A’s outside basis
$35,000
Tax basis in A’s partnership interest.
Figure 02 / Partnership laboratory
One partnership.
Three different ledgers.
Move cash and contributed property through a simple two-partner example. See why tax basis and book capital answer different questions.
A
The partner’s interest
Outside basis belongs to A.
A + B
The partnership’s assets
Inside basis belongs to the entity.
§ 704(b)
A’s book capital account
A separate capital measure.
Model facts: A contributes cash and property. B contributes cash equal to the total fair market value of A’s contribution. They have equal book capital and split the modeled ordinary cash profit 50/50. Distributions are equal and stay within A’s basis and available cash.
Partnership inside tax basis
$110,000
Total tax basis of all partnership assets, for both partners.
A’s § 704(b) book capital
$75,000
A’s separate capital account under the book-capital framework.
The difference that survives
$40,000
A’s book capital exceeds A’s outside basis by the appreciation already present at contribution. The property remains unsold in this illustration.
Equal numbers do not make two accounts interchangeable. A’s tax-basis capital happens to equal outside basis here because there are no liabilities or other outside-only adjustments.
A’s tax-basis capital: $35,000
Follow the accounts, event by event.
| Event | A outside | Entity inside | A book capital |
|---|---|---|---|
| Before formation | $0 | $0 | $0 |
| Contributions | $30,000 | $100,000 | $70,000 |
| After ordinary cash profit | $45,000 | $130,000 | $85,000 |
| After cash distributions | $35,000 | $110,000 | $75,000 |
Show the arithmetic
- A’s outside basis
- $10,000 + $20,000 + $15,000 − $10,000 = $35,000
- Partnership inside tax basis
- ($10,000 + $20,000) + $70,000 + 2 × $15,000 − 2 × $10,000 = $110,000
- A’s book capital
- $10,000 + $60,000 + $15,000 − $10,000 = $75,000
- Partnership assets at the end
- Cash $90,000 + property tax basis $20,000 = $110,000
- Reconcile the partners’ tax bases in this model
- A $35,000 + B $75,000 = $110,000
This last equality follows from these restricted facts. It is not a general identity for every partnership.
What this figure teaches
Contribution does not turn appreciation into extra tax basis. The property enters the modeled partnership at carryover tax basis, while A’s book capital reflects its contribution-date value. Future § 704(c) allocations must address that difference; this figure does not calculate a § 704(c) method.
Liability allocations under § 752 can change outside basis without an equivalent increase in § 704(b) book capital. Tax-basis capital also differs from outside basis when liability and other adjustments apply. No debt is included here.
Assumptions and boundaries
- Domestic, two-partner partnership; ordinary § 721 contribution treatment is assumed. No services, investment-company exception, disguised sale, or cross-border rule.
- No liabilities, depreciation, losses, special allocations, property sales or property distributions, revaluations, partner transfers, or § 743(b)/734(b) adjustments.
- FMV is at least tax basis. Positive ordinary profit is earned in cash and is equal for book and tax. Contributions happen first, profit second, and cash distributions last.
- This is a teaching model, not a partner basis schedule or return-preparation system. Actual facts can require additional accounts and adjustments.
Follow the authority
Official U.S. Code and Treasury regulation links. Reviewed November 15, 2026; check source currency and applicable effective dates.