Posted by Lee Meyercord and Mary McNulty In Greenwald, the Tax Court found that it had jurisdiction to determine partners’ outside basis in a partnership in a partner-level proceeding.Under the unified partnership audit and litigation procedures, all “partnership items” are determined in audits and litigation for the partnership as a whole. Once adjustments are made at the partnership level, the IRS will make any changes at the partner-level, including changes to “affected items,” which are those partner-level items that are affected by a partnership item. In a partner-level proceeding, the court has jurisdiction over affected items, but not partnership items.The regulations define partnership items to include “[o]ptional adjustments to the basis of partnership property pursuant to an election under section 754 (including necessary preliminary determinations, such as the determination of a transferee partner’s basis in a partnership interest).” The partners in Greenwald argued that because the partnership had a Section 754 election in effect, the partners’ outside basis is a partnership item. As such, the court lacked jurisdiction to determine their outside basis in the partner-level proceeding.The court disagreed, finding that even when a partnership has a Section 754 election in effect, the court must look at a partner’s specific facts to determine the partner’s outside basis. For example, the court noted, “if a partner incurred litigation costs in the defense of the ownership of the partnership interest, those costs would be added to the partner’s outside basis, but they would not be taken into account as part of a section 754 election or any other partnership-level determination.” The court distinguished Tigers Eye Trading LLC and Woods on the grounds that those cases involved partnerships found to be shams. Once the partnerships are determined not to exist, there is no partner-level determination because the partners’ outside basis is necessarily zero. The court concluded that outside of this unique situation, a partner’s outside basis is an affected item requiring partner-level determinations. Accordingly, the court has jurisdiction to determine the partners’ outside basis in a partner-level proceeding.If you have any questions about these issues, please contact one of the undersigned or any of the other Tax lawyers at Thompson & Knight.