20 Sep Basis Calculation
Under §165, in general, the basis ofa partnership interest equals the sumof the amount of money contributed, the partner’s share of partnershipliabilities and the partner’s distributive share of partnership income andlosses.How to compute the adjustedbasis of the partnership interestwhen there is an initial contribution to the partnership, followed bya large distributed loss that exceedsthe partner’s original basis can become complicated.
Section 705(a) requires thatthe adjusted basis be determinedby increasing the original basis bythe sum of the partner’s distributive share of partnership income forthe current and prior taxable yearsand decreasing it by the sum of thepartner’s distributive share of lossesfor the current and prior taxableyears.
It appears that ifa partnership incurs and distributes
a signiï¬cant loss in one taxable year,that loss is carried along in ultimately calculating what the adjustedbasis of a partnership interest wouldbe in a later year.The adjusted basisat any particular point cannot gobelow zero. However, this does notmean that the sum of the distributive shares of income and losses overthe history of the partnership ispermanently set to zero at any pointthat the sum becomes negative.The nondeductible portion of the lossis suspended and deducted in a subsequent year in which there is additionalbasis. The loss is not gone forever.
The calculation of basis willoccur only when needed, and that
calculation will reflect all precedingdistributed income and losses. Theadjusted basis need not be calculatedannually. In addition, the adjustedbasis for one year does not begin withthe basis set for the immediately preceding year, with any negative resultfor that prior period being set to zero.
