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the partner’s individual liabilities), only the net
decrease is treated as a distribution from the
partnership and only the net increase is treated as a
contribution of money to the partnership.
Section 1.752-1(g), Income Tax Regs., provides the following
example of the effect of netting:
Example 1. Property contributed subject to a liability;
netting of increase and decrease in partner’s share of
liability. B contributes property with an adjusted basis
of $1,000 to a general partnership in exchange for a
one-third interest in the partnership. At the time of
the contribution, the partnership does not have any
liabilities outstanding and the property is subject to a
recourse debt of $150 and has a fair market value in
excess of $150. After the contribution, B remains
personally liable to the creditor and none of the other
partners bears any of the economic risk of loss for the
liability under state law or otherwise. Under paragraph
(e) of this section, the partnership is treated as having
assumed the $150 liability. As a result, B’s individual
liabilities decrease by $150. At the same time, however,
B’s share of liabilities of the partnership increases by
$150. Only the net increase or decrease in B’s share of
the liabilities of the partnership and B’s individual
liabilities is taken into account in applying section
752. Because there is no net change, B is not treated as
having contributed money to the partnership or as having
received a distribution of money from the partnership
under paragraph (b) or (c) of this section. Therefore
B’s basis for B’s partnership interest is $1,000 (B’s
basis for the contributed property).
Petitioners were at all times personally liable for the debts
erroneously included as partnership liabilities. Netting results
in a complete offset (i.e., no change) for the deemed contributions
and distributions when petitioners’ personal liabilities are
assumed by the Bitker partnership and when the liabilities are
removed from the partnership. In essence, the total distributions
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