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

[e patashnikov]

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?

 

[David Woods, EA, ChFC, CLU]

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.

 

[A]

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.

 

[Brian]

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

 

[A]

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.

 

[David Woods, EA, ChFC, CLU]

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.

 

[Brian]

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

 

[A]

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!

 

[liveirisjul]

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??