I.R.C. § 704(a) Effect Of Partnership Agreement —
A partner's distributive share of income, gain, loss, deduction, or credit shall,
except as otherwise provided in this chapter, be determined by the partnership agreement.
I.R.C. § 704(b) Determination Of Distributive Share —
A partner's distributive share of income, gain, loss, deduction, or credit (or item
thereof) shall be determined in accordance with the partner's interest in the partnership
(determined by taking into account all facts and circumstances), if—
I.R.C. § 704(b)(1) —
the partnership agreement does not provide as to the partner's distributive share
of income, gain, loss, deduction, or credit (or item thereof), or
I.R.C. § 704(b)(2) —
the allocation to a partner under the agreement of income, gain, loss, deduction,
or credit (or item thereof)
does not have substantial economic effect.
I.R.C. § 704(c) Contributed Property
I.R.C. § 704(c)(1) In General —
Under regulations prescribed by the Secretary—
I.R.C. § 704(c)(1)(A) —
income, gain, loss, and deduction with respect to property contributed to the partnership
by a partner shall be shared among the partners so as to take account of the variation
between the basis of the property to the partnership and its fair market value at
the time of contribution,
I.R.C. § 704(c)(1)(B) —
if any property so contributed is distributed
(directly or indirectly) by the partnership (other than to the contributing partner)
within 7 years of being contributed—
I.R.C. § 704(c)(1)(B)(i) —
the contributing partner shall be treated as recognizing gain or loss (as the case
may be) from the sale of such property in an amount equal to the gain or loss which
would have been allocated to such partner under subparagraph (A) by reason of the
variation described in subparagraph (A) if the property had been sold at its fair
market value at the time of the distribution,
I.R.C. § 704(c)(1)(B)(ii) —
the character of such gain or loss shall be determined by reference to the character
of the gain or loss which would have resulted if such property had been sold by the
partnership to the distributee, and
I.R.C. § 704(c)(1)(B)(iii) —
appropriate adjustments shall be made to the adjusted basis of the contributing
partner's interest in the partnership and to the adjusted basis of the property distributed
to reflect any gain or loss recognized under this subparagraph, and
I.R.C. § 704(c)(1)(C) —
if any property so contributed has a built-in loss—
I.R.C. § 704(c)(1)(C)(i) —
such built-in loss shall be taken into account only in determining the amount of
items allocated to the contributing partner, and
I.R.C. § 704(c)(1)(C)(ii) —
except as provided in regulations, in determining the amount of items allocated to
other partners, the basis of the contributed property in the hands of the partnership
shall be treated as being equal to its fair market value at the time of contribution.
For purposes of subparagraph (C), the term “built-in loss” means the excess of the
adjusted basis of the property (determined without regard to subparagraph
(C)(ii)) over its fair market value at the time of contribution.
I.R.C. § 704(c)(2) Special Rule For Distributions Where Gain Or Loss Would Not Be Recognized Outside
Partnerships —
Under regulations prescribed by the Secretary, if—
I.R.C. § 704(c)(2)(A) —
property contributed by a partner (hereinafter referred to as the “contributing
partner”) is distributed by the partnership to another partner, and
I.R.C. § 704(c)(2)(B) —
other property of a like kind (within the meaning of section 1031)
is distributed by the partnership to the contributing partner not later than the
earlier of—
I.R.C. § 704(c)(2)(B)(i) —
the 180th day after the date of the distribution described in subparagraph (A),
or
I.R.C. § 704(c)(2)(B)(ii) —
the due date (determined with regard to extensions) for the contributing partner's
return of the tax imposed by this chapter for the taxable year in which the distribution
described in subparagraph (A) occurs,
then to the extent of the value of the property described in subparagraph (B), paragraph
(1)(B) shall be applied as if the contributing partner had contributed to the partnership
the property described in subparagraph (B).
I.R.C. § 704(c)(3) Other Rules —
Under regulations prescribed by the Secretary, rules similar to the rules of paragraph
(1) shall apply to contributions by a partner (using the cash receipts and disbursements
method of accounting) of accounts payable and other accrued but unpaid items. Any
reference in paragraph (1) or (2) to the contributing partner shall be treated as
including a reference to any successor of such partner.
I.R.C. § 704(d) Limitation On Allowance Of Losses
I.R.C. § 704(d)(1) In General —
A partner's distributive share of partnership loss (including capital loss) shall
be allowed only to the extent of the adjusted basis of such partner's interest in
the partnership at the end of the partnership year in which such loss occurred.
I.R.C. § 704(d)(2) Carryover —
Any excess of such loss over such basis shall be allowed as a deduction at the end
of the partnership year in which such excess is repaid to the partnership.
I.R.C. § 704(d)(3) Special Rules
I.R.C. § 704(d)(3)(A) In General —
In determining the amount of any loss under paragraph
(1), there shall be taken into account the partner's distributive share of amounts
described in paragraphs (4) and (6) of section 702(a).
I.R.C. § 704(d)(3)(B) Exception —
In the case of a charitable contribution of property whose fair market value exceeds
its adjusted basis, subparagraph (A)
shall not apply to the extent of the partner's distributive share of such excess.
I.R.C. § 704(e) Partnership Interests Created By Gift
I.R.C. § 704(e)(1) Distributive Share Of Donee Includible In Gross Income —
In the case of any partnership interest created by gift, the distributive share
of the donee under the partnership agreement shall be includible in his gross income,
except to the extent that such share is determined without allowance of reasonable
compensation for services rendered to the partnership by the donor, and except to
the extent that the portion of such share attributable to donated capital is proportionately
greater than the share of the donor attributable to the donor's capital. The distributive
share of a partner in the earnings of the partnership shall not be diminished because
of absence due to military service.
I.R.C. § 704(e)(2) Purchase Of Interest By Member Of Family —
For purposes of this subsection, an interest purchased by one member of a family
from another shall be considered to be created by gift from the seller, and the fair
market value of the purchased interest shall be considered to be donated capital.
The
“family” of any individual shall include only his spouse, ancestors, and lineal descendants,
and any trusts for the primary benefit of such persons.
I.R.C. § 704(f) Cross Reference —
For rules in the case of the sale, exchange, liquidation, or reduction of a partner's
interest, see section 706(c)(2).
(Aug. 16, 1954, ch. 736, 68A Stat. 240; Oct. 4, 1976,
Pub. L. 94-455, title II, Sec. 213(c)(2), (3)(A), (d), (e), title XIX, Sec. 1906(b)(13)(A), 90
Stat. 1548, 1834; Nov. 6, 1978, Pub. L. 95-600,
title II, Sec. 201(b)(1), 92 Stat. 2816; July 18, 1984, Pub. L. 98-369, div. A, title I, Sec. 71(a), 98 Stat. 589; Dec. 19, 1989, Pub. L. 101-239,
title VII, Sec. 7642(a), 103 Stat. 2379; Pub. L. 102-486, Sec. 1937(b)(1), Oct. 24, 1992; Pub. L. 105-34, title X, Sec. 1063(a), Aug. 5, 1997, 111 Stat 788; Pub. L. 108-357, title VIII, Sec. 833(a), Oct. 22, 2004, 118 Stat. 1418; Pub. L. 114-74, title XI, Sec. 1102(b), Nov. 2, 2015; added by Pub. L. 115-97, title I, Sec. 13503(a)(1)-(3), Dec. 22, 2017, 131 Stat. 2054.)
BACKGROUND NOTES
AMENDMENTS
2017 -
Subsec. (d). Pub. L. 115-97, Sec. 13503(a), amended subsec. (d) substituting “(1) IN GENERAL.—A partner's distributive
share’’ for “A partner's distributive share”, by substituting “Any excess of such
loss” for “(2) CARRYOVER.—Any excess of such loss”, and by adding par. (3).
2015 - Subsec. (e). Pub. L. 114-74, Sec. 1102(b)(3), amended the heading of subsec. (e) by substituting “Partnership
Interests Created By Gift” for “Family Partnerships”.
Subsec. (e)(1)-(3). Pub. L. 114-74, Sec. 1102(b)(1), amended subsec. (e) by striking par. (1) and by redesignating par.
(2) and (3) as par. (1) and (2), respectively. Before being struck, par. (1) read
as follows:
“(1) Recognition Of Interest Created By Purchase Or Gift.—A person shall be recognized
as a partner for purposes of this subtitle if he owns a capital interest in a partnership
in which capital is a material income-producing factor, whether or not such interest
was derived by purchase or gift from any other person.”
“Subsec. (e)(2). Pub. L. 114-74, Sec. 1102(b)(2), amended par. (2), as redesignated, by substituting “this subsection”
for “this section”.
2004 - Subsec. (c)(1). Pub. L. 108-357, Sec. 833(a), amended par. (1) by striking “and” at the end of subpar. (A); by substituting
“, and” for the period at the end of subpar. (B); and by adding subpar.
(C).
1997 - Subsec. (c)(1)(B). Pub. L. 105-34, Sec. 1063(a), substituted
“7 years” for “5 years”.
1992 - Subsec. (c)(1)(B). Pub. L. 102-486, Sec. 1937(b)(1), amended subpar. (B) by substituting “is distributed (directly or indirectly)” for
“is distributed” in the material preceding clause (i).
1989 - Subsec. (c). Pub. L. 101-239 amended subsec. (c) generally. Prior to amendment, subsec. (c) read as follows: ‘Under
regulations prescribed by the Secretary, income, gain, loss, and deduction with respect
to property contributed to the partnership by a partner shall be shared among partners
so as to take account of the variation between the basis of the property to the partnership
and its fair market value at the time of contribution. Under regulations prescribed
by the Secretary, rules similar to the rules of the preceding sentence shall apply
to contributions by a partner (using the cash receipts and disbursements method of
accounting) of accounts payable and other accrued but unpaid items.’
1984 - Subsec. (c). Pub. L. 98-369 amended subsec. (c) generally, substituting provisions directing that, under regulations
prescribed by the Secretary, income, gain, loss, and deduction with respect to property
contributed to the partnership by a partner be shared among partners so as to take
account of the variation between the basis of the property to the partnership and
its fair market value at the time of contribution, and that similar rules apply to
contributions by a partner (using the cash receipts and disbursements method of accounting)
of accounts payable and other accrued but unpaid items for provisions which had directed
that, if the partnership agreement so provided, depreciation, depletion, or gain or
loss with respect to property contributed to the partnership by a partner would under
regulations prescribed by the Secretary, be shared among the partners so as to take
account of the variation between the basis of the property to the partnership and
its fair market value at the time of contribution, and struck out provisions which
had directed that in determining a partner's distributive share of items described
in section 702(a), depreciation, depletion, or gain or loss with respect to property
contributed to the partnership by a partner would, except to the extent otherwise
provided, be allocated among the partners in the same manner as if such property had
been purchased by the partnership and that if the partnership agreement did not provide
otherwise, depreciation, depletion, or gain or loss with respect to undivided interests
in property contributed to a partnership would be determined as though such undivided
interests had not been contributed to the partnership.
1978 - Subsec. (d). Pub. L. 95-600 struck out provisions relating to adjusted basis of a partner's interest.
1976 - Subsec. (a). Pub. L. 94-455, Sec. 213(c)(2), substituted ‘except as otherwise provided in this chapter’ for ‘except as otherwise
provided in this section’.
Subsec. (b). Pub. L. 94-455, Sec. 213(d), among other changes, substituted
‘Determination of distributive share’ for ‘Distributive share determined by income
or loss ratio’ in heading, in provisions preceding par.
(1) ‘the partner's interest in the partnership (determined by taking into account
all facts and circumstances)' for ‘his distributive share of taxable income or loss
of the partnership, as described in section 702(a)(9), for the taxable year’, and
in par. (2) provision relating to a lack of substantial economic effect in a partnership
agreement for provisions relating to the partnership agreement's purpose being the
avoidance or evasion of taxes.
Subsec. (c)(2). Pub. L. 94-455, Sec. 1906(b)(13)(A), struck out ‘or his delegate’ after ‘Secretary’.
Subsec. (d). Pub. L. 94-455, Sec. 213(e), inserted provision relating to the determination of the adjusted basis of a partner's
liability where there is no personal liability and the applicability of such determination
where section 465 of this title applies or the principal activity of the partnership
is real estate investment.
Subsec. (f). Pub. L. 94-455, Sec. 213(c)(3)(A), added subsec. (f).
EFFECTIVE DATE OF 2017 AMENDMENTS
Amendments by Pub. L. 115-97, Sec. 13503(a), effective for partnership taxable years beginning after December
31, 2017.
EFFECTIVE DATE OF 2015 AMENDMENTS
Amendments by Sec. 1102(b) of Pub. L. 114-74 effective for partnership taxable years beginning after December 31, 2015.
EFFECTIVE DATE OF 2004 AMENDMENTS
Amendments by Sec. 833(a) of Pub. L. 108-357 effective for contributions made after the date of the enactment of this Act
[Enacted: Oct. 22, 2004].
EFFECTIVE DATE OF 1997 AMENDMENT
Section 1063(b)(1) of Pub. L. 105-34 provided that:
“The amendment made by subsection (a) shall apply to property contributed to a partnership
after June 8, 1997."
Section 1063(b)(2) provided the following exception:
“(2) Binding contracts.--The amendment made by subsection (a) shall not apply to any
property contributed pursuant to a written binding contract in effect on June 8, 1997,
and at all times thereafter before such contribution if such contract provides for
the contribution of a fixed amount of property.”
EFFECTIVE DATE OF 1992 AMENDMENT
Amendment by Sec. 1937(b)(1)
of Pub. L. 102-486 effective for distributions on or after June 25, 1992.
EFFECTIVE DATE OF 1989 AMENDMENT
Section 7642(b) of Pub. L. 101-239 provided that: ‘The amendment made by subsection
(a) (amending this section) shall apply in the case of property contributed to the
partnership after October 3, 1989, in taxable years ending after such date.’
EFFECTIVE DATE OF 1984 AMENDMENT
Section 71(c) of Pub. L. 98-369 provided that: ‘The amendments made by this section
(amending this section and sections 613A and 743 of this title) shall apply with respect
to property contributed to the partnership after March 31, 1984, in taxable years
ending after such date.’
EFFECTIVE DATE OF 1978 AMENDMENT
Amendment by Pub. L. 95-600 and enactment of provision set out as a note under this section by section 201(b)(2)
of Pub. L. 95-600 applicable to taxable years beginning after Dec. 31, 1978, see section 204(a)
of Pub. L. 95-600, set out as a note under section 465 of this title.
EFFECTIVE DATE OF 1976 AMENDMENT
Amendment by section 213(c)(2), (c)(3)(A), (d)
of Pub. L. 94-455 applicable in the case of partnership taxable years beginning after Dec. 31, 1975,
see section 213(f)(1) of Pub. L. 94-455, set out as an Effective Date note under section 709 of this title.
Amendment by section 213(e) of Pub. L. 94-455 applicable to liabilities incurred after Dec. 31, 1976, see section 213(f)(2) of
Pub. L. 94-455, set out as an Effective Date note under section 709 of this title.
TRANSITIONAL RULE FOR LIMITATION ON ALLOWANCE OF LOSSES
Section 201(b)(2) of Pub. L. 95-600, as amended by Pub. L. 99-514, Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ‘In the case of a loss which was not
allowed for any taxable year by reason of the last 2 sentences of section 704(d) of the Internal Revenue Code of 1986 (formerly I.R.C. 1954) (as in effect before the date of the enactment of this Act (Nov. 6, 1978)), such
loss shall be treated as a deduction (subject to section 465(a) of such Code)
for the first taxable year beginning after December 31, 1978. Section 465(a) of such
Code (as amended by this section) shall not apply with respect to partnership liabilities
to which the last 2 sentences of section 704(d) of such Code (as in effect on the
day before the date of enactment of this Act) did not apply because of the provisions
of section 213(f)(2) of the Tax Reform Act of 1976 (set out as a note under section
709 of this title).'
