Under § 721, neither the partnership nor the partners recognizes any gain
on formation of the entity.
Chip will take a cash basis of $200,000 in his partnership interest.
Marty will take a substituted basis of $100,000 in his partnership interest
($100,000 basis in the property contributed to the entity).
The partnership will take a carryover basis in the assets it receives
($200,000 basis in cash, and $100,000 basis in property).
Liz has a realized loss of $15,000. However, § 721 contains the general
rule that no gain or loss is recognized to a partnership or any of its partners
upon the contribution of money or other property in exchange for a capital
interest. Since Liz is subject to this rule, she does not recognize the loss. p.
$60,000. Section 722 provides that the basis of a partner’s interest
acquired by a contribution of property, including money, is the amount of
such money and the adjusted basis of such property to the contributing
partner at the time of the contribution. p. 21-12
$75,000, the adjusted basis of the contributed property (§ 722). p. 21-12
$75,000. Under § 723, the basis of property to the entity is the adjusted
basis of such property to the contributing partner at the time of the
contribution, increased by any § 721(b) gain recognized by such partner.
Since no such gain (and no loss) was recognized by Liz on the
contribution, the partnership takes a carryover basis in the property.
A more efficient tax result may arise if Liz sells the property to an
unrelated party for $60,000, recognizes the $15,000 loss on the property,
and contributes $60,000 cash to the partnership. The partnership could
then use the $60,000 to acquire similar property, in which it would take a
$60,000 basis. Example 9
Carol realizes a gain of $20,000 on contribution of the land. Connie
realizes a gain of $60,000 on contribution of the equipment. The
partnership realizes a gain equal to the value of the property it receives (it
has a $0 basis in the partnership interests it issues).
Under § 721, neither the partnership nor either of the partners recognizes
any gain on formation of the entity. Example 8
Carol will take a substituted basis of $70,000 in her partnership interest
($30,000 cash plus $40,000 basis in land). Connie will take a substituted
basis of $30,000 in her partnership interest ($30,000 basis in the
equipment). Example 14