Internal Revenue Code:Sec. 704. Partner's distributive share

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Contents


Location in Internal Revenue Code


     TITLE 26 - INTERNAL REVENUE CODE
      Subtitle A - Income Taxes
       CHAPTER 1 - NORMAL TAXES AND SURTAXES
        Subchapter K - Partners and Partnerships
         PART I - DETERMINATION OF TAX LIABILITY
       

Statute

    Sec. 704. Partner's distributive share
 
    (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.
    (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 -
        (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
        (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.
    (c) Contributed property
      (1) In general
        Under regulations prescribed by the Secretary -
          (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, 
          (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) 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,
            (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
            (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
           (C) if any property so contributed has a built-in 
                loss--
              (i) such built-in loss shall be taken into 
          account only in determining the amount of items 
          allocated to the contributing partner, and
             (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.
      (2) Special rule for distributions where gain or loss would not
          be recognized outside partnerships
        Under regulations prescribed by the Secretary, if -
          (A) property contributed by a partner (hereinafter referred
        to as the ''contributing partner'') is distributed by the
        partnership to another partner, and
          (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) the 180th day after the date of the distribution
          described in subparagraph (A), or
            (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).
      (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.
    (d) Limitation on allowance of losses
      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.  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.
    (e) Family partnerships
      (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.
      (2) 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.
      (3) Purchase of interest by member of family
        For purposes of this section, 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.
    (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).
 

Sources

    (Aug. 16, 1954, ch. 736, 68A Stat. 240; Pub. L. 94-455, title II,
    Sec. 213(c)(2), (3)(A), (d), (e), title XIX, Sec. 1906(b)(13)(A),
    Oct. 4, 1976, 90 Stat. 1548, 1834; Pub. L. 95-600, title II, Sec.
    201(b)(1), Nov. 6, 1978, 92 Stat. 2816; Pub. L. 98-369, div.  A,
    title I, Sec. 71(a), July 18, 1984, 98 Stat. 589; Pub. L. 101-239,
    title VII, Sec. 7642(a), Dec. 19, 1989, 103 Stat. 2379; Pub. L.
    102-486, title XIX, Sec. 1937(b)(1), Oct. 24, 1992, 106 Stat. 3033;
    Pub. L. 105-34, title X, Sec. 1063(a), Aug. 5, 1997, 111 Stat.
    947.)
 

Miscellaneous

                                 AMENDMENTS
      2004 - Subsec.833(a),Pub.L.108-357, amended Sec.704(c)(1)
    added a new subparagraph (C).
      1997 - Subsec. (c)(1)(B). Pub. L. 105-34 substituted ''7 years''
    for ''5 years'' in introductory provisions.
      1992 - Subsec. (c)(1)(B). Pub. L. 102-486 substituted ''is
    distributed (directly or indirectly)'' for ''is distributed''.
      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 2004 AMENDMENT
      Amendment by Pub.L.108-357,Sec.833(a), shall apply to 
    contributions made after the date of the enactment of this Act.
                      EFFECTIVE DATE OF 1997 AMENDMENT
      Section 1063(b) of Pub. L. 105-34 provided that:
      ''(1) In general. - The amendment made by subsection (a)
    (amending this section and section 737 of this title) shall apply
    to property contributed to a partnership after June 8, 1997.
      ''(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
      Section 1937(c) of Pub. L. 102-486 provided that: ''The
    amendments made by this section (enacting section 737 of this title
    and amending this section and section 731 of this title) shall
    apply to 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).''
 

References

                   SECTION REFERRED TO IN OTHER SECTIONS
      This section is referred to in sections 59, 168, 461, 514, 613A,
    737, 743, 761, 1366, 1446, 6241 of this title.
 

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