Internal Revenue Service
Revenue Ruling
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smRev. Rul. 66-94
1966-1 C.B. 166
Sec. 704
Sec. 705
Sec. 731
IRS Headnote
In determining the basis of a partner's interest in a partnership under section 705(a) of the Internal Revenue Code of 1954 for purposes of determining the distributive share of partnership losses which will be allowed as a deduction to a partnership, such basis is computed without taking into account his distributive share of partnership losses for its taxable year with respect to which the loss allowable to the partner is being determined.
In determining the basis of a partner's interest in a partnership under section 705(a) of the Code for purposes of determining the gain realized by a partner upon a distribution of money to him by the partnership, such basis is computed without taking into account distributions made by the partnership during its current taxable year with respect to which the partner's gain is being determined.
Distributions are taken into consideration before losses in computing a partner's adjusted basis for his partnership interest under section 705(a) of the Code.
Full Text
Rev. Rul. 66-94
Advice has been requested as to the manner in which a partner should compute the basis of his partnership interest under section 705(a) of the Internal Revenue Code of 1954 for purposes of determining the extent to which his distributive share of partnership losses will be allowed as a deduction, and the extent to which gain will be realized by a partner upon the distribution of cash to him by the partnership.
During the taxable year, A, a member of the partnership, contributed 50 x dollars to the partnership as his initial capital contribution, and received 30 x dollars as a cash distribution from the partnership. A's distributive share of partnership losses at the end of its taxable year was 60 x dollars.
Section 705(a) of the Code provides, in part, that the adjusted basis of a partner's interest in a partnership shall be the basis of such interest determined under section 722 of the Code (relating to contributions to a partnership)-(1) increased by the sum of his distributive share for the taxable year and prior taxable years of taxable income of the partnership, tax exempt income of the partnership, and the excess of depletion deductions over the basis of depletable property, and (2) decreased, but not below zero, by distributions by the partnership as provided in section 733 and by the sum of his distributive share of partnership losses and nondeductible partnership expenditures not chargeable to capital account.
Section 1.704-1(d)(1) of the Income Tax Regulations provides, in part, that a partner's distributive share of partnership loss will be allowed only to the extent of the adjusted basis (before reduction by current year's losses) of such partner's interest in the partnership at the end of the partnership taxable year in which such loss occurred.
Section 1.704-1(d)(2) of the regulations provides, in part, that in computing the adjusted basis of a partner's interest for the purpose of ascertaining the extent to which a partner's distributive share of partnership loss shall be allowed as a deduction for the taxable year, the basis shall first be increased under section 705(a)(1) of the Code and decreased under section 705(a)(2) of the Code, except for losses of the taxable year and losses previously disallowed.
Section 1.731-1(a). of the regulations provides, in part, that where money is distributed by a partnership to a partner, no gain or loss shall be recognized to the partner except to the extent that the amount of money distributed exceeds the adjusted basis of the partner's interest in the partnership immediately before the distribution. For purposes of sections 731 and 705 of the Code, advances or drawings of money or property against a partner's distributive share of income shall be treated as current distributions made on the last day of the partnership taxable year with respect to such partner.
Based on the foregoing, it is concluded that:
(1) In computing A's adjusted basis for his interest in the partnership under section 705(a) of the Code, A's original basis, which is determined under section 722 relating to contributions to the partnership, should be decreased by first deducting distributions made to A by the partnership and thereafter, by deducting his distributive share of partnership losses. However, A's basis for his interest in the partnership may not be reduced below zero. Thus:
A's contribution to the partnership............... 50 x dollars
Deduct cash distributions made to A
by the partnership................................ -30 x dollars
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20 x dollars
Deduct A's distributive share of losses
(60 x dollars) but only to the extent that
A's basis is not reduced below zero............... -20 x dollars
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A's basis for his interest in the partnership
under section 705 of the Code..................... - 0
(2) In order to determine the extent to which A's distributive share of partnership losses will be allowed as a deduction, A's basis for his interest in the partnership computed in accordance with section 705(a) of the Code, should be determined without taking into account his distributive share of partnership losses for the taxable year. Thus:
A's contribution to the partnership............... 50 x dollars
Deduct cash distributions made to A
by the partnership................................ -30 x dollars
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20 x dollars
A's distributive share of partnership losses
for the taxable year are not taken into account... - 0
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A's basis for determining the amount of his
allowable partnership losses...................... 20 x dollars
(3) In order to determine the extent to which gain will be realized by A upon the distribution of cash to him by the partnership, A's basis for his interest in the partnership computed in accordance with section 705(a) of the Code, should be determined without taking into account cash distributions made to him by the partnership during its current taxable year. Thus:
A's contribution to the partnership............... 50 x dollars
Cash distributions made by the
partnership to A during the taxable
year are not taken into account.................. -0 x dollars
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50 x dollars
Deduct A's distributive share of partnership
losses to the extent allowed by section
704(d) of the Code.
(See examples (1) and (2).)...................... -20 x dollars
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A's basis for determining the amount
of gain be realized upon the distribution
of cash to him by the partnership................. 30 x dollars
A may deduct his distributive share of the partnership loss to the extent of 20 x dollars (see example 2) and he realizes no gain from the cash distribution of 30 x dollars because his basis for determining the amount of gain upon such distribution is 30 x dollars (example 3).