- 7 - basis is initially equal to the amount of cash plus his adjusted basis in the contributed property. Sec. 722; sec. 1.722-1, Example (1), Income Tax Regs. Outside basis increases when a partner contributes additional assets to the partnership or when the partnership has a gain; it decreases when the partner contributes liabilities to the partnership, the partnership has a loss, or the partnership distributes assets to the partner. Sec. 705(a). When Kligfeld initially contributed the Inktomi stock to Holdings 1, his outside basis in the partnership was equal to his basis in the contributed stock, or approximately $300,000. Likewise, the Inktomi stock continued to have the same inside basis to the partnership as it had before it was contributed-- again, approximately $300,000. When Kligfeld (through Investments) later contributed the proceeds from the short sale, he arguably increased his outside basis in the partnership in an amount equal to the value of those proceeds. However, Kligfeld presumably reasoned that the attached obligation to close out the short sale, an obligation that he also contributed, was a contingent liability and therefore shouldn’t reduce his outside basis as contributing a fixed liability would.10 As a result, 10 Section 752 states that outside basis is decreased by the amount of any personal liability assumed by the partnership. At the time of this transaction, it didn’t specifically include contingent liabilities, and so Kligfeld probably reasoned that (continued...)Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 NextLast modified: November 10, 2007