Dividing the Indivisible: Identifying the "Property" in Partnership Transactions

Abstract

[...]the rules in subchapter K are a blend of aggregate and entity concepts. The partner also has a share of partnership basis in its assets (inside basis). [...]when a general partner transfers its capital interest, it is transferring not only an interest in the partnership as an entity but also an interest in the partnership assets and tax attributes. Stock presents more difficult issues, because the shares are often economically fungible, but not certificated or labeled, and they have different tax attributes. [...]the question is how the partnership should identify which shares are sold or distributed, which in turn determines the amount of basis or built-in gain. Because each share is a separate piece of property, a partner's share of inside gain can be spread across all of the shares, making it more difficult to prevent shifts of built-in gain when a partnership that owns stock distributes some of that stock to a partner.