Hi there,
I have a client that is a partner in an investment partnership as defined by IRC Sec. 731(C)(3)(C)(I) and would be exempt from IRC Sec 731(c)(1)(a). The client received a distribution of stock and subsequently sold it. The client has no outside basis in the partnership prior to the distribution, and no partnership loans that would provide basis.
I'm not sure what the correct tax treatment should be. I could either calculate a distribution in excess of basis for the allocated tax basis of the stock distributed, and then allocate it to the stock sale on Schedule D. Alternatively, I could allocate 0 cost basis to the stock distributed with no distribution in excess of basis, and provide no cost basis for the stock sale. I believe in either case, the overall tax impact is the same, since it will be all LTCG.
I believe the former would be the correct treatment. Any suggestions?
Thanks!