§732 Basis of distributed property other than money

Summary

When a partnership gives a partner property instead of cash, the partner’s tax basis in that property is normally the partnership’s adjusted basis in the property right before the transfer. If the partner is not ending their partnership interest, that basis cannot be more than the partner’s own interest basis reduced by any cash given at the same time. If the partner is leaving the partnership (liquidation), the basis equals the partner’s interest basis minus any cash paid. When the allowed basis is smaller than the sum of the property bases, you must first give that basis to unrealized receivables and inventory items up to their partnership bases, then to the other properties. If you must raise bases, add first to properties with unrealized gain (by how much each has), then by fair market value. If you must lower bases, reduce first those with unrealized loss (by how much each has), then by their adjusted bases. A partner who bought an interest and did not make a certain adjustment election may choose, under Treasury rules, to treat the distributed property’s basis as if that adjustment had been made, but only if the distribution is within 2 years of the purchase (and the IRS can require this when fair market value was more than 110 percent of the partnership basis at the time of purchase). The rules do not apply when the distribution is treated as a sale under the rules for unrealized receivables and inventory. Special rules apply when a corporate partner gets stock of another corporation it controls: the basis of the controlled corporation’s property may be reduced (subject to limits), any excess reduction can be taxed as long-term capital gain and then added to the stock basis, and the IRS will issue regulations to prevent double counting and abuse.