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partner’s different outside basis.12 Since both Holdings 1 and
Holdings 2 attached a section 754 election to their 1999 tax
returns, Holdings 2 adjusted the inside basis of its Inktomi
stock to almost $10.4 million to reflect Corporation’s higher
outside basis.13
Holdings 2 sold most of the Inktomi stock at the end of 1999
and reported the sale on its 1999 partnership return. The
capital gain from that sale--now comparatively slight due to the
increase in inside basis--flowed through to the partners, again
increasing their outside basis. However, Holdings 2 didn’t
actually distribute the proceeds from the sale until 2000, when
it distributed both the cash proceeds and the remaining shares of
12 Section 754 allows a partnership to adjust the basis of
its property under section 743, which provides in subsection (b):
SEC. 743(b) Adjustment to Basis of Partnership
Property.--In the case of a transfer of an interest in
a partnership by sale or exchange * * *, a partnership
with respect to which the election provided in section
754 is in effect * * * shall--
(1) increase the adjusted basis of the
partnership property by the excess of the
basis to the transferee partner of his
interest in the partnership over his
proportionate share of the adjusted basis of
the partnership property * * *
13 The assets in Holdings 2 at the time it was created
consisted of cash and the Inktomi stock. Because cash has a
fixed basis, the only partnership property whose basis could be
adjusted was the stock. The newly adjusted inside basis
consisted of the original inside basis plus the value of the
short sale proceeds contributed by Kligfeld.
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Last modified: November 10, 2007