Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

2. An individual is considered to own the in

than 2 years apart, the transfers are presumed

The partnership may also have to file Form

terest directly or indirectly owned by, or

not to be a sale unless the facts clearly indicate

8865, even if no contributions are made during

for, the individual's family. For this rule,

that the transfers are a sale.

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

“family” includes only brothers, sisters,

a foreign partnership at any time during the

Form 8275 required. A partner must at

halfbrothers, halfsisters, spouses, an

year. See the form instructions for more infor

tach Form 8275, Disclosure Statement, (or

cestors, and lineal descendants.

mation.

other statement) to his or her return if the part

3. If a person is considered to own an inter

ner contributes property to a partnership and,

Basis of contributed property. If a partner

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

within 2 years (before or after the contribution),

contributes property to a partnership, the part

structive owner”) is treated as if actually

the partnership transfers money or other con

nership's basis for determining depreciation,

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

sideration to the partner. For exceptions to this

depletion, gain, or loss for the property is the

are applied. However, if a person is con

requirement, see section 1.7073(c)(2) of the

same as the partner's adjusted basis for the

sidered to own an interest using rule (2),

regulations.

property when it was contributed, increased by

that person is not treated as actually own

A partnership must attach Form 8275 (or

any gain recognized by the partner at the time

ing that interest in reapplying rule (2) to

other statement) to its return if it distributes

of contribution.

make another person the constructive

property to a partner, and, within 2 years (be

owner.

fore or after the distribution), the partner trans

Allocations to account for builtin gain or

fers money or other consideration to the part

loss. The fair market value of property at the

Example. Individuals A and B and Trust T

nership.

time it is contributed may be different from the

are equal partners in Partnership ABT. A's hus

Form 8275 must include the following infor

partner's adjusted basis. The partnership must

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

mation.

allocate among the partners any income, de

Trust T's partnership interest will be attributed

A caption identifying the statement as a

duction, gain, or loss on the property in a man

to AH only for the purpose of further attributing

disclosure under section 707 of the Internal

ner that will account for the difference. This rule

the interest to A. As a result, A is a

Revenue Code.

also applies to contributions of accounts paya

morethan50% partner. This means that any

A description of the transferred property or

ble and other accrued but unpaid items of a

deduction for losses on transactions between

money, including its value.

cash basis partner.

her and ABT will not be allowed, and gain from

A description of any relevant facts in deter

The partnership can use different allocation

property that in the hands of the transferee is

mining if the transfers are properly viewed

methods for different items of contributed prop

not a capital asset is treated as ordinary, rather

as a disguised sale. See section

erty. A single reasonable method must be con

than capital, gain.

1.7073(b)(2) of the regulations for a de

sistently applied to each item, and the overall

scription of the facts and circumstances

method or combination of methods must be

More information. For more information on

considered in determining if the transfers

reasonable. See section 1.7043 of the regula

these special rules, see Sales and Exchanges

are a disguised sale.

tions for allocation methods generally consid

Between Related Persons in chapter 2 of Publi

ered reasonable.

cation 544.

Contribution to partnership treated as in

If the partnership sells contributed property

vestment company. Gain is recognized when

and recognizes gain or loss, builtin gain or loss

Contribution of Property

property is contributed (in exchange for an in

is allocated to the contributing partner. If con

terest in the partnership) to a partnership that

tributed property is subject to depreciation or

would be treated as an investment company if it

Usually, neither the partner nor the partnership

other cost recovery, the allocation of deductions

recognizes a gain or loss when property is con

were incorporated.

for these items takes into account builtin gain

tributed to the partnership in exchange for a

A partnership is generally treated as an in

or loss on the property. However, the total de

partnership interest. This applies whether a

vestment company if over 80% of the value of

preciation, depletion, gain, or loss allocated to

partnership is being formed or is already oper

its assets is held for investment and consists of

partners cannot be more than the depreciation

ating. The partnership's holding period for the

certain readily marketable items. These items

or depletion allowable to the partnership or the

property includes the partner's holding period.

include money, stocks and other equity inter

gain or loss realized by the partnership.

ests in a corporation, and interests in regulated

The contribution of limited partnership inter

Example. Areta and Sofia formed an equal

investment companies and real estate invest

ests in one partnership for limited partnership

partnership. Areta contributed $10,000 in cash

ment trusts. For more information, see section

interests in another partnership qualifies as a

to the partnership and Sofia contributed depre

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

taxfree contribution of property to the second

ciable property with a fair market value of

related regulations. Whether a partnership is

partnership if the transaction is made for busi

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

treated as an investment company under this

ness purposes. The exchange is not subject to

partnership's basis for depreciation is limited to

test is ordinarily determined immediately after

the rules explained later under Disposition of

the adjusted basis of the property in Sofia's

the transfer of property.

Partner's Interest.

hands, $4,000.

This rule applies to limited partnerships and

In effect, Areta purchased an undivided

general partnerships, regardless of whether

Disguised sales. A contribution of money or

onehalf interest in the depreciable property

they are privately formed or publicly syndicated.

other property to the partnership followed by a

with her contribution of $10,000. Assuming that

distribution of different property from the part

the depreciation rate is 10% a year under the

Contribution to foreign partnership. A do

nership to the partner is treated not as a contri

General Depreciation System (GDS), she would

mestic partnership that contributed property af

bution and distribution, but as a sale of prop

have been entitled to a depreciation deduction

ter August 5, 1997, to a foreign partnership in

erty, if both of the following tests are met.

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

exchange for a partnership interest may have to

The distribution would not have been

partnership, if the adjusted basis of the property

file Form 8865 if either of the following apply.

made but for the contribution.

equaled its fair market value when contributed.

The partner's right to the distribution does

1. Immediately after the contribution, the

To simplify this example, the depreciation de

not depend on the success of partnership

partnership owned, directly or indirectly, at

ductions are determined without regard to any

operations.

least a 10% interest in the foreign partner

firstyear depreciation conventions.

ship.

All facts and circumstances are considered

However, since the partnership is allowed

in determining if the contribution and distribu

only $400 per year of depreciation (10% of

2. The fair market value of the property con

tion are more properly characterized as a sale.

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

tributed to the foreign partnership, when

However, if the contribution and distribution oc

between the partners. The entire $400 must be

added to other contributions of property

cur within 2 years of each other, the transfers

allocated to Areta.

made to the partnership during the pre

are presumed to be a sale unless the facts

ceding 12month period, is greater than

clearly indicate that the transfers are not a sale.

Distribution of contributed property to an

$100,000.

If the contribution and distribution occur more

other partner. If a partner contributes property

Page 8

Publication 541 (December 2013)

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2013 Page 8

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