Allocations with Respect to
Contributed Property (revised)
Howard E. Abrams
Warren Distinguished Professor, USD School of Law
May 2015
www.taxnerds.com
Copyright 2015 by Howard E. Abrams
Substantial Economic Effect Under §704(b)
 The substantial economic effect requirement is satisfied only if tax
allocations correspond with the associated economic (i.e., book)
allocations. This means that allocations of taxable income must be
coupled with a right to receive additional value at liquidation (or
sooner) while allocations of loss must reduce claims on partnership
assets.
 One consequence is that partners are taxed as the partnership
recognizes income and deductions and so liquidating distributions of
cash should be tax free.
Substantial Economic Effect: Example
 X and Y each contribute cash of $10,000 to the XY partnership. The
partnership earns $2,000 in its first year, and the partners agree to
allocate the economic profit 60% to X and 40% to Y. Thus, if the
partnership liquidates now, X will receive $11,200 while Y will receive
$10,800.
 The partners are, in general, free to allocate the economics however
they like, but tax allocations must follow book allocations.
Substantial Economic Effect: Analysis
X
CA
10,000
Y
OB
10,000
CA
10,000
OB
10,000 Contributions
Substantial Economic Effect: Analysis
X
CA
Y
OB
CA
OB
10,000
10,000
10,000
1,200
0
800
10,000 Contributions
0 Book (Economic) Allocations
Substantial Economic Effect: Analysis
X
CA
Y
OB
CA
OB
10,000
10,000
10,000
1,200
0
800
0
1,200
0
10,000 Contributions
0 Book (Economic) Allocations
800 Tax Must Follow Book
Substantial Economic Effect: Analysis
X
CA
Y
OB
CA
OB
10,000
10,000
10,000
1,200
0
800
0
1,200
0
11,200
11,200
10,800
10,000 Contributions
0 Book (Economic) Allocations
800 Tax Must Follow Book
10,800 Totals
Book and Tax Allocations (revised)
 First, allocate book items in accordance with the partnership
agreement subject to the requirement of “substantial economic
effect.”
 Second, allocate tax equal to book as required by §704(b).
 Third, if there is tax without book, the extra tax is allocated under
§704(c). If there is less tax then book, there is a ceiling limitation
problem.
Built-In Gain
 Section 704(c)(1)(A) provides that “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 the contribution.”
 The regulations provide that this means built-in gain in contributed
property must be allocated to the contributing partner when that gain
is recognized by the partnership.
Built-In Gain: Example
 Assume P contributes cash of $10,000 to the PQ partnership while Q
contributes nondepreciable property with adjusted basis of $6,000
and fair market value of $10,000. Assume further that they agree to
be equal partners except as required by section 704(c).
 The statute provides that the inside basis of the contributed property
as well as the outside basis of Q is carried over from the Q’s adjusted
basis in the property; that is, each equals $6,000. The regulations
provide that Q’s capital account equals the fair market value of the
contributed property at the time of contribution, or $10,000. Thus,
the “built-in gain” equals $4,000.
 Assume the property eventually is sold for $12,000.
Example: Analysis
P
CA
10,000
Q
OB
10,000
CA
10,000
OB
6,000 Contributions
Example: Analysis
P
CA
Q
OB
10,000
1,000
10,000
CA
OB
10,000
1,000
6,000 Contributions
Book Gain (Partnership Agreement)
Example: Analysis
P
CA
Q
OB
10,000
CA
10,000
1,000
OB
10,000
1,000
1,000
6,000 Contributions
Book Gain (Partnership Agreement)
1,000 Tax Gain Under §704(b)
Example: Analysis
P
CA
Q
OB
10,000
CA
10,000
1,000
OB
10,000
1,000
1,000
0
0
6,000 Contributions
Book Gain (Partnership Agreement)
1,000 Tax Gain Under §704(b)
0
4,000 Tax Gain Under §704(c)
Example: Analysis
P
CA
Q
OB
10,000
CA
10,000
1,000
OB
10,000
1,000
1,000
6,000 Contributions
Book Gain (Partnership Agreement)
1,000 Tax Gain Under §704(b)
0
0
0
11,000
11,000
11,000
4,000 Tax Gain Under §704(c)
11,000 Totals
Accounts Payable
 While partnership liabilities are covered by section 752, accounts
payable contributed to a partnership by a cash-basis contributor are
not treated as “liabilities” but rather as property described in section
704(c) with a $0 adjusted basis and a negative fair market value. Thus,
such payables have a book/tax disparity when contributed to the
partnership, and the usual rules under section 704(c) apply.
Accounts Payable: Example
 A and B are equal partners in the AB general partnership. Each
partner has an outside basis and capital account of $40,000. The
partnership owns Purpleacre with adjusted basis of $80,000 and
value of $100,000. C is admitted as a one-third partner, and A and B
each reduce their interest from one-half to one third. C contributes
accounts receivable of $65,000 and accounts payable of $15,000 from
her cash basis business in exchange for her partnership interest. The
partnership elects to book-up its assets immediately prior to the
admission of C. Eventually, Purpleacre is sold, the receivables are
collected, and the payables are paid.
Accounts Payable: Analysis
A
B
C
CA
OB
CA
OB
40,000
40,000
40,000
40,000
CA
OB
Starting Values
Accounts Payable: Analysis
A
B
C
CA
OB
CA
OB
40,000
40,000
40,000
40,000
10,000
10,000
CA
OB
Starting Values
Book-Up
Accounts Payable: Analysis
A
B
C
CA
OB
CA
OB
40,000
40,000
40,000
40,000
10,000
CA
OB
Starting Values
10,000
Book-Up
65,000
0 Contribution of Receivables
Accounts Payable: Analysis
A
B
C
CA
OB
CA
OB
40,000
40,000
40,000
40,000
10,000
CA
OB
Starting Values
10,000
Book-Up
65,000
-15,000
0 Contribution of Receivables
0 Contribution of Payables
Accounts Payable: Analysis
A
B
C
CA
OB
CA
OB
40,000
40,000
40,000
40,000
10,000
CA
OB
Starting Values
10,000
Book-Up
65,000
-15,000
0
0
0
0
0
0 Contribution of Receivables
0 Contribution of Payables
0 Sale of Purpleacre: §704(b)
Accounts Payable: Analysis
A
B
C
CA
OB
CA
OB
40,000
40,000
40,000
40,000
10,000
CA
OB
Starting Values
10,000
Book-Up
65,000
-15,000
0
0
10,000
0
0
10,000
0
0 Contribution of Receivables
0 Contribution of Payables
0 Sale of Purpleacre: §704(b)
Sale of Purpleacre: §704(c)
Accounts Payable: Analysis
A
B
C
CA
OB
CA
OB
40,000
40,000
40,000
40,000
10,000
CA
OB
Starting Values
10,000
Book-Up
65,000
-15,000
0
0
0
10,000
0
0
0
0
10,000
0
0
0 Contribution of Receivables
0 Contribution of Payables
0 Sale of Purpleacre: §704(b)
Sale of Purpleacre: §704(c)
0
65,000 Collection of Receivables
Accounts Payable: Analysis
A
B
C
CA
OB
CA
OB
40,000
40,000
40,000
40,000
10,000
CA
OB
Starting Values
10,000
Book-Up
65,000
-15,000
0
0
0
10,000
0
0
10,000
0 Contribution of Receivables
0 Contribution of Payables
0 Sale of Purpleacre: §704(b)
Sale of Purpleacre: §704(c)
0
0
0
0
0
0
0
0
0
0
65,000 Collection of Receivables
-15,000 Payment of Payables
Accounts Payable: Analysis
A
B
C
CA
OB
CA
OB
40,000
40,000
40,000
40,000
10,000
CA
OB
Starting Values
10,000
Book-Up
65,000
-15,000
0
0
0
10,000
0
0
10,000
0 Contribution of Receivables
0 Contribution of Payables
0 Sale of Purpleacre: §704(b)
Sale of Purpleacre: §704(c)
0
0
0
0
0
0
0
0
0
0
50,000
50,000
50,000
50,000
50,000
65,000 Collection of Receivables
-15,000 Payment of Payable
50,000 Totals
Depreciation Example
 Now assume the property is depreciable using the straight-line
method over five years, so that the partnership is entitled to a
depreciation deduction of $1,200 per year for five years.
 Reg. §1.704-1(b)(2)(iv)(g)(3) provides that book depreciation is to
book value as tax depreciation is to adjusted basis. Accordingly,
because tax depreciation equals one-fifth of adjusted basis each year
(or $1,200 per year), book depreciation equals one-fifth of book value
per year (or $2,000 per year).
Depreciation
 First, we determine how book depreciation will be allocated
according to the partnership agreement subject to the rules of
§704(b).
 Next, we allocate to the noncontributing partner as much tax
depreciation as equals her share of the book depreciation.
 Lastly, we allocate the remaining tax depreciation to the contributing
partner.
Depreciation Analysis
P
CA
10,000
Q
OB
10,000
CA
10,000
OB
6,000 Contributions
The property has a book value of $10,000 and an inside basis of $6,000.
Depreciation Analysis
P
CA
Q
OB
CA
10,000
10,000
10,000
-1,000
0
-1,000
OB
6,000 Contributions
0 Year 1 Book Depreciation
Depreciation Analysis
P
CA
Q
OB
CA
OB
10,000
10,000
10,000
-1,000
0
-1,000
0
-1,000
0
6,000 Contributions
0 Year 1 Book Depreciation
-200 Year 1 Tax Depreciation
Depreciation Analysis
P
CA
Q
OB
CA
OB
10,000
10,000
10,000
-1,000
0
-1,000
0
-1,000
0
9,000
9,000
9,000
6,000 Contributions
0 Year 1 Book Depreciation
-200 Year 1 Tax Depreciation
5,800 Totals
The property now has a book value of $8,000 and an inside basis of $4,800.
Depreciation Analysis
P
CA
Q
OB
CA
OB
10,000
10,000
10,000
6,000 Contributions
-1,000
-1,000
-1,000
-200 Year 1 Depreciation
-1,000
-1,000
-1,000
-200 Year 2 Depreciation
8,000
8,000
8,000
5,600 Year 2 Totals
Notice how the book/tax disparity is reduced by $800 per year.
The property now has a book value of $6,000 and an inside basis of $3,600.
Depreciation Analysis
P
CA
Q
OB
CA
OB
10,000
10,000
10,000
6,000 Contributions
-1,000
-1,000
-1,000
-200 Year 1 Depreciation
-1,000
-1,000
-1,000
-200 Year 2 Depreciation
8,000
8,000
8,000
5,600 Year 2 Totals
Notice how the book/tax disparity is reduced by $800 per year.
-1,000
-1,000
-1,000
-200 Year 3 Depreciation
-1,000
-1,000
-1,000
-200 Year 4 Depreciation
-1,000
-1,000
-1,000
-200 Year 5 Depreciation
5,000
5,000
5,000
5,000 Totals
Depreciation and Disposition Example
 Reconsider this example but assume that the property is sold for
$12,000 after the partnership has held it for 3 years. Some of the
built-in gain will have been burned off via the depreciation allocations
while the remainder will be handled at disposition. Again, there will
be book depreciation of $2,000 per year and tax depreciation of
$1,200 per year, so after three years the property will have a book
value of $4,000 and an inside basis of $2,400. When the property is
sold for $12,000, there will be a book gain of $8,000 and a tax gain of
$9,600. The t-accounts will look as follows:
Depreciation and Disposition: Analysis
X
CA
Y
OB
CA
OB
10,000
10,000
10,000
6,000 Contributions
-3,000
-3,000
-3,000
-600 Years 1-3 Depreciation
4,000
0
4,000
0 Disposition Book Gain
0
4,000
0
4,000 Disposition §704(b) Tax Gain
0
0
0
1,600 Disposition §704(c) Tax Gain
11,000
11,000
11,000
11,000 Totals
Ceiling Limitation Example
 Reconsider the PQ partnership in which P contributes cash of $10,000
and Q contributes nondepreciable property with adjusted basis of
$6,000 and fair market value of $10,000. Now assume that the
partnership eventually sells the property for $7,000. On that sale
there is a book loss of $3,000 but a tax gain of $1,000. The “ceiling
limitation” provides that the partnership can only allocate so much
taxable gain and loss as it recognizes. Here, that means no tax loss can
be allocated and only $1,000 of tax gain can be allocated.
Ceiling Limitation Analysis
P
CA
10,000
Q
OB
10,000
CA
10,000
OB
6,000 Contributions
Ceiling Limitation Analysis
P
CA
10,000
-1,500
Q
OB
10,000
CA
10,000
-1,500
OB
6,000 Contributions
Book Loss (Partnership Agreement)
Ceiling Limitation Analysis
P
CA
Q
OB
10,000
CA
10,000
-1,500
0
OB
10,000
-1,500
0
0
6,000 Contributions
Book Loss (Partnership Agreement)
1,000 Tax Gain (Section 704(c))
Ceiling Limitation Analysis
P
CA
Q
OB
10,000
CA
10,000
-1,500
OB
10,000
-1,500
0
0
0
8,500
10,000
8,500
6,000 Contributions
Book Loss (Partnership Agreement)
1,000 Tax Gain (Section 704(c))
7,000 Totals
Solutions to the Ceiling Limitation Problem
 Reg. §1.704-3(b) - The Traditional Method
 Reg. §1.704-3(c) - The Traditional Method with Curative Allocations
 Reg. §1.704-3(d) - The Remedial Allocation Method
The Traditional Method
P
CA
Q
OB
10,000
CA
10,000
-1,500
OB
10,000
-1,500
0
0
0
8,500
10,000
8,500
6,000 Contributions
Book Loss (Partnership Agreement)
1,000 Tax Gain (Section 704(c))
7,000 Totals
The Traditional Method
P
CA
Q
OB
10,000
CA
10,000
-1,500
OB
10,000
-1,500
0
0
0
8,500
10,000
8,500
6,000 Contributions
Book Loss (Partnership Agreement)
1,000 Tax Gain (Section 704(c))
7,000 Totals
Do nothing: live with the book/tax disparities until the partners exit the venture. In general, use of the
traditional method is desired by the contributing partner and disliked by the noncontributing partner.
The Traditional Method with Curative
Allocations
 Assume that the partnership has additional book and tax income of
$4,000 in the year of disposition. If the partnership were using the
traditional method, this income would be allocated $2,000 to each
partner for both book and tax purposes.
 But using the Traditional Method with Curative Allocations, allocation
of the taxable income (not the book income) is skewed to eliminate
the book/tax disparities.
The Traditional Method with Curative
Allocations
P
CA
Q
OB
10,000
CA
10,000
-1,500
OB
10,000
-1,500
0
0
0
8,500
10,000
8,500
6,000 Contributions
Book Loss (Partnership Agreement)
1,000 Tax Gain (Section 704(c))
7,000 Totals
The Traditional Method with Curative
Allocations
P
CA
Q
OB
10,000
CA
10,000
-1,500
OB
10,000
-1,500
0
0
0
8,500
10,000
8,500
2,000
2,000
0
500
0
10,500
10,500
10,500
6,000 Contributions
Book Loss (Partnership Agreement)
1,000 Tax Gain (Section 704(c))
7,000 Totals
Unrelated Book Income
3,500 Skew Tax Allocations
10,500 Totals
The Traditional Method with Curative
Allocations and Depreciable Property
Now suppose Q’s contributed property has an adjusted basis of only
$4,000 when contributed and that this property is depreciable over five
years using the straight line method. Also assume PQ receives
unrelated income of $600 each year.
P
Q
CA
OB
CA
10,000
10,000
10,000
-1,000
-800
-1,000
9,000
9,200
9,000
OB
4,000 Contributions
0 Depreciation
4,000 Totals
The Traditional Method with Curative
Allocations and Depreciable Property
Now suppose Q’s contributed property has an adjusted basis of only
$4,000 when contributed and that this property is depreciable over five
years using the straight line method. Also assume PQ receives
unrelated income of $600 each year.
P
Q
CA
OB
CA
10,000
10,000
10,000
-1,000
-800
-1,000
9,000
9,200
9,000
300
OB
300
0
100
0
9,300
9,300
9,300
4,000 Contributions
0 Depreciation
4,000 Totals
Unrelated Book Income
500 Skew Unrelated Tax Income
4,500 Totals
Curative Allocations and Depreciable Property
(continued)
P
Q
CA
OB
CA
OB
10,000
10,000
10,000
-1,000
0
-1,000
0
-800
0
300
100
300
9,300
9,300
9,300
-4,000
-3,200
-4,000
1,200
400
1,200
2,000 Years 2-5 Cure
6,500
6,500
6,500
6,500 Totals
4,000 Contributions
0 Book Depreciation
0 Tax Depreciation
500 Cure with Unrelated Income
4,500 Totals
0 Years 2-5 Depreciation
The noncontributing partner generally prefers the curative method.
The Remedial Allocation Method
 Under this method, depreciable appreciated property contributed to
a partnership is divided into two components, one unappreciated and
one having a zero-basis. This method treats a contribution as if two
properties have been contributed.
 The unappreciated asset is depreciated using a step-in-the-shoes rule
while the wholly appreciated asset is treated as newly placed in
service.
 The book and tax depreciation for any year is the sum of the
depreciation from the two assets.
The Remedial Allocation Method Example
 When a ceiling limitation causes a book/tax disparity, the partners cure the
disparity by manufacturing tax allocations to cure. Reg. §1.704-3(d)(1).
 The manufactured tax allocations will always net to zero.
 Continue the PQ example assuming the depreciable property has a
remaining useful life of 5 years, and assume the partners have agreed to
use the remedial allocation method. Finally, assume there is a statutory
recovery period of 10-years if newly placed in service and that all
depreciation is recovered ratably.
The Remedial Allocation Method (revised)
Unappreciated Component
Zero-Basis Component
Fair Market Value: 4,000
Adjusted Basis: 4,000
Depreciation schedule continues:
Fair Market Value: 6,000
Adjusted Basis: 0
Depreciation schedule starts fresh:
Thus, with 5 years remaining,
Thus, with 10 years remaining,
Year 1 book depreciation = 4,000/5 = 800
Year 1 book depreciation = 6,000/10 = 600
Year 1 tax depreciation = 4,000/5 = 800
Year 1 tax depreciation = 0/10 = 0
Therefore, the overall year 1 book depreciation = 800 + 600 = 1,400
and the overall year 1 tax deprecation = 800.
The Remedial Allocation Method: Analysis
P
CA
10,000
Q
OB
10,000
CA
10,000
OB
4,000 Contributions
The Remedial Allocation Method: Analysis
P
CA
Q
OB
CA
OB
10,000
10,000
10,000
-700
-700
-700
4,000 Contributions
-100 Year 1 Depreciation
The Remedial Allocation Method: Analysis
P
CA
Q
OB
CA
OB
10,000
10,000
10,000
-700
-700
-700
-2,800
-2,800
-2,800
4,000 Contributions
-100 Year 1 Depreciation
-400 Years 2-5 Depreciation
The Remedial Allocation Method: Analysis
P
CA
Q
OB
CA
OB
10,000
10,000
10,000
-700
-700
-700
-2,800
-2,800
-2,800
6,500
6,500
6,500
4,000 Contributions
-100 Year 1 Depreciation
-400 Years 2-5 Depreciation
3,500 Totals
Now that the unappreciated portion of the property
has been fully depreciated, so there is only book
depreciation remaining.
The Remedial Allocation Method: Analysis
P
CA
Q
OB
CA
OB
10,000
10,000
10,000
-700
-700
-700
-2,800
-2,800
-2,800
6,500
6,500
6,500
-300
0
-300
4,000 Contributions
-100 Year 1 Depreciation
-400 Years 2-5 Depreciation
3,500 Totals
0 Year 6 Depreciation
The Remedial Allocation Method: Analysis
P
CA
Q
OB
CA
OB
10,000
10,000
10,000
-700
-700
-700
-2,800
-2,800
-2,800
6,500
6,500
6,500
-300
0
-300
0
-300
0
4,000 Contributions
-100 Year 1 Depreciation
-400 Years 2-5 Depreciation
3,500 Totals
0 Year 6 Depreciation
300 Year 6 Remedy
The Remedial Allocation Method: Analysis
P
CA
Q
OB
CA
OB
10,000
10,000
10,000
-700
-700
-700
-2,800
-2,800
-2,800
6,500
6,500
6,500
-300
0
-300
0
-300
0
-1,200
0
-1,200
4,000 Contributions
-100 Year 1 Depreciation
-400 Years 2-5 Depreciation
3,500 Totals
0 Year 6 Depreciation
300 Year 6 Remedy
0 Years 7-10 Depreciation
The Remedial Allocation Method: Analysis
P
CA
Q
OB
CA
OB
10,000
10,000
10,000
-700
-700
-700
-2,800
-2,800
-2,800
6,500
6,500
6,500
-300
0
-300
0
-300
0
-1,200
0
-1,200
0
-1,200
0
4,000 Contributions
-100 Year 1 Depreciation
-400 Years 2-5 Depreciation
3,500 Totals
0 Year 6 Depreciation
300 Year 6 Remedy
0 Years 7-10 Depreciation
1,200 Years 7-10 Remedy
The Remedial Allocation Method: Analysis
(correct)
P
CA
Q
OB
CA
OB
10,000
10,000
10,000
-700
-700
-700
-2,800
-2,800
-2,800
6,500
6,500
6,500
-300
0
-300
0
-300
0
-1,200
0
-1,200
0
-1,200
0
5,000
5,000
5,000
4,000 Contributions
-100 Year 1 Depreciation
-400 Years 2-5 Depreciation
3,500 Totals
0 Year 6 Depreciation
300 Year 6 Remedy
0 Years 7-10 Depreciation
1,200 Years 7-10 Remedy
5,000 Totals
Reverse §704(c) Allocations to the Existing
Partners
 “Reverse §704(c) allocations” are actually allocations under §704(b)
which are based on §704(c) principles.
 Reverse §704(c) allocations arise whenever a partnership elects to
revalue its assets and restate capital accounts (a “book-up”).
 The most common “book-up” events are the contribution of property
or services to a partnership and the distribution of property from a
partnership. Note: both contributed property and distributed
property must be booked to fair market value; the optional book-up
refers to other assets of the partnership.
Reverse 704(c) Allocation Example (correct)
 Suppose the XY partnership owns a single nondeprecible asset with
an adjusted basis of $50,000 and fair market value of $80,000. If Z
wants to join the partnership on an equal footing with X and Y, how
much should Z be required to contribute to the partnership? What
will happen to X and Y’s t-charts? And if the partnership eventually
sells the property for $170,000, how should the book and tax gain be
allocated?
Reverse 704(c) Allocation Analysis
X
Y
Z
CA
OB
CA
OB
25,000
25,000
25,000
25,000
CA
OB
Pre-Admissions Values
Reverse 704(c) Allocation Analysis
X
Y
Z
CA
OB
CA
OB
CA
25,000
25,000
25,000
25,000
15,000
0
15,000
0
OB
Pre-Admissions Values
Book-Up from $50,000 to $80,000
Reverse 704(c) Allocation Analysis
X
Y
Z
CA
OB
CA
OB
25,000
25,000
25,000
25,000
15,000
0
15,000
0
40,000
25,000
40,000
25,000
Asset
CA
OB
Pre-Admissions Values
Book-Up from $50,000 to $80,000
40,000
40,000 Admission of Z Totals
Book Value
Inside Basis
Property
80,000
50,000
Cash
40,000
40,000
Reverse 704(c) Allocation Analysis
X
Y
Z
CA
OB
CA
OB
CA
25,000
25,000
25,000
25,000
15,000
0
15,000
0
40,000
25,000
40,000
25,000
40,000
30,000
0
30,000
0
30,000
OB
Pre-Admissions Values
Book-Up from $50,000 to $80,000
40,000 Admission of Z Totals
Book
Gain on Sale
170,000–80,000 = 90,000
0 Allocation of Book Gain
Tax
170,000–50,000 = 120,000
Reverse 704(c) Allocation Analysis
X
Y
Z
CA
OB
CA
OB
25,000
25,000
25,000
25,000
15,000
0
15,000
0
40,000
25,000
40,000
25,000
40,000
30,000
0
30,000
0
30,000
0
30,000
0
30,000
0
Asset
Cash
CA
OB
Pre-Admissions Values
Book-Up from $50,000 to $80,000
40,000 Admission of Z Totals
0 Allocation of Book Gain
30,000 Allocation of §704(b) Tax Gain
Book Value
210,000
Inside Basis
40,000
Reverse 704(c) Allocation Analysis
X
Y
Z
CA
OB
CA
OB
25,000
25,000
25,000
25,000
15,000
0
15,000
0
40,000
25,000
40,000
25,000
40,000
30,000
0
30,000
0
30,000
0
30,000
0
30,000
0
30,000 Allocation of §704(b) Tax Gain
0
15,000
0
15,000
0
0 Allocation of §704(c) Tax Gain
Asset
Cash
CA
OB
Pre-Admissions Values
Book-Up from $50,000 to $80,000
40,000 Admission of Z Totals
0 Allocation of Book Gain
Book Value
210,000
Inside Basis
40,000
Reverse 704(c) Allocation Analysis
X
Y
Z
CA
OB
CA
OB
25,000
25,000
25,000
25,000
15,000
0
15,000
0
40,000
25,000
40,000
25,000
40,000
30,000
0
30,000
0
30,000
0
30,000
0
30,000
0
30,000 Allocation of §704(b) Tax Gain
0
15,000
0
15,000
0
0 Allocation of §704(c) Tax Gain
70,000
70,000
70,000
70,000
70,000
Asset
Cash
CA
OB
Pre-Admissions Values
Book-Up from $50,000 to $80,000
40,000 Admission of Z Totals
0 Allocation of Book Gain
70,000 Totals
Book Value
210,000
Inside Basis
40,000
Observations
 Application of §704(c)(1)(A) to any book/tax disparity in property
contributed to the partnership is mandatory.
 Restating partnership assets to FMV upon admission of a new partner
(and apply §704(c) principles) nominally is optional. See Reg. §1.7041(b)(2)(iv)(f).
 However, failure to revalue (and apply §704(c) principles) might be
characterized as a gift or otherwise. See Reg. §1.704-1(b)(2)(iv)(f)(last
sentence)
Allocations with Respect to
Contributed Property
Howard E. Abrams
Warren Distinguished Professor, USD School of Law
May 2015
www.taxnerds.com
Copyright 2015 by Howard E. Abrams