Partner and partnership's holding periods in contributed property.

• Author: Ellentuck, Albert B.

Facts

On Mar. 1, 1992, Louise, Diane and Mia formed Allenwood Hardware, a small retail business. Louise contributed cash, Diane contributed equipment that she had owned for two years, and Mia contributed inventory she had acquired three months earlier. Louise is now considering selling her partnership interest to Mia at a profit, and the partnership is considering selling some of the equipment contributed by Diane. They asked a tax adviser to help them determine whether the timing of these transactions had any tax significance, and, if so, when they should complete the transactions.

Issues

What is Louise's holding period for her partnership interest? What is Allenwood Hardware's holding period for the equipment contributed by Diane?

Analysis

A partner's holding period for a partnership interest received in exchange for a contribution of property depends on the character of the contributed property. If the contributed property was a capital asset or property used in a trade or business (within the meaning of Sec. 12311 immediately prior to the contribution, the partner's holding period for the partnership interest will include the holding period of the contributed property. If the partnership interest was received for money or other property, the partner's holding period will commence on the date the interest was acquired, i.e., the date of the contribution. The partnership's holding period for the contributed property will include the contributor's holding period.

There is no clear rule for determining a partner's holding period when the partnership interest was acquired for contributions of more than one type of property or contributions at different times. In such situations the partner may have a split holding period for the partnership interest. For this reason, if the holding period of a partnership interest becomes relevant, the tax adviser should suggest that the transaction be structured so that determining the exact...