read this thread
http://www.stansburyweaver.com/allocating-gains-and-losses-built-into-llc-and-partnership-property/
to give a quick summary of code section 704(c) and the related regulations say if the contributed property is sold first gain is allocated to the contributing partner equal to the difference between the $1 million and his tax basis at the time of contribution. doesn't this seem fair. only the excess gain, if any, is allocated to all partners. this prevents you from paying tax on his gain.
what the IRS wants for schedule L on the k-1 per instructions
The partnership must report your beginning capital account and ending capital account for the year using the Tax Basis Method, including the amount of capital you contributed to the partnership during the year, your share of the partnership's current year net income or loss as computed for tax purposes, any withdrawals and distributions made to you by the partnership, and any other increases or decreases to your capital account determined in a manner generally consistent with figuring the partner's adjusted tax basis in its partnership interest (without regard to partnership liabilities), taking into account the rules and principles of sections 705, 722, 733, and 742. See the Instructions for Form 1065 for more details.
For many reasons, your ending capital account as reported to you by the partnership in item L may not equal the adjusted tax basis in your partnership interest. Generally, this is because a partner's adjusted tax basis in its partnership interest includes the partner's share of partnership liabilities (and capital accounts determined by using the tax basis method do not). In addition, your partnership may not have all the necessary information from you to accurately figure the adjusted tax basis in your partnership interest due to partner-level adjustments. You are responsible for maintaining an annual record of the adjusted tax basis in your partnership interest as determined under the principles and provisions of subchapter K, including, for example, those under sections 705, 722, 733, and 742. Regulations section 1.705-1(a)(1) provides that a partner is required to determine the adjusted basis of its interest in a partnership when necessary to determine its tax liability or that of any other person. For example, a determination is required in ascertaining the extent to which a partner's share of loss is allowed, when there is a sale or exchange of all or part of a partnership interest, and when a partner's entire partnership interest is liquidated. The adjusted basis of a partner's interest in a partnership is determined without regard to any amount shown in the partnership books as the partner's “capital,” “equity,” or similar account
Item N on k-1
If you are allocated a share of section 704(c) gain or loss, the partnership will report your net unrecognized section 704(c) gain or loss both at the beginning and at the end of the partnership's tax year in item N. The partnership can use any reasonable method in reporting net unrecognized section 704(c) built-in gain or loss to you. You will be allocated unrecognized section 704(c) gain or loss if:
• You contributed property with FMV in excess of adjusted tax basis (built-in gain property);
• You contributed property with FMV less than adjusted tax basis (built-in loss property); or
• The partnership elected, under certain circumstances, to revalue property (book-up or book-down) on its books to reflect changes in the FMV of such property. These revaluations are sometimes referred to as reverse section 704(c) allocations.
The partnership is providing this for your information. If the partnership disposes of the property or there are special allocations due to depreciation, depletion, or amortization, the partnership will report these items on other parts of Schedule K-1.
Note. Although the partnership is reporting the beginning and ending balances on an aggregate net basis, it is generally required to keep records of this information on a property-by-property basis.
