Adjusting the Basis of Partnership Property Generally, a partnership cannot adjust the basis of its propertybecause of a distribution of property to a partner or because of atransfer of an interest in the partnership, whether by sale orexchange or because of the death of a partner. The partnership canadjust the basis only if it files an election to make an optionaladjustment to the basis of its property upon all distributions andtransfers. A partnership does not adjust the basis of partnershipproperty for a contribution of property, including money, to thepartnership. Distributions.When there is a distribution of partnership property to a partner,the partnership makes the optional adjustment by: Increasing the adjusted basis of the retained partnershipproperty by: Any gain recognized by the distributee partner on thedistribution, plus The excess, if any, of the partnership's adjusted basis forthe distributed property (immediately before the distribution) overthe basis of the property to the distributee, or Decreasing the adjusted basis of the retained partnershipproperty by: Any loss recognized by the distributee partner on thedistribution, plus The excess, if any, of the distributee partner's basis forthe distributed property over the partnership's adjusted basis for theproperty (immediately before the distribution). Timing of adjustment.If a partnership completely liquidates the interest of a partner bymaking a series of cash payments treated as distributions of thepartner's interest in partnership property, the basis adjustments topartnership property must correspond in timing and amount with therecognition of gain or loss by the retiring partner, or a deceasedpartner's successor in interest, with respect to those payments. Example.Alan owns a one-third interest in the partnership SylvanAssociates. Sylvan has an optional adjustment to basis election ineffect. When Alan retires, Sylvan continues without dissolution andagrees to liquidate Alan's one-third interest in the partnershipproperty by making a series of cash payments to Alan that are treatedas distributions. The total amount of payments Alan will receive isfixed and exceeds the adjusted basis of Alan's interest in thepartnership. Sylvan increases the adjusted basis of its property by Alan'srecognized gain in each partnership tax year during which Alanrecognizes gain with respect to the payments. Transfers.When there is a transfer of a partnership interest because of asale or exchange or a partner's death, the partnership makes theoptional adjustment by: Increasing the adjusted basis of the partnership property bythe excess of: The transferee's basis for his or her partnership interest,over The transferee's share of the adjusted basis of allpartnership property, or Decreasing the adjusted basis of partnership property by theexcess of: The transferee partner's share of the adjusted basis of allpartnership property, over The transferee's basis for his or her partnershipinterest. five star hotel in BlackpoolThese adjustments affect the basis of partnership property for thetransferee partner only. They become part of his or her share of thecommon partnership basis. Making the election.The optional adjustment to basis is made by filing a writtenstatement with Form 1065 for the tax year in which the distribution ortransfer occurs. For the election to be valid, the return must befiled on time, including extensions. The statement must include thename and address of the partnership, be signed by one of the partners,and state that the partnership elects under section 754 to applysections 734(b) and 743(b) of the Internal Revenue Code. Once a validelection has been made, it applies in succeeding years until it isrevoked. If the election cannot be made with the return, a partner or thepartnership can request an automatic extension of 12 months to makethe election. See section 301.9100-2 of the regulations for moreinformation. Revoking the election.The election can be revoked only with the approval of the IRS. Anapplication to revoke the election must be filed with the director forthe district in which the partnership return must be filed. Thisapplication must be filed within 30 days after the close of thepartnership tax year for which the change is to be effective. Theapplication must be signed by one of the partners and state why thepartnership wishes to revoke the election. Examples of sufficient grounds for approving the applicationinclude the following. A change in the nature of the business. A substantial increase in assets. A change in the character of the assets. Sovata uebernachtungAn increased frequency of retirements or shifts ofpartnership interests. However, the IRS will not approve an application to revoke theelection if its primary purpose is to avoid decreasing the basis ofpartnership assets upon a transfer or distribution.