TAX 9863 Lecture Notes - Lecture 37: Capital Account, General Partnership

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14 Feb 2020
Balance in each partner’s tax capital account is that partner’s “share of” inside basis
I.e. contribution that she has made to inside basis, net of liabilities
Each partner’s tax capital account equals her outside basis
Liabilities reflected in inside basis and in the partners outside basis but not in the partner’s tax
capital accounts
Example #3: assume that the land contributed by C had a fair market value of $250, but was subject to a $100
mortgage, which the partnership assumed.
C’s capital account credited w/ $150 which is the FMV of the property, net of liabilities, as required by
the basic rules of the regulations
Pship books the land @ FMV
List mortgage as liability
Inside basis: subtracting from the basis of the contributed property the liabilities encumbering the
RULE: On contribution of property the contributor’s tax capital account is equal to her
contribution to inside basis, net of liabilities.
In this example, C will have tax capital account of zero b/c basis = 100 and liability = 100.
Assets Liabilities & Capital
Basis Book
$150 $150 Liabilities = $100
100 250
$250 $400
Capital Accounts
Tax Book
C $ 0 $150
D 150 150
$150 $300
Book value of the assets = liabilities + Book capital
Tax Capital + Liabilities = inside basis
Assume equal general partnership
C will have a $50 share of the liability after the contribution
Relieved of 100 liability
Net reduction in liab = 50
Section 723 and 752 Cs outside basis will be $100-50 or $50.
Ds basis will increase by her $50 share of the liability, giving her outside basis of $200
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