§732 Basis of Distributed Property Other Than Money

Summary

Explains how to set the tax basis for property (not money) a partnership gives to a partner. If the partner keeps a separate interest after the gift, the partner’s basis in the property is usually the partnership’s adjusted basis in that property just before the gift. But that basis cannot be more than the partner’s adjusted basis in their partnership interest minus any cash given at the same time. If the partner is leaving the partnership and gets property in full payment of their interest, the property’s basis equals the partner’s adjusted basis in the partnership interest reduced by any money given at the same time. If the total basis available is less or more than the items’ bases, the law gives rules for how to spread the basis among items. First, give basis to unrealized receivables and inventory items. Any extra or shortfall is then shared among the other properties by rules that favor items with unrealized gains for increases and items with unrealized losses for decreases, then use fair market value or adjusted bases as needed. A partner who recently bought an interest may elect special treatment for distributions within 2 years if a certain partnership election was not made, and the tax agency can require this if the property’s fair market value exceeded 110 percent of its basis at transfer. The rules don’t apply when the distribution is treated as a sale under another rule. Special and limited rules also apply when a corporate partner gets stock in another company and then controls that company; any excess basis differences can reduce the controlled company’s asset bases, with limits and tax recognition for any leftover amount. "Control" means the stock ownership required by tax law (section 1504(a)(2)). The Treasury may make rules to carry out and prevent abuse.