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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...)
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Last modified: November 10, 2007