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1On brief, the parties explained that respondent audited and
initially disallowed all expense deductions for Tri-City’s 1990 taxable
year. The parties stipulated that petitioner’s income inclusion from
Tri-City for 1990 was $41,105.
We agree that this inclusion of income increased petitioner’s
basis. Subch. K of the Code governs basis in a partnership. Sec. 705
details how to calculate basis. Specifically, a partner’s basis in his
partnership interest is increased by, inter alia, the amount of his
distributive share of taxable income. Sec. 705. Thus, to the extent
petitioner recognized additional income as a result of the adjustment to
Tri-City, he is also entitled to an upward adjustment of his basis in
Tri-City. Respondent’s and petitioner’s calculations correctly
incorporate the increase in basis due to the additional income
inclusion.
2See supra note 5. The inclusion of the “extra” $1,000 is
irrelevant, since it increases the basis and likewise increases the
amount realized.
One difference between petitioner’s and respondent’s
calculation of unreported income from this sale is whether the
inclusion of petitioner’s relief from partnership debt under the
sales agreement should be included as part of the sale proceeds.
We believe that respondent, in contrast to petitioner, correctly
includes, as an amount realized, that portion of the liability of
which petitioner is relieved by virtue of the sales agreement.30
“If a partnership interest is sold or exchanged, the reduction in
the transferor partner’s share of partnership liabilities is
treated as an amount realized under section 1001 and the
regulations thereunder.” Secs. 1.752-1(h), 1.1001-2(a), Income
30Petitioner argues that respondent incorrectly included
petitioner’s relief from indebtedness as an amount realized in
the sale. It is clear that the amount of the indebtedness from
which petitioner is relieved is included as an amount realized in
the sale transaction, and likewise, petitioner’s basis in
partnership is increased by his proportionate share of the
partnership liability. See secs. 705, 722, 752. Thus, the
amount realized is equally offset by the basis increase.
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