Partnership basis and capital account

The answers to your questions, assuming you are using a tax basis balance sheet are:

1. You are correct.

2. If he buys pieces of each partner's interest on the outside, then it is a memo transfer of the balance on the partnership's books. If the partnership makes an election to adjust basis under IRC Sec. 754, then the partner would get a special basis adjustment under IRC Sec 743(b) which technically is unique to the partner and SHOULD NOT be presented on the partnership's balance sheet. However, as a matter of practice some partnerships record it on the balance sheet, particularly if there is an allocation to depreciable property and the partner may not be capable of tracking the special IRC Sec. 743 (b) depreciation on his own.

3. The sale of an interest is typically not reported on the partnership's return as it is a partner level transaction...a mere memo entry to record the interest transfer is required. The comment in 2 above may apply in the case of an optional basis adjustment election. The only exception may occur in the case where "hot assets" are present and the provisions of IRC Sec. 751 (a) apply.

Great answer.