Partnership installment obligations.

• Author: Laffie, Lesli S.

Proposed regulations (REG-16033002, 11/21/03) clarify how certain property transfers and dispositions in partnerships are treated for Secs. 704(c) and 737 purposes. If a partnership disposes of Sec. 704(c) property for an installment obligation, the obligation itself would be treated as Sec. 704(c) property.

The proposed regulations would also clarify that, if a partner contributes a contract that is Sec. 704(c) property to a partnership, and the partnership subsequently acquires property under that contract in a transaction in which less than all of the gain or loss is recognized, the acquired property is treated as Sec. 704(c) property.

Background: Sec. 704(c)(1)(A) provides that income, gain, loss or deduction on property contributed to a partnership by a partner is shared among partners to take into account the variation between the basis of the property to the partnership and its fair market value (FMV) on contribution. Under Sec. 704(c)(1)(B), any partner who contributes Sec. 704(c) property to a partnership must recognize gain or loss on the distribution to another partner within seven years of the contribution. The gain or loss recognized is the amount that would have been allocated to the partner under Sec. 704(c)(1)(A) had the partnership sold the property to the distributee partner for its FMV at the time of the distribution.

Under Sec. 737(a), any partner who contributes Sec. 704(c) property to a partnership can recognize gain on a distribution of...