    >> Usually upon formation the two are the same, but if a
    >> partner sells his interest to an outside party the new
    >> partner would have a basis in his partnership interest
    >> (outside basis) of the price he paid.


    > I would differ with your statement. I have numerous
    > partnerships that involve contributed property. Typically a
    > partner that contributes property other than cash has a
    > capital account that is credited with the value of that
    > property, not the tax basis. If A and B form a partnership
    > with A contributing land with basis of $100 and value of
    > $1,000 and B contributing cash of $1,000, they will each be
    > credited with $1,000 in their capital account. While A's
    > capital account would be $1,000 his basis is only $100.


    True, but he did not ask about the capital account BALANCE,
    he asked about its tax basis, and as you pointed out these
    are not the same. The tax basis to the partnership of a
    tax-deferred contribution of a capital asset is the same as
    the partner's basis before contribution (§723). The partner
    gets a substituted basis in his/her partnership interest. At
    this point we have two assets, the property in the hands of
    the partnership and the partner's interest in the
    partnership. Both have the same basis (inside and outside
    basis). If the partner sells the partnership interest, the
    inside basis of the contributed property does not change,
    but the buyer's basis in the partnership interest is what
    was paid. At this point the inside and outside basis is
    different.

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    A, Jul 29, 2004
    #5
  6. Re: What's the difference between a Partner's Tax Capital Account

    "A" <> wrote:
    > "Brian" <> wrote:
    >> "A" <> wrote:
    >>> "e patashnikov" <> wrote:


    >>>> Shouldn't a partner's basis in his/her
    >>>> partnership interest equal his/her equity?


    >>> Usually upon formation the two are the same, but if a
    >>> partner sells his interest to an outside party the new
    >>> partner would have a basis in his partnership interest
    >>> (outside basis) of the price he paid.


    >> I would differ with your statement. I have numerous
    >> partnerships that involve contributed property. Typically a
    >> partner that contributes property other than cash has a
    >> capital account that is credited with the value of that
    >> property, not the tax basis. If A and B form a partnership
    >> with A contributing land with basis of $100 and value of
    >> $1,000 and B contributing cash of $1,000, they will each be
    >> credited with $1,000 in their capital account. While A's
    >> capital account would be $1,000 his basis is only $100.


    > True, but he did not ask about the capital account BALANCE,
    > he asked about its tax basis, and as you pointed out these
    > are not the same. The tax basis to the partnership of a
    > tax-deferred contribution of a capital asset is the same as
    > the partner's basis before contribution (§723). The partner
    > gets a substituted basis in his/her partnership interest. At
    > this point we have two assets, the property in the hands of
    > the partnership and the partner's interest in the
    > partnership. Both have the same basis (inside and outside
    > basis). If the partner sells the partnership interest, the
    > inside basis of the contributed property does not change,
    > but the buyer's basis in the partnership interest is what
    > was paid. At this point the inside and outside basis is
    > different.


    Actually he asked about the difference between basis in a
    partnership interest and equity in the interest. Since
    equity has little meaning in tax law in this context, one
    can reasonably assume he was referring to the capital
    account. As the previous poster noted, if one contributes
    appreciated property to a partnership, there is an immediate
    difference between the partner's capital account and the
    partner's basis in the interest.

    --
    David M. Woods, EA, ChFC, CLU
    Woods Financial Services
    Norwood, MA 02062
    www.woods-financial.com

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    David Woods, EA, ChFC, CLU, Jul 31, 2004
    #6
  7. e patashnikov

    Brian Guest

    "A" <> wrote:
    >>> "e patashnikov" <> wrote:


    >>>> Shouldn't a partner's basis in his/her
    >>>> partnership interest equal his/her equity?


    "A" <> wrote:

    >>> Usually upon formation the two are the same, but if a
    >>> partner sells his interest to an outside party the new
    >>> partner would have a basis in his partnership interest
    >>> (outside basis) of the price he paid.


    >> I would differ with your statement. I have numerous
    >> partnerships that involve contributed property. Typically a
    >> partner that contributes property other than cash has a
    >> capital account that is credited with the value of that
    >> property, not the tax basis.


    > True, but he did not ask about the capital account BALANCE,
    > he asked about its tax basis, and as you pointed out these
    > are not the same. The tax basis to the partnership of a
    > tax-deferred contribution of a capital asset is the same as
    > the partner's basis before contribution (§723). The partner
    > gets a substituted basis in his/her partnership interest. At
    > this point we have two assets, the property in the hands of
    > the partnership and the partner's interest in the
    > partnership. Both have the same basis (inside and outside
    > basis). If the partner sells the partnership interest, the
    > inside basis of the contributed property does not change,
    > but the buyer's basis in the partnership interest is what
    > was paid. At this point the inside and outside basis is
    > different.


    I agree completely with your analysis. However, when the
    question was asked about basis equalling "equity" I was
    assuming that, as used, the term was referring to book
    capital. Book capital (which normally controls who gets
    liquidation proceeds) typically begins with the fair market
    value of contributed property. While inside and outside tax
    basis may be the same, tax basis and book capital are not.
    I may have misread what was intended by the original poster.

    Brian Bivona

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    Brian, Jul 31, 2004
    #7
  8. e patashnikov

    A Guest

    > I agree completely with your analysis. However, when the
    > question was asked about basis equalling "equity" I was
    > assuming that, as used, the term was referring to book
    > capital. Book capital (which normally controls who gets
    > liquidation proceeds) typically begins with the fair market
    > value of contributed property. While inside and outside tax
    > basis may be the same, tax basis and book capital are not.
    > I may have misread what was intended by the original poster.


    The original question was a little convoluted, the body did
    say "equity" but the subject header seemed a little more
    detailed with "Partner's Tax Capital Account Basis," which I
    read as partner's capital account tax basis... but who
    knows! :)

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    A, Aug 4, 2004
    #8
  9. e patashnikov

    liveirisjul

    Joined:
    Jul 9, 2009
    Messages:
    1
    A partner that contributes property other than cash has a capital account that is credited with the value of that property, not the tax basis??

    :)
     
    liveirisjul, Jul 9, 2009
    #9
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