Contributed Property

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Contributed Property 704(c)
General Rule Built-in gain or loss allocated
to the contributing partner. But what if
actual gain or loss less than built-in gain of
loss? Traditional Approach Ceiling Rule
kicks in. Max allocated to contributing partner
is actually tax gain or loss. Book tax disparity
perpetuated. Traditional Approach with
Curative Allocation Can allocate extra amount
of other gain or loss of same character to
eliminate book and tax disparity. Remedial
Approach Allocate to noncontributing partner
tax gain or loss equal to book gain or loss, and
then have remedial allocation to contributing
partner to offset any extra gain or loss
allocated to noncontributing partner.

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Problem 196 - 3

• Buy land as joint tenants and contribute to
  partnership or buy through partnership? Both
  partners are dealers.
• If they buy and contribute, their dealer status
  will taint property as inventory for 5 yrs. If
  partnership buys, 724(b) not apply and property
  may qualify as investment property from day one.
• Buy land for 100k. Appreciate to 200k by year
  three. C contributes 100k cash for 1/3 interest,
  which used to improve property. Sell for 450k.
  How allocate gain 250 gain (450 200 basis).
  100k allocated to A B, built-in gain at C
  admission. Excess 150k allocated equally 50k
  to each.

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Problem 196 - 3

• Buy land as joint tenants and contribute to
  partnership or buy through partnership? Both
  partners are dealers.
• What result in (b) if use reverse 704(c) election
  and apply traditional allocation method? Restate
  book accounts on Cs admission to FMV 200k.
  Thus, book gain on sale is 150k (450k 300K) and
  tax gain of 250 (450 200). Book gain allocated
  equally to all three 50k each. Excess tax gain
  of 100k allocated to A B. Same net result as
  in (b).

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Problem 196 - 3
Buy land as joint tenants and contribute to
partnership or buy through partnership? Both
partners are dealers. (d) What result if no
adjustment to capital accounts when C admitted
and no special allocation of built-in gain?
Here, 250 gain allocated equally to each partner
83,333 to each. Capital accounts as follows
No allocation
Allocation A
133,333 (50 83333)
150,000 (50 100) B
133,333 (50 83333) 150,000 (50
100) C 183,333 (100
83,333) 150,000 (100 50)
Total 450,000
450,000 Result Economic
value shift of 33,333 from A B to C. Could be
treated as gift if relatives or compensation
payment if employee.
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Problem 196 - 3