Partners in a partnership receive adjusted basis in their partnership interests for their allocable share of partnership liabilities. Since basis will allow for distributions to be made to partners without gain, losses to be deducted by partners, and gain reduction on a sale of a partnership interest, such basis is often advantageous.
When thinking about what partnership liabilities count for this purpose, most practitioners will first think of promissory notes, mortgages, and other major booked liabilities of the partnership. A recent private letter ruling points out that other esoteric liabilities can enter this computation.
In the PLR, the partnership received “notice to proceed” payments from customers before it started with a construction project or a phase of a project. Such payments were not fully included in income when received because the partnership was reporting its construction income on the percentage of completion method – that method ties into the percent of work completed and not the receipt of payments.
So the partnership was receiving advance payments for services it would render. Since the partnership would have liability for failing to perform the work it had been paid for, the IRS allowed the notice to proceed payments to be treated as Section 752 liabilities to the extent not yet included in income.