Methodology

Authority ordering

Tax positions are supported in this order, and a higher source controls when sources conflict:

1. Internal Revenue Code — the statute itself (e.g. §705, §704(d), §465, §469, §741, §751).
2. Treasury Regulations (e.g. Reg. §1.705-1).
3. Case law, weighted by court level and jurisdiction (e.g. Sennett v. Commissioner on §704(d) suspended losses after disposition).
4. Revenue Rulings and Revenue Procedures.
5. IRS publications and form instructions — cited for reader convenience only, never as the sole support for a claim. The Partner’s Instructions for Schedule K-1 (Form 1065) supply the worksheet format the tools implement; the underlying rules cite the Code and regulations.

Blogs, software documentation, and AI output are never treated as authority.

Where authority is unsettled or the treatment is facts-dependent, the page or workpaper says so explicitly and states the positions rather than presenting one as settled law.

Order of computation

The capital account on Schedule K-1 (Part II, Item L) is not tax basis. It commonly omits the partner’s share of liabilities, may be stated on a book or GAAP basis rather than a tax basis, and does not reflect the statutory ordering rules. Outside basis must be built from the full K-1 history and the partner’s own contribution and distribution records.

Reconstruction therefore proceeds in this order:

1. Initial outside basis. For a contributed interest, the basis of money and property contributed (§722); for a purchased or inherited interest, basis under §742. Established from the subscription agreement and purchase records — not from the K-1.
2. Annual adjustments in statutory order (§705). Income items increase basis first (§705(a)(1)); distributions reduce it next (§733, with cash distributions in excess of basis recognized as gain under §731(a)(1)); then nondeductible, non-capital items (§705(a)(2)(B)); losses come last. Basis never goes below zero.
3. Liability shares (§752), tracked year over year from Item K. Increases in the partner’s share are treated as contributions (§752(a)); decreases as distributions (§752(b)).
4. Loss limitation sequencing. Losses pass through three gates in order: the §704(d) basis limitation, then the §465 at-risk limitation (Form 6198), then the §469 passive activity rules (Form 8582; for publicly traded partnerships, the per-PTP silo of §469(k)). See Reg. §1.469-2T(d)(6) for the ordering. Each layer keeps its own suspended-loss carryforward — a loss that clears one gate can still suspend at the next.
5. Disposition. Gain or loss is measured against the reconstructed basis (§741, subject to §751). Suspended layers are then settled by their own rules: passive losses are generally freed by a complete taxable disposition (§469(g)); losses still suspended under §704(d) for lack of basis generally do not survive the disposition (Sennett v. Commissioner).

Assumptions hierarchy

Basis reconstruction works from evidence in a fixed order of preference. Each tier is used only when every tier above it is unavailable:

1. Taxpayer source documents — K-1s for all years held, the subscription agreement, contribution and disposition records.
2. Partnership or sponsor records — capital account statements, transfer confirmations, liquidation letters.
3. As-filed return data — Schedule E pages, Forms 8582, any prior basis worksheets.
4. Derived amounts — values a roll-forward identity forces from surrounding years’ documents, so internal consistency holds.
5. Stated assumptions — used only when tiers 1–4 fail; chosen conservatively (when in doubt, the direction less favorable to the deduction).

Every substituted assumption is disclosed in the workpaper’s assumptions memo, alongside the missing document that would replace it. The memo also states the documents relied on, the ordering rules applied, and any amended-return implications in plain language. No orphan numbers: every computed line cites its authority or its numbered assumption.

Scope limits

• Everything here is educational computation or analytical workpaper preparation — not tax advice, not return preparation, and not a CPA engagement. Lucas Andersen is not a CPA and does not prepare returns; you or your preparer file the return.
• Computations reflect U.S. federal income tax rules for individual taxpayers. State observations are informational; no state filings are prepared.
• The free K-1 Basis Tracker tracks basis for publicly traded partnerships from the K-1 data you provide. The basis reconstruction service is a separate engagement for private partnership interests. The two are not interchangeable.
• Inputs are not audited. Tool outputs are computed from the data you enter; workpapers state the documents relied on and flag what could not be verified.
• Facts-dependent treatments are flagged as such, with what the outcome depends on — they are not silently resolved in either direction.
• For service engagements: everything in writing, nothing retained. No client documents are kept after delivery.

Verification and corrections

The computation engine runs its full test suites before every deploy, and published worked examples are generated by the engine and committed as golden-test fixtures — the article and the test share one source of truth.

Substantive published errors are recorded on the public corrections log when fixed — shipped, not quietly edited.

Every page carries a last-reviewed date. An annual review pass each January confirms citations against current law, updates reviewed dates, and retires or refreshes stale examples.