Kligfeld Holdings, Kligfeld Corporation, Tax Matters Partner - Page 9

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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