Partnerships — Formation and Contributions of Property or Services (Portfolio 711)


Elliott Manning

Professor of Law Emeritus and Dean's Distinguished Scholar for the Profession Emeritus

University of Miami

At a glance

I. Introduction
II. Contributions of Property to a Partnership
III. Partnership Interest Received for Services


Bloomberg Tax Portfolio, Partnerships — Formation and Contributions of Property or Services, No. 711, provides a detailed discussion of the federal income tax consequences of contributions of property or services to partnerships by partners on formation of a partnership or thereafter. In general, §721 provides that no gain or loss is recognized by transferors or the partnership upon the transfer of property to a partnership in exchange for a partnership interest. Like other nonrecognition provisions, §721 defers recognition of gain or loss through substituted basis and other rules preserving significant tax attributes inherent in contributed property and obligations at the time of contribution. Despite the breadth of nonrecognition under §721, gain (or, less frequently, loss) may be recognized by the contributing partner or the partnership (remaining partners) on some partnership contributions, including some involving transfers of encumbered property, those determined to be disguised sales rather than contributions, and some involving contributions of services or “sweat equity.”

This Portfolio explains the basic requirements of a §721 nonrecognition transaction and analyzes: (i) the determination of the contributing partner's and the partnership's basis, holding period, and other tax characteristics for the contributed property and the partnership interest; (ii) allocations of some of the tax consequences to the transferring or other partners of the property and obligations contributed; (iii) preservation of the tax characteristics of contributed property and other issues related to contributions of property with specific tax characteristics; (iv) transfers of fixed or contingent liabilities and other obligations to or from partnerships, particularly in connection with transfers of encumbered property; and (v) transfers to partnerships that are recharacterized as sales. The Portfolio examines the treatment of the receipt of a partnership profits or capital interest for services and the use of both compensatory and noncompensatory partnership options. It also considers partnership tax years, accounting, elections, and initial expenditures. Because of the fundamental role of partnership capital accounting in understanding the tax consequences of the transactions considered, this Portfolio provides a summary of the capital account consequences and the effect under the special allocation regulations.

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