Hi, I was reading IRS Publication 541 and 731 and would appreciate clarification on the following:

Marketable securities treated as money. Generally, a marketable security distributed to a partner is treated as money in determining whether gain is recognized on the distribution. This treatment, however, does not generally apply if that partner contributed the security to the partnership or an investment partnership made the distribution to an eligible partner.
Question: the marketable security (the stock) was not distributed, the stock was sold by the Partnership and the proceeds (cash/check) were distributed to the Partner who contributed the stock.

The amount treated as money is the security's fair market value when distributed, reduced (but not below zero) by the excess (if any) of:
1. The partner's distributive share of the gain that would be recognized had the partnership sold all its marketable securities at their fair market value immediately before the transaction resulting in the distribution, over
2. The partner's distributive share of the gain that would be recognized had the partnership sold all such securities it still held after the distribution at the fair market value in (1).

Loss on distribution. A partner does not recognize loss on a partnership distribution unless all the following requirements are met.
The adjusted basis of the partner's interest in the partnership exceeds the distribution.
The partner's entire interest in the partnership is liquidated.
The distribution is in money, unrealized receivables, or inventory items
Question: For discussion purposes, I combined these 2 sections and let us assume that both the Partners contributions and the Partners distributive share of the gain, are both 100%.
I don’t know if I under this, assume that there are 3 stocks, Stock “A” cost basis $100, Stock “B” cost basis $400 and Stock “C cost basis $1,000 and let’s assume that the current FMV for each of stocks is $600 so the total cost basis for all 3 stocks is $1,500 (“A” $100, “B” $400 and “C” $1,000) and the FMC for all 3 stocks is $1,800 (“A” $600,” B” $600 and “C” $600.)
So individually, “A” would have an unrealized GAIN of $400, “B” would have an unrealized GAIN of $200 and “C” would have an unrealized LOSS of $200.
What would be the effect to the Partner in these 2 scenarios:
(1) if the Partnership sold stock “A” for a $400 GAIN and
(2) if the Partnership sold stock “C” for a $200 LOSS?

• Would the Partner be able to receive a distribution in BOTH cases ($400 gain for the sale of Stock “A” and $200 Loss for the sale of Stock “C”)?
• Does the Partner claim a $400 Profit on his Form 1040 and pay Capital Gains tax on the $400 profit?
• Does the Partner claim a $200 Short Term Capital Loss on his Form 1040 (for example purposes let’s that this is a STCL , and deduct $200 from his Ordinary Income (again to avoid confusion, let’s assume that the STCL are < $3,000).

Thank you for your help,
Bob

”This treatment, however, does not generally apply if that partner contributed the security to the partnership or an investment partnership made the distribution to an eligible partner.”--->I guess what you mean is that neither the P/S nor any partner recognizes gain or loss when partners contribute property,i.e., money (security), as you said above, in exchange for a partnership interest; however,three exceptions to this general rule may require a partner TO recognize a gain upon the contribution of property to a P/S in exchange for a P/S interest ;1) contribution of property to a P/S that’d be treated as an investment company if it were incorporated,2) contribution of property followed by a distribution in an arrangement that may be considered a sale rather than a contribution, finally,3) contribution of property to a P/S along with the P/S ‘s assumption of liabilities previously owed by the partner. So, it depends on the situation.

“Question: the marketable security (the stock) was not distributed, the stock was sold by the Partnership and the proceeds (cash/check) were distributed to the Partner who contributed the stock. The amount treated as money is the security's fair market value when distributed, reduced (but not below zero) by the excess (if any) of:
1. The partner's distributive share of the gain that would be recognized had the partnership sold all its marketable securities at their fair market value immediately before the transaction resulting in the distribution, over
2. The partner's distributive share of the gain that would be recognized had the partnership sold all such securities it still held after the distribution at the fair market value in (1). “--->A partnership distribution is not taken into account in determining the partner's distributive share of partnership income or loss. If any gain or loss from the distribution is recognized by the partner, it must be reported on his or her return for the tax year in which the distribution is received. Money or property withdrawn by a partner in anticipation of the current year's earnings is treated as a distribution received on the last day of the partnership's tax year.A partnership generally does not recognize any gain or loss because of distributions it makes to partners. The partnership may be able to elect to adjust the basis of its undistributed property.

Thank you Wnhough, I think I finally "GOT IT", my mistake was that I did not understand that Partnership Profits are (proportionally) distributed to the Partners and in my scenario, one of the Partners is a 99.5% Partner so in essence, all profits will increase his cost basis inside the Partnership.
I have a semi-related question, is the Partnership required to keep "books" for BOTH Inside and Outside basis?
And while I am at it, WHAT (GAAP) "books" does the Partnership need to keep (tax books, GL, P&Ls,....)?
Thank you again for ALL the great help you have provided me to straighten out this "mess".
Bob

“is the Partnership required to keep "books" for BOTH Inside and Outside basis?”----> Under the corporate veil conept, “every state-registered business (corporation, limited liability company, and SOME partnerships) must keep certain records to maintain its protection against liability.” Ingeneral, a P/S maintains separate books of account, which typically include records of the P/S's financial transactions and each partner's capital contributions. The books must be kept at the P/S's principal place of business, and each partner must have access to the books and be allowed to inspect and copy them upon demand. If a P/S denies a partner access to the books, he or she usually has a right to obtain an Injunction from a court to compel the P/S to allow him or her to inspect and copy the books P/S is not responsible for keeping the information needed to figure the basis of your P/S interest. Although the P/S does provide an analysis of the changes to your capital account in item L of Schedule K-1, that information is based on the P/S’s books and records and cannot be used to figure your basis. A partner ina P/S needs the worksheet provided in the K-1 instructions to calculate his/her baisi in P/S; you can figure the adjusted basis of your partnership interest by adding items that increase your basis and then subtracting items that decrease your basis.
Please visit the IRS Website here, “Worksheet for Adjusting the Basis of a Partner's Interest in the Partnership “ ; Partner's Instructions for Schedule K-1 (Form 1065) (2010)
“And while I am at it, WHAT (GAAP) "books" does the Partnership need to keep (tax books, GL, P&Ls,....)?”-----> Needleless to say, a P/S carrying on a business has to keep proper records and accounts of all its business transactions. This is so that the income earned and business expenses claimed can be readily ascertained. These books and records must be supported by source documents which substantiate the amounts in the books of account.For instance, source documents include (but are not limited to) invoices for purchases and sales, deposit slips, cheques, and contracts. These books and records areUSUALLY used to prepare financial statements of the business,i.e, I/S, Distribution of Net Income Statement, P/S OE, or B/S, which must be prepared according to GAAP as you mentioned.
I guess you can visit the Web Link here; http://www.irs.gov/pub/irs-pdf/p583.pdf

Wnhough: Under the corporate veil concept, “every state-registered business (corporation, limited liability company, and In general, a P/S maintains separate books of account, which typically include records of the P/S's financial transactions and each partner's capital contributions. The books must be kept at the P/S's principal place of business, and each partner must have access to the books and be allowed to inspect and copy them upon demand. If a P/S denies a partner access to the books, he or she usually has a right to obtain an Injunction from a court to compel the P/S to allow him or her to inspect and copy the books P/S is not responsible for keeping the
Bob: my situation is a little unique since I indirectly or directly am "the Partners" in the Partnership (i.e. my Living Trust which I am Trustee is a 99.5% Partner and the S-Corp which I am President is a 0.5% Partner) so I don't anticipate any issues with "the Partners". Nevertheless, I understand that I need to keep records


Wnhough:SOME partnerships) must keep certain records to maintain its protection against liability.”
Bob: Again, I don't believe that liability (sued) by "other Partners" is an issue but in the event that I personally will ever be sued, I understand that I need to have a good set of books, for my own protection.


Wnhough:A partner in a P/S needs the worksheet provided in the K-1 instructions to calculate his/her basis in P/S....... Please visit the IRS Website here, “Worksheet for Adjusting the Basis of a Partner's Interest in the Partnership “ ; Partner's Instructions for Schedule K-1
Bob: I plan to do this


NWnhough:eedleless to say, a P/S carrying on a business has to keep proper records and accounts of all its business transactions. This is so that the income earned and business expenses claimed can be readily ascertained. These books and records must be supported by source documents which substantiate the amounts in the books of account. For instance, source documents include (but are not limited to) invoices for purchases and sales, deposit slips, cheques, and contracts. These books and records are USUALLY used to prepare financial statements of the business,i.e, I/S, Distribution of Net Income Statement, P/S OE, or B/S, which must be prepared according to GAAP as you mentioned..... visit the Web Link here; http://www.irs.gov/pub/irs-p
Bob: I'll look at the IRS Website and was also reading about OCBOA books which apparently are less complicated/cumbersome to keep, than GAAP books. Would this be an option since the only "people" that would possibly look at the books are the IRS and since I am not hiding anything and reporting all income, I don't see that happening but you never know.

Thank you for all your help Wnhough,
Bob