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Petitioner argues that it was arbitrary for respondent to
rely on the Schedules K-1 to compute basis, especially in light
of the instructions to Form 1065, which indicate that the capital
account information provided on the Schedule K-1 may not be
determinative of basis. The instructions to Form 1065 merely
reflect that basis and capital account are frequently not equal,
as, for example, where property (as distinguished from cash) is
contributed to or distributed from a partnership. In such
circumstances, taxpayers may not rely on capital account as a
substitute for basis. However, these instructions do not
foreclose the use of Schedules K-1 in appropriate circumstances
to compute basis. Most importantly for petitioner, if we did not
rely on the Schedules K-1, there would be insufficient evidence
of basis on this record, and petitioner would not be entitled to
any loss deduction. See Blocker v. Commissioner, T.C. Memo.
1992-725, affd. without published opinion 25 F.3d 1043 (5th Cir.
1994).
In the circumstances of this case, the Schedules K-1 provide
an accurate measure of basis. Although contributions and
distributions of property (as distinguished from cash) can cause
the capital account and basis in a partnership interest to
diverge,5 no such divergence occurred in this case because
5 In general, to determine a partner's capital account
balance, the fair market value of property that is contributed by
or distributed to the partner is added to or subtracted from his
existing capital account balance. See, e.g., secs. 1.705-
1(a)(1), 1.704-1(b)(2)(iv)(b), Income Tax Regs. By contrast, to
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