CCH Federal Taxation Comprehensive Topics Chapter 20 Partnerships—Distributions, Sales, and Exchanges ©2005, CCH INCORPORATED 4025 W. Peterson Ave. Chicago, IL

CCH Federal Taxation Comprehensive Topics 2 of 45 Chapter 20 Exhibits Chapter 20, Exhibit Contents 1. Distributions—Effect on Partners 2. Distributions—Effect on Partnerships 3. Distributions—Rules Under Code Sections 731 to Proportionate Distributions—Example 5. Selling a Partnership Interest—Effect on Selling Partner 6. Selling a Partnership Interest—Effect on Partnership 7. Selling a Partnership Interest—Example 8. Selling a Partnership Interest with Hot Assets—Example 9. Termination of Partnership 10. Basic Partnership Tax Accounting—Outside Basis, Inside Basis and Capital Account 11. Basic Partnership Tax Accounting—Built-In Gains and Losses 12. Basic Partnership Tax Accounting—Example 1 (Formation) 13. Basic Partnership Tax Accounting—Example 2 (Profit Allocation)

CCH Federal Taxation Comprehensive Topics 3 of 45 Distributions—Effect on Partners How is “amount distributed” to owners computed? Cash + debt relief [i.e., for purposes of determining gain, only cash + debt relief are subject to capital gains. Other property received by a partner is tax-free.] What is the owners’ tax treatment for the “amount distributed?” Cash + debt relief:  Tax-free up to outside basis;  Capital gain to a partner on the excess of cash or debt relief in excess of outside basis. (Loss is never recognized.)  Other property: Tax-free. Chapter 20, Exhibit 1a

CCH Federal Taxation Comprehensive Topics 4 of 45 What is the basis of property distributed to an owner? Same as the partnership’s inside basis. [However, if a partner’s outside basis is less than the partnership’s inside basis in property distributed to a partner, then the partner’s basis of property received is taken from his outside basis, not from the partnership’s inside basis. This makes sense, given that a partner’s outside basis must be reduced by the “amount” of distributions and that it cannot be negative] Chapter 20, Exhibit 1b Distributions—Effect on Partners

CCH Federal Taxation Comprehensive Topics 5 of 45 Does a partnership recognize gain or loss on the distribution of: Cash or its own bonds to owners? No. Other property (other than its own stock)? No gain or loss, unless it is part of a disguised sale. In a disguised sale, the partnership’s recognized gain or loss = (a) – (b), where: (a) = FMV of prop. dist’d. (b) = AB of prop. dist’d. Chapter 20, Exhibit 2a Distributions—Effect on Partnerships

CCH Federal Taxation Comprehensive Topics 6 of 45 What is the character of the entity’s gain or loss on distribution of property to owners? The character of the partnership’s gain or loss on a disguised sale is the same as the character of the property before it is distributed. Distributions—Effect on Partnerships Chapter 20, Exhibit 2b

CCH Federal Taxation Comprehensive Topics 7 of 45 Distributions—Rules Under Code Sections 731 to 733 The rules indicated below assume that the partnership DOES NOT make a disproportionate distribution of the Code Sec. 751 “hot” assets. What is a distribution? A distribution is a transfer of value from the P/S to a partner in reference to his interest in the partnership. A distribution may be in the form of money, debt relief, or other property. Any decrease in a partner’s allocable share of P/S debt is treated as a distribution of money. This can result from payment of principal by the P/S on its debt. Also, a draw against a partner’s share of partnership income is a distribution. Chapter 20, Exhibit 3a

CCH Federal Taxation Comprehensive Topics 8 of 45 Distributions—Rules Under Code Sections 731 to 733 Will the partnership recognize either a gain or loss on the transfer of property? Generally no, not unless it is part of a disguised sale. Even distribution of Code Sec or Code Sec property does not trigger recognition. The exceptions are: (1) Distribution of property with built-in gain or loss within 7 years of contribution; and (2) Disproportionate distributions. Chapter 20, Exhibit 3b

CCH Federal Taxation Comprehensive Topics 9 of 45 Distributions—Rules Under Code Sections 731 to 733 Will the partner recognize either a gain or loss on the distribution? Capital gain is recognized only if cash or debt relief received is greater than her outside basis. Loss is never recognized. Code Sec. 731(a); Reg (a)(1). If the cash received is a draw against profits and the amount received is greater than outside basis, gain is NOT recognized. The reason: A distribution reduces outside basis as shown below. However, the profits implied in a draw against profits increases basis by an equal amount. Thus, a cash draw would have a zero effect on outside basis. What affect does the distribution have on the partner’s outside basis? Her outside basis is reduced by the amount of cash plus the partnership’s inside in the distributed asset(s). However, her outside basis cannot be reduced below zero Chapter 20, Exhibit 3c

CCH Federal Taxation Comprehensive Topics 10 of 45 Distributions—Rules Under Code Sections 731 to 733 What is the basis of the transferred assets to the partner? Follow this step-by-step formula: (1) Reduce her outside basis by the amount of cash received. (2)(a) If her remaining outside basis is enough, she will pick up the partnership’s inside basis in the distributed asset; OR, (2)(b) If her remaining outside basis is NOT enough, she will allocate the remaining outside basis to the distributed assets according to the partnership’s relative basis in the assets. What is the holding period and character of the transferred asset? The holding period begins on the day after the date that the partnership acquired the asset. The character is determined by the use that the partner makes of the asset. Chapter 20, Exhibit 3d

CCH Federal Taxation Comprehensive Topics 11 of 45 Proportionate Distributions—Example FACTS: On July 1, 20x1, ABC Partnership distributes to each of its equal partners $10,000 cash and land with a fair market value (FMV) of $10,000 and basis (AB) of $5,000. The three parcels of land were acquired by ABC on 12/31/80. A, B and C have outside bases of $20,000, $10,000, and $5,000 respectively. The partnership has the following tax/book balance sheet prior to the distribution. Chapter 20, Exhibit 4a

CCH Federal Taxation Comprehensive Topics 12 of 45 Tax/Book Balance Sheet at July 1, 20x1 AssetsEquities DescriptionInside Basis Current FMV Description:Outside Basis Current FMV Cash$ 50,000 Debt0 Receivable020,000 Inventory20,00030,000Capital—A$20,000$ 70,000 Land30,00060,000Capital—B10,00070,000 Building10,00050,000Capital—C5,00070,000 TOTALS$110,000$210,000$35,000$210,000 Proportionate Distributions—Example Chapter 20, Exhibit 4b

CCH Federal Taxation Comprehensive Topics 13 of 45 QUESTION 1: What are the tax consequences of the distribution to A, B and C? QUESTION 2: What result to C if he receives the land first and the cash in a subsequent separate distribution on October 1? QUESTION 3: What result to C in QUESTION 2, if the cash distribution on October 1 is a draw against his share of partnership income, which is $20,000 for the year? Proportionate Distributions—Example Chapter 20, Exhibit 4c

CCH Federal Taxation Comprehensive Topics 14 of 45 Proportionate Distributions—Example QUESTION 1 SOLUTION ABCC’s Capital Gain Outside basis before distribution $ 20,000$ 10,000 $ 5,000 Less: Cash distribution10,000 Remaining balance after cash10,0000(5,000)$5,000 Less: P/S inside basis of land (5,000)00 Outside basis after distribution 5,00000 Partners’ basis in land5,00000 Beg. holding period of land1/1/81 Chapter 20, Exhibit 4d

CCH Federal Taxation Comprehensive Topics 15 of 45 Proportionate Distributions—Example QUESTION 2 SOLUTION CC’s Capital Gain Outside basis before distribution$5,000 Less: P/S inside basis of land5,000 Remaining balance after land0 Less: Cash distribution10,000 Remaining balance after cash:(10,000)$10,000 Outside basis after distribution0 Beg. HP date of Land1/1/81 Chapter 20, Exhibit 4e

CCH Federal Taxation Comprehensive Topics 16 of 45 Proportionate Distributions—Example QUESTION 3 SOLUTION CC’s Capital Gain Outside basis before distribution$5,000 Less: P/S inside basis of land5,000 Remaining balance after land0 Less: Draw distribution(10,000) Addback: Related income10,000 Outside basis after distribution00 Beg. HP date of Land1/1/81 Chapter 20, Exhibit 4f

CCH Federal Taxation Comprehensive Topics 17 of 45 Selling a Partnership Interest— Effect on Selling Partner How is a partner’s initial outside basis in a partnership (P/S) interest determined if purchased from a partner? A partner buying into a P/S takes an outside basis that is the sum of: (a) Purchase price (Code Sec. 742); (b) Partner’s share of partnership liabilities (Code Sec. 752(d)). Chapter 20, Exhibit 5a

CCH Federal Taxation Comprehensive Topics 18 of 45 Selling a Partnership Interest— Effect on Selling Partner What is the selling partner’s character of gain or loss on the sale of a P/S interest? Code Sec. 741 provides that a sale of a partnership interest results in capital gains or losses. However, Code Sec. 741 yields to Code Sec. 751 and gain or loss is ordinary if amounts received by the selling partner are attributable to “hot assets.” Code Sec. 751 defines “hot” assets as the following items: Unrealized receivables in which no taxable income resulted from the credit sale. Generally cash basis but not accrual basis P/S’s would have unrealized receivables. However in determining the character of gain on sale of a partnership interest, unrealized receivables must include any Code Sec or 1250 depreciation recapture potential from Code Sec assets! On the other hand, in determining the character of gain on distribution of partnership assets, unrealized receivables do NOT include depreciation recapture potential. Chapter 20, Exhibit 5b

CCH Federal Taxation Comprehensive Topics 19 of 45 Selling a Partnership Interest— Effect on Selling Partner Appreciated inventory, where aggregate FMV exceeds aggregate basis. For purposes of determining aggregate amounts under Code Sec. 751, inventory includes all partnership property except cash, capital assets and Code Sec assets. Thus, for purposes of the “aggregate” computation, inventory includes unrealized receivables! In determining the character of gain on sales of partnership interests the minimum 20% substantial appreciation requirement has been repealed effective August 5, 20x1. However, this 20% substantial appreciation requirement has been retained for inventory distributions (or deemed distribution) by partnerships. Code Sec and 1250 business assets (i.e., long-term business assets with depreciation recapture potential.) A selling partner’s distributive share of any built-in gain on sale of “hot” assets is recognized as ordinary income, even when there is a realized loss on the sale. In such a case, the recognized capital loss would be increased by the ordinary income amount. The combined effect of Code Sec. 741 & 751 may yield surprising results when a partner sells a partnership interest—an ordinary gain under Code Sec. 751 and a capital loss under Code Sec Chapter 20, Exhibit 5c

CCH Federal Taxation Comprehensive Topics 20 of 45 Selling a Partnership Interest— Effect on Partnership What is the tax effect on a partnership’s (P/S’s) inside basis of assets when a partner sells her interest? Without Code Sec. 754 election. Code Sec. 743(a) provides that “the basis of partnership property shall not be adjusted as the result of a transfer of an interest in a partnership by sale...” However, if the partnership carries “hot assets,” the tax effect is initially quite alarming. Consider the following example. Chapter 20, Exhibit 6

CCH Federal Taxation Comprehensive Topics 21 of 45 Selling a Partnership Interest—Example FACTS: 12/31/x1: Buyer pays $40,000 cash to Seller for a 1/3 interest in a cash method partnership that has as its primary asset $90,000 of accounts receivable with a zero basis and land with a $30,000 fair market value (FMV) and basis. Comments: As indicated earlier, Buyer’s outside basis is cost, or $40,000. In effect, he has paid $30,000 for his 1/3 interest in receivables (1/3 x $90m = $30m) and $10,000 for his 1/3 interest in the land (1/3 x $30m = $10m)] 1/1/x2: $90,000 cash is received by the P/S on the receivables. Chapter 20, Exhibit 7a

CCH Federal Taxation Comprehensive Topics 22 of 45 QUESTION 1: Does Seller have ordinary income of $30,000? ANSWER 1: Yes, Seller is taxed under Code Sec. 751 on the $30,000 of ordinary income attributable to the receivables when she sells her partnership interest to Buyer. Selling a Partnership Interest—Example Chapter 20, Exhibit 7b

CCH Federal Taxation Comprehensive Topics 23 of 45 Selling a Partnership Interest—Example QUESTION 2: Does the Buyer have ordinary income of $30,000? (i.e., a 1/3 share in the partnership’s income from collections—1/3 x [90m cash – 0 inside basis of P/S] = 30m) ANSWER 2: Yes! Buyer is taxed on his 1/3 share, or $30,000 ordinary income. This result occurs even though (1) Seller already recognizes $30,000 as ordinary income and (2) Buyer pays $30,000 for his share of the receivables and has no real gain on their collection. Comments: Of course, Buyer’s outside basis will increase by his $30,000 share of P/S ordinary income. When he eventually sells his P/S interest, the increased outside basis will reduce capital gain (or increase capital loss) by $30,000. Not much consolation, given the timing (i.e., 20x2) and character (i.e., ordinary) of his taxable income. Chapter 20, Exhibit 7c

CCH Federal Taxation Comprehensive Topics 24 of 45 Selling a Partnership Interest—Example QUESTION 3: Is there a way to prevent the Buyer’s dilemma? ANSWER 3: Yes! Read on. With Code Sec. 754 election. To avoid taxing Buyer on the appreciation of his proportionate share of partnership assets prior to the date of purchase, the P/S may elect under Code Sec. 754 to adjust its inside basis of the receivables. In the example above, a Code Sec. 754 election by the P/S gives Buyer a $30,000 inside “cost” basis in his “share” of the receivables. When the receivables are collected, the other partners each will be taxed just as they would be with the Code Sec. 754 election. However, Buyer realizes no income because of the upward adjustment of his “personal” inside basis. Chapter 20, Exhibit 7d

CCH Federal Taxation Comprehensive Topics 25 of 45 Selling a Partnership Interest—Example COMMENTS: Code Sec. 754 cuts both ways. If partnership assets had declined in value as of the time of the sale of the partnership interest, a Code Sec. 754 election would create a downward adjustment to the Buyer’s personal inside basis in the partnership assets. Obviously, such an election would be disadvantageous to Buyer. Chapter 20, Exhibit 7e

CCH Federal Taxation Comprehensive Topics 26 of 45 Selling a Partnership Interest with Hot Assets—Example FACTS: 1. S sells his 1/3 capital interest to B for $150,000 cash. 2. The tax/book balance sheet of the partnership (P/S) immediately before the sale is as follows: Chapter 20, Exhibit 8a

CCH Federal Taxation Comprehensive Topics 27 of 45 $450,000$180,000Total Capital$450,000$180,000Total Assets 180,000150,000Land 300,000120,000Capital- S (2/3)240,0000Accounts receivable $150,000$ 30,000Capital- S (1/3)$ 30,000 Cash FMVOutside Basis FMVInside Basis P/S Balance Sheet Immediately Before the Sale Selling a Partnership Interest with Hot Assets—Example Chapter 20, Exhibit 8b

CCH Federal Taxation Comprehensive Topics 28 of 45 QUESTIONS: What is the amount and character of the gain to S? Indicate how the partnership tax/book balance sheet will appear assuming that a Code Sec. 754 election is NOT in place. Indicate how the partnership tax/book balance sheet will appear assuming that a Code Sec. 754 election IS in place. Selling a Partnership Interest with Hot Assets—Example Chapter 20, Exhibit 8c

CCH Federal Taxation Comprehensive Topics 29 of 45 Selling a Partnership Interest with Hot Assets—Example Chapter 20, Exhibit 8d $10,000$80,000$90,000$60,000$150,000 CapitalOIRealized gainOutside Basis of Seller Sales Price (e) = (c) – (d) (d) = 1/3 x [240m – 0] (c) = (a) – (b)(b)(a) Amount and character of the gain to S SOLUTION:

CCH Federal Taxation Comprehensive Topics 30 of 45 Selling a Partnership Interest with Hot Assets—Example Chapter 20, Exhibit 8e P/S Tax/Book Balance Sheet - Without Code Sec. 754 Election: FMVOutsideFMVInside Basis $450,000$270,000Total Capital$450,000$180,000Total Assets 180,000150,000Land 300,000120,000Capital-Z (2/3)240,0000Accounts receivable $150,000 Capital-B (1/3)$ 30,000 Cash Partnership Tax/Book Balance Sheet assuming that a Code Sec. 754 election is NOT in place. SOLUTION:

CCH Federal Taxation Comprehensive Topics 31 of 45 Selling a Partnership Interest with Hot Assets—Example Chapter 20, Exhibit 8f P/S Tax/Book Balance Sheet - With Code Sec. 754 Election: FMVOutsideFMVInside Basis $450,000$270,000Total Capital $450,000 $270,000Total Assets 180,000160,000Land [Inside Basis: ] 300,000120,000Capital-Z (2/3)240,00080,000A/R [Inside Basis: m] $150,000 Capital-B (1/3) $ 30,000 Cash Partnership Tax/Book Balance Sheet assuming that a Code Sec. 754 election IS in place. SOLUTION:

CCH Federal Taxation Comprehensive Topics 32 of 45 Note on the $80,000 step-up of A/R: The $80,000 step-up in P/S’s inside basis of receivables benefits only B, not the other partners. In effect, B gets a “personal inside basis” in P/S’s receivables, which will reduce his share of P/S income when the receivables are collected. Selling a Partnership Interest with Hot Assets—Example Chapter 20, Exhibit 8g

CCH Federal Taxation Comprehensive Topics 33 of 45 Termination of Partnership When must a partnership terminate for tax purposes? When operations of the partnership cease or 50% or more of the total partnership interests are sold within any 12-month period. Disposition of a > 50% partnership interest by gift, inheritance or partial liquidation do not cause termination. Death of a > 50% partner, in itself, does not cause termination. However the liquidation of her interest by the estate does. Chapter 20, Exhibit 9

CCH Federal Taxation Comprehensive Topics 34 of 45 Basic Partnership Tax Accounting— Outside Basis, Inside Basis and Capital Account Code Sec. 704(D) Outside Basis Definition. This is a partner’s adjusted basis (AB) in the partnership (P/S) capital interest. Purpose. Outside basis is used mainly in computing gain or loss on the sale of a P/S interest, and for determining the deductibility of Code Sec. 702(a)(8) operating losses under the at-risk rules. Chapter 20, Exhibit 10a

CCH Federal Taxation Comprehensive Topics 35 of 45 Inside Basis Definition. This is the P/S’s basis in assets. Purpose. Inside basis is used by the P/S to compute depreciation, or its gain or loss on disposition of the property. Computation. If the assets are acquired through a partner’s contribution, inside basis is generally the partner’s AB at date of contribution. If obtained from a non-partner, inside basis is cost. Chapter 20, Exhibit 10b Basic Partnership Tax Accounting— Outside Basis, Inside Basis and Capital Account

CCH Federal Taxation Comprehensive Topics 36 of 45 Capital Account Definition. A capital account is maintained for each partner at the partnership level. It represents a partner’s equity in the P/S. Purpose. At any point in time during the life of a P/S, the capital account generally identifies what each partner would be entitled to receive upon liquidation of her outside basis. Computation. A partner’s initial capital account balance is the FMV (net of debt relief) of the contributed property. It is increased by the partner’s share of P/S profits. It is decreased by the partner’s share of losses, and the amount of cash and the FMV of any property distributed to the partner. Comparison with outside basis. It is different from the partner’s outside basis in that (1) capital arising from property contributions are stated at FMV, not contributing partner’s AB; and (2) it does not include the partner’s share of P/S liabilities as does the outside basis. Chapter 20, Exhibit 10c Basic Partnership Tax Accounting— Outside Basis, Inside Basis and Capital Account

CCH Federal Taxation Comprehensive Topics 37 of 45 Basic Partnership Tax Accounting— Built-In Gains and Losses Definition. This is refers to the amount and character of potential gain or loss in property contributed by a partner to a partnership (P/S), i.e., fair market value (FMV) at contribution date – adjusted basis (AB) at contribution date. Contribution of property. When a partner contributes property to a P/S, pre-contribution, built-in gain or loss is not recognized. Chapter 20, Exhibit 11a

CCH Federal Taxation Comprehensive Topics 38 of 45 Basic Partnership Tax Accounting— Built-In Gains and Losses Sale within 7 years. If the P/S disposes of the property within 7 years of the contribution date, built-in gains or losses are passed back to the contributing partner rather than allocated among all partners. The character of the gain or loss is determined by the character of the property as originally held by the contributing partner. Code Sec. 704(c) Sale after 7 years. If the P/S disposes of built-in gain or loss property (other than unrealized receivables) after 7 years, then any built-in gains or losses are shared proportionately among all partners. Chapter 20, Exhibit 11b

CCH Federal Taxation Comprehensive Topics 39 of 45 Basic Partnership Tax Accounting— Example 1 (Formation) FACTS: On 1/1/x1, A, B and C form the ABC Partnership. The basis and FMV of their contributions are as follows: ABC ABFMVABFMVABFMV Cash$10,000 Securities$40,000$60,000 Land$30,000 Chapter 20, Exhibit 12a

CCH Federal Taxation Comprehensive Topics 40 of 45 Reconstruct the P/S Balance Sheet, and identify: (1) Built-In Gain/Loss, (2) Outside Bases, (3) Inside Bases and (4) Capital Account Balances. TAX/BOOK BALANCE SHEET AT 1/1/x1: Inside Cont’nOutside Cont’n Cash$10,000**$10,000Liabilities Securities40,000**60,000Capital Land30,000**30,000A (10%)10,000*10,000*** B (60%)40,000*60,000*** C (30%)30,000*30,000*** Total assets 80,000100,000Liab. & Cap.80,000100,000 Built-in gain: B has a $20,000 built in gain [$60,000 – $40,000] * Outside basis of partners: A: $10,000; B: $40,000; C: $30,000 ** Inside basis of P/S: Cash: $10,000; Securities: $40,000; Land: $30,000 *** Capital account balance of partners: A: $10,000; B: $60,000; C: $30,000 Basic Partnership Tax Accounting— Example 1 (Formation) Chapter 20, Exhibit 12b

CCH Federal Taxation Comprehensive Topics 41 of 45 COMMENTS: “Tax/book” balance sheet means a financial statement that shows (1) the partnership’s inside basis in its assets, (2) the partners’ outside basis in their capital interest, and (3) the partners’ capital accounts as reported on the partnership books. Basic Partnership Tax Accounting— Example 1 (Formation) Chapter 20, Exhibit 12c

CCH Federal Taxation Comprehensive Topics 42 of 45 Basic Partnership Tax Accounting— Example 2 (Profit Allocation) FACTS: [Use the balance sheet at Example1 as the starting point] Same as above, except that during 20x1, ABC reports $10,000 Code Sec. 702(a)(8) income from cash sales, and sold the land for $40,000 cash. Profits are allocated according to the partners’ capital account balances. Allocate 20x1 Income, reconstruct the P/S Balance Sheet, and identify: (1) Built-In Gain/Loss (2) Outside Bases (3) Inside Bases and (4) Capital Account Balances Chapter 20, Exhibit 13a

CCH Federal Taxation Comprehensive Topics 43 of 45 20x1 Income Allocation Sales Price Inside Basis Total (100%) A (10%) B (60%) C (30%) Code Sec. 702(a)(8) TI: $10,000$1,000$6,000$3,000 Land$40,000$30,00010,000 Gain 1,0006,0003,000 Totals$20,000$2,000$12,000$6,000 Basic Partnership Tax Accounting— Example 2 (Profit Allocation) Chapter 20, Exhibit 13b

CCH Federal Taxation Comprehensive Topics 44 of 45 Tax/book Balance Sheet At 12/31/x1 Inside Cont’n. Outside Basis Cont’n. Cash [ ]60,000**60,000Liabilities: (none so far.) Securities [no change]40,000**60,000Capital: Land [sold in 20x1] A, 10% [Beg.+ 2m]$12,000*$12,000*** B, 60% [Beg.+12m]$52,000*$72,000*** C, 30% [Beg. + 6m]$36,000*$36,000*** Total assets100,000120,000Liability & Capital$100,000$120,000 Built-in gain: B still has a $20,000 built in gain [60m - 40m] * Outside basis of partners: A: $12,000; B: $52,000; C: $36,000. [Increased by the partners’ proportionate share of Code Sec. 702(a)(8) TI and gain on sale.] ** Inside basis of P/S: Cash: $60,000; [10m beg. increased by 10m TI + 40 sales proceeds] Securities: $40,000. [No change.] *** Capital account balance of partners: A: $12,000; B: $72,000; C: $36,000. [Increased by the partners’ proportionate share of Code Sec. 702(a)(8) TI and gain on sale.] Chapter 20, Exhibit 13c Basic Partnership Tax Accounting— Example 2 (Profit Allocation)

CCH Federal Taxation Comprehensive Topics 45 of 45 COMMENTS: Each partner’s outside basis is increased by the partner’s share of partnership liabilities on the theory that the partners ultimately will be responsible for paying that debt. Code Sec. 752(a). The result is that the borrowed funds become an asset ($30,000 cash) having an inside basis of $30,000 to the partnership, and the resulting liability to repay that cash increases the partners’ outside bases by that same amount in a ratio of 1:6:3, or $3,000 to A, $18,000 to B and $9,000 to C. Basic Partnership Tax Accounting— Example 2 (Profit Allocation) Chapter 20, Exhibit 13d