- 37 -
expenses from partnership operations generally preserve the balance
between inside and outside bases. See id. Finally, section 752
prescribes bases adjustments to reflect increases and decreases in
a partner’s share of partnership liabilities. See LaRue v.
Commissioner, 90 T.C. 465, 477 (1988).
Under section 752(a), an increase in a partner’s share of
partnership liabilities is considered a contribution of money,
which results in an increase in the partner’s basis in his
partnership interest. See sec. 1.752-1(b), Income Tax Regs.8 The
practical impact of the basis adjustment prescribed in section
752(a) has been described as follows:
If a partnership borrows money, the basis of its
assets increases by the amount of cash received, even
though the receipt of the borrowed funds is not income.
By treating the partners as contributing cash in an
amount equal to their shares of the debt, inside/outside
basis equality is preserved and distortions are avoided.
If a liability for borrowed money were not added to the
partners’ bases, they could be taxed on a distribution of
the borrowed cash even though there is no gain inherent
in the partnership’s assets. A similar result could
occur if a partnership incurs a purchase money liability
to acquire property, since the liability is added to the
partnership’s basis in the property.
McKee, supra, par. 7.01[1], at 7-2; see Laney v. Commissioner, 674
F.2d 342, 345-346 (5th Cir. 1982), affg. in part and revg. in part
on another ground T.C. Memo. 1979-491.
In the instant case, the parties disagree whether Salina’s
8 On the other hand, sec. 752(b) provides that a decrease
in a partner’s share of partnership liabilities is considered a
distribution of cash to the partner, which results in a decrease
in the partner’s outside basis in his partnership interest.
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