§732 Basis of Distributed Property Other Than Money

Summary

When a partnership gives a partner property (not cash), the partner usually takes the partnership’s tax basis in that property right before the transfer. If the partner did not get the property in ending their partnership interest, that basis cannot be larger than the partner’s own adjusted basis in their partnership interest minus any cash given at the same time. If the partner gets property while leaving the partnership, the partner’s basis in the property equals the partner’s adjusted basis in the partnership interest minus any cash given at the same time. If the allowed basis is smaller than the amounts involved, the law tells how to spread that smaller basis among the items received. First it covers special items like unrealized receivables and inventory (accounts or goods for sale). Any remaining basis goes to the other property. If the total basis must be increased, the extra goes first to items with unrealized gains (up to those gains), then by their market values. If the total basis must be decreased, the cut goes first to items with unrealized losses, then by their adjusted bases. A partner who recently bought an interest without a special election may choose, within 2 years, to use an adjusted-basis rule as if a different election had been made; the tax agency can require that choice if the property’s market value was over 110 percent of its adjusted basis at the transfer. The rules do not apply when a transfer is treated as a sale of inventory or receivables. Special, more detailed rules apply when a corporation gets stock from a partnership and then controls the distributed company; those rules limit and adjust bases, can create taxable gain in excess, and are subject to tax-agency regulations to prevent misuse.