Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

Contribution of Property

property is contributed (in exchange for an inter-

these items takes into account built-in gain or

est in the partnership) to a partnership that

loss on the property. However, the total depreci-

would be treated as an investment company if it

Usually, neither the partner nor the partnership

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

were incorporated.

recognizes a gain or loss when property is con-

ners cannot be more than the depreciation or

A partnership is generally treated as an in-

tributed to the partnership in exchange for a

depletion allowable to the partnership or the

vestment company if over 80% of the value of its

partnership interest. This applies whether a part-

gain or loss realized by the partnership.

assets is held for investment and consists of

nership is being formed or is already operating.

certain readily marketable items. These items

The partnership’s holding period for the property

Example. Areta and Sofia formed an equal

include money, stocks and other equity interests

includes the partner’s holding period.

partnership. Areta contributed $10,000 in cash

in a corporation, and interests in regulated in-

The contribution of limited partnership inter-

to the partnership and Sofia contributed depre-

vestment companies and real estate investment

ests in one partnership for limited partnership

ciable property with a fair market value of

trusts. For more information, see section

interests in another partnership qualifies as a

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

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

tax-free contribution of property to the second

partnership’s basis for depreciation is limited to

related regulations. Whether a partnership is

partnership if the transaction is made for busi-

the adjusted basis of the property in Sofia’s

treated as an investment company under this

ness purposes. The exchange is not subject to

hands, $4,000.

test is ordinarily determined immediately after

the rules explained later under Disposition of

In effect, Areta purchased an undivided

the transfer of property.

Partner’s Interest.

one-half interest in the depreciable property with

This rule applies to limited partnerships and

her contribution of $10,000. Assuming that the

Disguised sales. A contribution of money or

general partnerships, regardless of whether

depreciation rate is 10% a year under the Gen-

other property to the partnership followed by a

they are privately formed or publicly syndicated.

eral Depreciation System (GDS), she would

distribution of different property from the part-

have been entitled to a depreciation deduction

nership to the partner is treated not as a contri-

Contribution to foreign partnership. A do-

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

bution and distribution, but as a sale of property,

mestic partnership that contributed property af-

partnership, if the adjusted basis of the property

if both of the following tests are met.

ter August 5, 1997, to a foreign partnership in

equaled its fair market value when contributed.

exchange for a partnership interest may have to

•

The distribution would not have been

To simplify this example, the depreciation de-

file Form 8865 if either of the following apply.

made but for the contribution.

ductions are determined without regard to any

•

1. Immediately after the contribution, the part-

first-year depreciation conventions.

The partner’s right to the distribution does

nership owned, directly or indirectly, at

not depend on the success of partnership

However, since the partnership is allowed

least a 10% interest in the foreign partner-

operations.

only $400 per year of depreciation (10% of

ship.

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

All facts and circumstances are considered in

between the partners. The entire $400 must be

2. The fair market value of the property con-

determining if the contribution and distribution

allocated to Areta.

tributed to the foreign partnership, when

are more properly characterized as a sale. How-

added to other contributions of property

ever, if the contribution and distribution occur

Distribution of contributed property to an-

made to the partnership during the preced-

within 2 years of each other, the transfers are

other partner. If a partner contributes prop-

ing 12-month period, is greater than

presumed to be a sale unless the facts clearly

erty to a partnership and the partnership

$100,000.

indicate that the transfers are not a sale. If the

distributes the property to another partner within

The partnership may also have to file Form

contribution and distribution occur more than 2

7 years of the contribution, the contributing part-

8865, even if no contributions are made during

years apart, the transfers are presumed not to

ner must recognize gain or loss on the distribu-

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

be a sale unless the facts clearly indicate that

tion.

a foreign partnership at any time during the year.

the transfers are a sale.

See the form instructions for more information.

A 5-year period applies to property

Form 8275 required. A partner must attach

contributed before June 9, 1997, or

Form 8275, Disclosure Statement, (or other

Basis of contributed property. If a partner

under a written binding contract:

CAUTION

statement) to his or her return if the partner

contributes property to a partnership, the part-

1. That was in effect on June 8, 1997, and at

contributes property to a partnership and, within

nership’s basis for determining depreciation, de-

all times thereafter before the contribution,

2 years (before or after the contribution), the

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

and

partnership transfers money or other considera-

as the partner’s adjusted basis for the property

tion to the partner. For exceptions to this require-

when it was contributed, increased by any gain

2. That provides for the contribution of a fixed

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

recognized by the partner at the time of contribu-

amount of property.

regulations.

tion.

A partnership must attach Form 8275 (or

The recognized gain or loss is the amount

Allocations to account for built-in gain or

other statement) to its return if it distributes prop-

the contributing partner would have recognized

loss. The fair market value of property at the

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

if the property had been sold for its fair market

time it is contributed may be different from the

after the distribution), the partner transfers

value when it was distributed. This amount is the

partner’s adjusted basis. The partnership must

money or other consideration to the partnership.

difference between the property’s basis and its

allocate among the partners any income, deduc-

Form 8275 must include the following infor-

fair market value at the time of contribution. The

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

mation.

character of the gain or loss will be the same as

that will account for the difference. This rule also

•

A caption identifying the statement as a

the character of the gain or loss that would have

applies to contributions of accounts payable and

disclosure under section 707 of the Inter-

other accrued but unpaid items of a cash basis

resulted if the partnership had sold the property

nal Revenue Code.

partner.

to the distributee partner. Appropriate adjust-

•

The partnership can use different allocation

ments must be made to the adjusted basis of the

A description of the transferred property or

methods for different items of contributed prop-

contributing partner’s partnership interest and to

money, including its value.

erty. A single reasonable method must be con-

the adjusted basis of the property distributed to

•

A description of any relevant facts in de-

sistently applied to each item, and the overall

reflect the recognized gain or loss.

termining if the transfers are properly

method or combination of methods must be rea-

viewed as a disguised sale. See section

sonable. See section 1.704-3 of the regulations

Disposition of certain contributed property.

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

for allocation methods generally considered rea-

The following rules determine the character of

description of the facts and circumstances

sonable.

the partnership’s gain or loss on a disposition of

considered in determining if the transfers

If the partnership sells contributed property

certain types of contributed property.

are a disguised sale.

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

1. Unrealized receivables. If the property

is allocated to the contributing partner. If contrib-

Contribution to partnership treated as in-

uted property is subject to depreciation or other

was an unrealized receivable in the hands

vestment company. Gain is recognized when

cost recovery, the allocation of deductions for

of the contributing partner, any gain or loss

Page 8

Publication 541 (April 2008)

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2008 Page 8

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