Is sec. 704(c) or sale treatment better for a contributing partner?

• Jurisdiction: United States
• Author: Holbrook, Terri L.
• Date: 01 May 1997

Sec. 723's carryover basis rules provide that a partnership's basis for property contributed by a partner is the property's basis in the contributing partner's hands. If the contributed property's basis differs from its fair market value (FMV) at the time of the contribution, income, gain, loss and deductions with respect to the contributed property are allocated among the partners under Sec. 704(c) and the regulations thereunder, to take account of the variation between the property's basis to the partnership and its FMV at the time of the contribution. The purpose of this special allocation of precontribution gain or loss is to prevent artificial shifting of tax consequences among partners.

If property contributed to a partnership is nondepreciable, nondepletable and nonamortizable, this special allocation is made when the partnership disposes of the property. On the other hand, property subject to any type of cost recovery requires a current Sec. 704(c) allocation.

The general rule for depreciation of contributed property by a partnership is that the partnership continues the contributing partner's depreciation. It retains that partner's depreciation elections and whatever life and method the contributing partner used. However, for contributed property, a special allocation of depreciation deductions may be made to the noncontributing partner(s). Depreciation deductions allocated to the noncontributing partner(s) must equal the amount that would be allowed if the partner purchased a direct interest in the contributed property.

Regs. Sec. 1.704-3 provides taxpayers with the following alternative methods for allocating cost recovery deductions...