Avoiding Errors in Establishing Basis in Business Interests

[...]purchased property receives a cost basis; property acquired in nonrecognition transactions (such as corporate reorganizations) takes a carryover or substituted basis; property acquired by inheritance takes a "stepped-up" basis; and property acquired by gift takes a carryover basis (limited to fair market value for purposes of determining future losses).1 After the initial basis is established, adjustments are required. Keep in mind the following generalities: * Where there are significant variations in per-share C or S corporation stock basis, distributions can result in gain recognition, even where the shareholder's overall basis exceeds the amount distributed. * Stock redemptions involving deemed dividends generally result in basis "hopping" to other shares.7 Such hops can cause large basis disparities that may result in unexpected income on later distributions or dispositions. * Contributions to wholly owned corporations in exchange for stock may have different basis consequences than capital contributions treated as Section 351 exchanges under the "meaningless gesture" doctrine.8 * Under complicated rules for determining partners' shares of partnership liabilities, partnership interest basis can decrease (sometimes unexpectedly) as a result of transactions such as repayments, modifications, refinancings, and so on. [...]in tax controversies, circumstantial or other secondary evidence (including testimony) can be helpful in establishing some basis.9 1 IRC Sections 1012, 358,1014, and 1015.