I have a sizable loss in 2012 in a LLC as a materially-active, at-risk, individual limited-partner.

My original tax basis for the partnership interest was zero in 2010,as it was granted to me and I then vested into the ownership of the shares in 2011 and 2012 (an sweat equity type vesting as an employee of the company).

My interpretation of the IRS documents is that the "adjusted" tax basis is the determining factor for the amount of loss allowed for deductions from ordinary income, not the "original" tax basis. Is that correct? Additionally, does my maturing of the vested shares in the LLC qualify for adjustment of the basis as the shares now have true value?

Any help would be appreciated.

Thanks!!

“My interpretation of the IRS documents is that the "adjusted" tax basis is the determining factor for the amount of loss allowed for deductions from ordinary income, not the "original" tax basis. Is that correct? “===========================>When you set up a partnership to operate a business, the assets you contribute to the partnership are set up on the partnership books at their FMV. But for tax purposes, the basis of the assets is the same as your basis in the assets. The partnership's basis in its assets for tax purposes is called the inside basis. The outside basis is the value of the partner's interest in the partnership. The outside basis consists of the partner's capital account for tax purposes and the partner's share of partnership liabilities. The inside basis for the partnership is generally equal to the total of each partner's outside basis.According to the IRS, the built-in gain or loss due to the difference between the fair market value and the tax basis is generally not recognized when property is contributed to a partnership.Unlike corporate tax law, partnership tax law provides for adjustments to the tax bases of partnership assets. In general, a tax law allows adjustments to be made to a partner’s share of the tax basis of the partnership assets, the “inside basis,” so that it is equal to the tax basis of his partnership interest, the “outside basis.” Inside basis is the basis that the partnership tax records compute for each partner. Inside tax basis is the initial investment (cash or the value of some other asset) plus profits minus loses minus distributions. Outside basis is what the tax rules say a partner’s share has cost the partner. Outside basis is effected by what the tax rules say the investment in the partnership is worth. Outside basis begins with the basis of the partners original investment plus profits minus loses minus distributions. For example, assume you and a friend decide to form a partnership. You contribute a building that you originally purchased for $75K and for which you have claimed $25K in depreciation. The FMV of the building is now $100K. Your friend contributes $50K in cash and equipment with a FMV of $50K that he originally purchased for $80K and for which he has claimed depreciation of $20K.The book value of the partnership's assets will be cash of $50K, equipment for $50K, and a building for $100K, for total book assets of $200K (at their FMV). You and your friend will each have capital accounts for $100K if you are equal partners.The inside basis for tax purposes is $50K for cash, $60K for equipment (your friend's cost of $80K - $20K in accumulated depreciation), and $50K for the building (your cost of $75K - $25K in accumulated depreciation) for a total of $160K. Your outside basis is $50Kand your friend's outside basis is $110K (cash of $50K plus the net depreciated value of the equipment for $60K).

In this example, you have a built-in gain of $50K ($100K FMV of the building less your basis of $50K) and your friend has a built-in loss of $10K ($50K FMVof the equipment less the basis of $60K). This built-in gain or loss would not be recognized until you sell or transfer your interests in the partnership.When you sell or transfer your interests in the partnership, your gain or loss would be calculated as the amount you receive for your interest less the outside basis of your partnership interest. The partnership's inside basis and your outside basis would change over time based on the partnership's activities, for example if the partnership acquires additional assets or incurs liabilities.

Another simple example is : assume that John’s father and Mary’s father each put $1K into a LLC. The partnership buys a piece of land for $2K. There are never any profits or losses. Years later the land is worth $1Million. John’s father gives John his partnership interest. As a gift, John assumes his father’s basis of $1K. John’s outside partnership basis is $1K. Mary’s father dies and she inherits her father’s partnership interest. As an inheritance, Mary can step up the basis to fair market value. Mary’s outside partnership basis is $500K(I mean 50% of the $1million). John and Mary put their partnership interests into a new partnership. Their inside basis in the new partnership is $500K each, half the value of the land. John’s outside basis is still $1K and Mary’s is $500K.


“Additionally, does my maturing of the vested shares in the LLC qualify for adjustment of the basis as the shares now have true value?”============>As mentioned above.