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Basis of contributed property. If a partner

half-brothers, half-sisters, spouses, ances-

contributes property to a partnership and, within

tors, and lineal descendants.

2 years (before or after the contribution), the

contributes property to a partnership, the part-

nership’s basis for determining depreciation, de-

partnership transfers money or other considera-

3. If a person is considered to own an interest

pletion, gain, or loss for the property is the same

tion to the partner. For exceptions to this require-

using rule (1), that person (the “construc-

as the partner’s adjusted basis for the property

ment, see section 1.707-3(c)(2) of the

tive owner”) is treated as if actually owning

when it was contributed, increased by any gain

regulations.

that interest when rules (1) and (2) are

recognized by the partner at the time of contribu-

A partnership must attach Form 8275 (or

applied. However, if a person is consid-

tion.

other statement) to its return if it distributes prop-

ered to own an interest using rule (2), that

erty to a partner, and, within 2 years (before or

person is not treated as actually owning

Allocations to account for built-in gain or

after the distribution), the partner transfers

that interest in reapplying rule (2) to make

loss. The fair market value of property at the

money or other consideration to the partnership.

another person the constructive owner.

time it is contributed may be different from the

Form 8275 must include the following infor-

partner’s adjusted basis. The partnership must

allocate among the partners any income, deduc-

mation.

Example. Individuals A and B and Trust T

tion, gain, or loss on the property in a manner

•

are equal partners in Partnership ABT. A’s hus-

A caption identifying the statement as a

that will account for the difference. This rule also

band, AH, is the sole beneficiary of Trust T.

disclosure under section 707 of the Inter-

applies to contributions of accounts payable and

Trust T’s partnership interest will be attributed to

nal Revenue Code.

other accrued but unpaid items of a cash basis

AH only for the purpose of further attributing the

•

partner.

A description of the transferred property or

interest to A. As a result, A is a more-than-50%

The partnership can use different allocation

money, including its value.

partner. This means that any deduction for

methods for different items of contributed prop-

losses on transactions between her and ABT will

•

A description of any relevant facts in de-

erty. A single reasonable method must be con-

not be allowed, and gain from property that in

termining if the transfers are properly

sistently applied to each item, and the overall

the hands of the transferee is not a capital asset

viewed as a disguised sale. See section

method or combination of methods must be rea-

is treated as ordinary, rather than capital, gain.

1.707-3(b)(2) of the regulations for a

sonable. See section 1.704-3 of the regulations

description of the facts and circumstances

for allocation methods generally considered rea-

More information. For more information on

considered in determining if the transfers

sonable.

these special rules, see Sales and Exchanges

are a disguised sale.

If the partnership sells contributed property

Between Related Persons in chapter 2 of Publi-

and recognizes gain or loss, built-in gain or loss

cation 544.

is allocated to the contributing partner. If contrib-

Contribution to partnership treated as in-

Contribution of Property

uted property is subject to depreciation or other

vestment company. Gain is recognized when

cost recovery, the allocation of deductions for

property is contributed (in exchange for an inter-

these items takes into account built-in gain or

Usually, neither the partner nor the partnership

est in the partnership) to a partnership that

loss on the property. However, the total depreci-

recognizes a gain or loss when property is con-

would be treated as an investment company if it

ation, depletion, gain, or loss allocated to part-

tributed to the partnership in exchange for a

were incorporated.

ners cannot be more than the depreciation or

partnership interest. This applies whether a part-

A partnership is generally treated as an in-

depletion allowable to the partnership or the

nership is being formed or is already operating.

vestment company if over 80% of the value of its

gain or loss realized by the partnership.

The partnership’s holding period for the property

assets is held for investment and consists of

includes the partner’s holding period.

certain readily marketable items. These items

Example. Areta and Sofia formed an equal

The contribution of limited partnership inter-

include money, stocks and other equity interests

partnership. Areta contributed $10,000 in cash

ests in one partnership for limited partnership

in a corporation, and interests in regulated in-

to the partnership and Sofia contributed depre-

interests in another partnership qualifies as a

vestment companies and real estate investment

ciable property with a fair market value of

tax-free contribution of property to the second

trusts. For more information, see section

$10,000 and an adjusted basis of $4,000. The

partnership if the transaction is made for busi-

351(e)(1) of the Internal Revenue Code and the

partnership’s basis for depreciation is limited to

ness purposes. The exchange is not subject to

related regulations. Whether a partnership is

the adjusted basis of the property in Sofia’s

the rules explained later under Disposition of

treated as an investment company under this

hands, $4,000.

Partner’s Interest.

test is ordinarily determined immediately after

In effect, Areta purchased an undivided

the transfer of property.

one-half interest in the depreciable property with

Disguised sales. A contribution of money or

her contribution of $10,000. Assuming that the

other property to the partnership followed by a

This rule applies to limited partnerships and

depreciation rate is 10% a year under the Gen-

distribution of different property from the part-

general partnerships, regardless of whether

eral Depreciation System (GDS), she would

nership to the partner is treated not as a contri-

they are privately formed or publicly syndicated.

have been entitled to a depreciation deduction

bution and distribution, but as a sale of property,

of $500 per year, based on her interest in the

if both of the following tests are met.

Contribution to foreign partnership. A do-

partnership, if the adjusted basis of the property

•

mestic partnership that contributed property af-

The distribution would not have been

equaled its fair market value when contributed.

ter August 5, 1997, to a foreign partnership in

made but for the contribution.

To simplify this example, the depreciation de-

exchange for a partnership interest may have to

•

ductions are determined without regard to any

The partner’s right to the distribution does

file Form 8865 if either of the following apply.

first-year depreciation conventions.

not depend on the success of partnership

However, since the partnership is allowed

operations.

1. Immediately after the contribution, the part-

only $400 per year of depreciation (10% of

nership owned, directly or indirectly, at

$4,000), no more than $400 can be allocated

All facts and circumstances are considered in

least a 10% interest in the foreign partner-

between the partners. The entire $400 must be

determining if the contribution and distribution

ship.

allocated to Areta.

are more properly characterized as a sale. How-

2. The fair market value of the property con-

ever, if the contribution and distribution occur

Distribution of contributed property to an-

tributed to the foreign partnership, when

within 2 years of each other, the transfers are

other partner. If a partner contributes prop-

added to other contributions of property

presumed to be a sale unless the facts clearly

erty to a partnership and the partnership

made to the partnership during the preced-

indicate that the transfers are not a sale. If the

distributes the property to another partner within

ing 12-month period, is greater than

contribution and distribution occur more than 2

7 years of the contribution, the contributing part-

$100,000.

years apart, the transfers are presumed not to

ner must recognize gain or loss on the distribu-

be a sale unless the facts clearly indicate that

The partnership may also have to file Form

tion.

the transfers are a sale.

8865, even if no contributions are made during

The recognized gain or loss is the amount

the tax year, if it owns a 10% or more interest in

Form 8275 required. A partner must attach

the contributing partner would have recognized

Form 8275, Disclosure Statement, (or other

a foreign partnership at any time during the year.

if the property had been sold for its fair market

statement) to his or her return if the partner

See the form instructions for more information.

value when it was distributed. This amount is the

Publication 541 (December 2010)

Page 8

Form 541 - Partnerships - Department Of The Treasury - Internal Revenue Service - 2010 Page 8

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