The Wonders of IRC Section 704(c) - A CPA's Guide to Selected Partnership/LLC Formation Issues and How to Deal with Them

When a partner contributes property which has increased or decreased in value to a partnership, the property has an inherent built-in gain or loss that arose during the period in which the partner owned the property outside of the partnership. Thus the property has a tax basis to the partnership that differs from its fair market value (FMV). Where the property’s FMV at the time of contribution ("book value”) and basis carried over from the contributing partner (“tax basis”) differ, the property is referred to as “section 704(c) property.” The goal of IRC section 704(c) is to prevent the shifting of tax consequences (gain, loss, and deductions) with respect to appreciated or depreciated property contributed by a partner to a partnership.

This presentation will review:

• IRC section 704(c)(1)(A) in the context of nondepreciable and depreciable property
• Methods to alleviate ceiling rule problems
• IRC section 704(c)(1)(B) rules dealing with contributed property that is distributed within 7 years of contribution
• IRC section 704(c)(1)(C) and duplication of built-in losses