Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

Gains. Gains are treated as ordinary income

the rules explained later under Disposition of

This rule applies to limited partnerships and

in a sale or exchange of property directly or

Partner’s Interest.

general partnerships, regardless of whether

indirectly between a person and a partnership,

they are privately formed or publicly syndicated.

Disguised sales. A contribution of money or

or between two partnerships, if both of the fol-

other property to the partnership followed by a

Contribution to foreign partnership. A do-

lowing tests are met.

distribution of different property from the part-

mestic partnership that contributed property af-

•

nership to the partner is treated not as a contri-

More than 50% of the capital or profits

ter August 5, 1997, to a foreign partnership in

bution and distribution, but as a sale of property,

interest in the partnership(s) is directly or

exchange for a partnership interest may have to

if both of the following tests are met.

indirectly owned by the same person(s).

file Form 8865 if either of the following apply.

•

The distribution would not have been

The property in the hands of the trans-

1) Immediately after the contribution, the

made but for the contribution.

feree immediately after the transfer is not

partnership owned, directly or indirectly, at

•

a capital asset. Property that is not a capi-

The partner’s right to the distribution does

least a 10% interest in the foreign partner-

tal asset includes accounts receivable, in-

not depend on the success of partnership

ship.

ventory, stock-in-trade, and depreciable or

operations.

2) The fair market value of the property con-

real property used in a trade or business.

tributed to the foreign partnership, when

All facts and circumstances are considered in

added to other contributions of property

determining if the contribution and distribution

More than 50% ownership. To determine if

made to the partnership during the preced-

are more properly characterized as a sale. How-

there is more than 50% ownership in partnership

ing 12-month period, is greater than

ever, if the contribution and distribution occur

capital or profits, the following rules apply.

$100,000.

within 2 years of each other, the transfers are

1) An interest directly or indirectly owned by

presumed to be a sale unless the facts clearly

The partnership may also have to file Form

or for a corporation, partnership, estate, or

indicate that the transfers are not a sale. If the

8865, even if no contributions are made during

trust is considered to be owned proportion-

contribution and distribution occur more than 2

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

ately by or for its shareholders, partners,

years apart, the transfers are presumed not to

a foreign partnership at any time during the year.

or beneficiaries.

be a sale unless the facts clearly indicate that

See the form instructions for more information.

the transfers are a sale.

2) An individual is considered to own the in-

Basis of contributed property. If a partner

terest directly or indirectly owned by or for

Form 8275 required. A partner must attach

contributes property to a partnership, the

the individual’s family. For this rule, “fam-

Form 8275, Disclosure Statement, (or other

partnership’s basis for determining depreciation,

ily” includes only brothers, sisters,

statement) to his or her return if the partner

depletion, and gain or loss for the property is the

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

contributes property to a partnership and, within

same as the partner’s adjusted basis for the

tors, and lineal descendants.

2 years (before or after the contribution), the

property when it was contributed, increased by

partnership transfers money or other considera-

any gain recognized by the partner at the time of

3) If a person is considered to own an inter-

tion to the partner. For exceptions to this require-

contribution.

est using rule (1), that person (the “con-

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

structive owner”) is treated as if actually

regulations.

Allocations to account for built-in gain or

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

A partnership must attach Form 8275 (or

loss. The fair market value of property at the

are applied. However, if a person is con-

time it is contributed may be different from the

other statement) to its return if it distributes prop-

sidered to own an interest using rule (2),

partner’s adjusted basis. The partnership must

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

that person is not treated as actually own-

allocate among the partners any income, deduc-

after the distribution), the partner transfers

ing that interest in reapplying rule (2) to

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

money or other consideration to the partnership.

make another person the constructive

that will account for the difference. This rule also

Form 8275 must include the following infor-

owner.

mation.

applies to contributions of accounts payable and

other accrued but unpaid items of a cash basis

•

A caption identifying the statement as a

Example. Individuals A and B and Trust T

partner.

disclosure under section 707 of the Inter-

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

The partnership can use different allocation

nal Revenue Code.

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

methods for different items of contributed prop-

•

Trust T’s partnership interest will be attributed to

A description of the transferred property or

erty. A single reasonable method must be con-

AH only for the purpose of further attributing the

money, including its value.

sistently applied to each item, and the overall

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

method or combination of methods must be rea-

•

A description of any relevant facts in de-

partner. This means that any deduction for

sonable. See section 1.704 – 3 of the regulations

termining if the transfers are properly

losses on transactions between her and ABT will

for allocation methods generally considered rea-

viewed as a disguised sale. (See section

not be allowed, and gain from property that in

sonable.

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

the hands of the transferee is not a capital asset

If the partnership sells contributed property

description of the facts and circumstances

is treated as ordinary, rather than capital, gain.

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

considered in determining if the transfers

is allocated to the contributing partner. If contrib-

are a disguised sale.)

More information. For more information on

uted property is subject to depreciation or other

these special rules, see Sales and Exchanges

cost recovery, the allocation of deductions for

Between Related Persons in chapter 2 of Publi-

Contribution to investment company. Gain

these items takes into account built-in gain or

cation 544.

is recognized when property is contributed (in

loss on the property. However, the total depreci-

exchange for an interest in the partnership) to a

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

Contribution of Property

partnership that would be treated as an invest-

ners cannot be more than the depreciation or

ment company if it were incorporated.

depletion allowable to the partnership or the

Usually, neither the partner nor the partnership

A partnership is generally treated as an in-

gain or loss realized by the partnership.

recognizes a gain or loss when property is con-

vestment company if over 80% of the value of its

tributed to the partnership in exchange for a

assets is held for investment and consists of

Example. Sara and Gail formed an equal

partnership interest. This applies whether a part-

certain readily marketable items. These items

partnership. Sara contributed $10,000 in cash to

nership is being formed or is already operating.

include money, stocks and other equity interests

the partnership and Gail contributed depreciable

The partnership’s holding period for the property

in a corporation, and interests in regulated in-

property with a fair market value of $10,000 and

includes the partner’s holding period.

vestment companies and real estate investment

an adjusted basis of $4,000. The partnership’s

The contribution of limited partnership inter-

trusts. For more information, see section

basis for depreciation is limited to the adjusted

ests in one partnership for limited partnership

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

basis of the property in Gail’s hands, $4,000.

interests in another partnership qualifies as a

related regulations. Whether a partnership is an

In effect, Sara purchased an undivided

tax-free contribution of property to the second

investment company under this test is ordinarily

one-half interest in the depreciable property with

partnership if the transaction is made for busi-

determined immediately after the transfer of

her contribution of $10,000. Assuming that the

ness purposes. The exchange is not subject to

property.

depreciation rate is 10% a year under the Gen-

Page 13

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2002 Page 13

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