Kligfeld Holdings, Kligfeld Corporation, Tax Matters Partner - Page 7

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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.           
               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              

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Last modified: November 10, 2007