26 U.S.C. § 704 — Partner’s distributive share

Page 1865 TITLE 26—INTERNAL REVENUE CODE § 704 Mar. 29, 1975, 89 Stat. 53; Pub. L. 94–455, title XIX, § 1901(b)(21)(F), title XXI, § 2115(c)(2), Oct. 4, 1976, 90 Stat. 1798, 1909; Pub. L. 95–30, title I, § 101(d)(10), May 23, 1977, 91 Stat. 134; Pub. L. 96–589, § 2(e)(1), Dec. 24, 1980, 94 Stat. 3396; Pub. L. 99–514, title V, § 511(d)(2)(B), title VII, § 701(e)(4)(E), Oct. 22, 1986, 100 Stat. 2249, 2343; Pub. L. 100–647, title I, § 1008(i), Nov. 10, 1988, 102 Stat. 3445; Pub. L. 103–66, title XIII, § 13150(c)(9), Aug. 10, 1993, 107 Stat. 448.) Editorial Notes AMENDMENTS 1993—Subsec. (b)(1). Pub. L. 103–66 substituted ‘‘sub- section (b)(5) or (c)(3)’’ for ‘‘subsection (b)(5)’’. 1988—Subsec. (b)(1). Pub. L. 100–647 substituted ‘‘sub- section (b)(5)’’ for ‘‘subsection (b)(5) or (d)(4)’’. 1986—Subsec. (b). Pub. L. 99–514 struck out former pars. (1) and (3) which related to elections under sec- tions 57(c) and 163(d), respectively, and redesignated former pars. (2), (4), and (5), as pars. (1), (2), and (3), re- spectively. 1980—Subsec. (b). Pub. L. 96–589 inserted reference to section 108(b)(5) and (d)(4). 1977—Subsec. (a)(2). Pub. L. 95–30 struck out subpar. (A) which made reference to the standard deduction provided in section 141, and redesignated subpars. (B) to (G) as (A) to (F), respectively. 1976—Subsec. (a)(2)(G). Pub. L. 94–455, § 2115(c)(2), sub- stituted ‘‘wells’’ for ‘‘production subject to the provi- sions of section 613A(c)’’. Subsec. (b). Pub. L. 94–455, § 1901(b)(21)(F), struck out ‘‘under section 615 (relating to pre-1970 exploration ex- penditures),’’ after ‘‘of the United States, and any elec- tion’’. 1975—Subsec. (a)(2)(G). Pub. L. 94–12 added subpar. (G). 1971—Subsec. (b). Pub. L. 92–178 substituted ‘‘,’’ for ‘‘or’’ after ‘‘(relating to pre-1970 exploration expendi- tures)’’ and inserted ‘‘under section 57(c) (relating to definition of net lease), or under section 163(d) (relating to limitation on interest on investment indebtedness)’’ after ‘‘(relating to deduction and recapture of certain mining exploration expenditures)’’. 1969—Subsec. (b). Pub. L. 91–172 substituted ‘‘(relating to pre-1970 exploration expenditures) or under section 617 (relating to deduction and recapture of certain min- ing exploration expenditures)’’ for ‘‘(relating to explo- ration expenditures) or under section 617 (relating to additional exploration expenditures in the case of do- mestic mining)’’. 1966—Subsec. (b). Pub. L. 89–570 provided for election under section 615 (relating to exploration expenditures) or under section 617 (relating to additional exploration expenditures in the case of domestic mining). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1993 AMENDMENT Amendment by Pub. L. 103–66 applicable to discharges after Dec. 31, 1992, in taxable years ending after such date, see section 13150(d) of Pub. L. 103–66, set out as a note under section 108 of this title. EFFECTIVE DATE OF 1988 AMENDMENT Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Amendment by section 511(d)(2)(B) of Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, see section 511(e) of Pub. L. 99–514, set out as a note under section 163 of this title. Amendment by section 701(e)(4)(E) of Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, with certain exceptions and qualifications, see section 701(f) of Pub. L. 99–514, set out as an Effective Date note under section 55 of this title. EFFECTIVE DATE OF 1980 AMENDMENT Amendment by Pub. L. 96–589 applicable to trans- actions which occur after Dec. 31, 1980, other than transactions which occur in a proceeding in a bank- ruptcy case or similar judicial proceeding or in a pro- ceeding under Title 11 commencing on or after Dec. 31, 1980, with an exception permitting the debtor to make the amendment applicable to transactions occurring after Sept. 30, 1979; in a specified manner, see section 7(a)(1), (f) of Pub. L. 96–589, set out as a note under sec- tion 108 of this title. EFFECTIVE DATE OF 1977 AMENDMENT Amendment by Pub. L. 95–30 applicable to taxable years beginning after Dec. 31, 1976, see section 106(a) of Pub. L. 95–30, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1976 AMENDMENT Amendment by section 1901(b)(21)(F) of Pub. L. 94–455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title. Amendment by section 2115(c)(2) of Pub. L. 94–455 ef- fective on Jan. 1, 1975 and applicable to taxable years ending after Dec. 31, 1974, see section 2115(f) of Pub. L. 94–455, set out as a note under section 613A of this title. EFFECTIVE DATE OF 1975 AMENDMENT Amendment by Pub. L. 94–12 effective Jan. 1, 1975, to apply to taxable years ending after Dec. 31, 1974, see section 501(c) of Pub. L. 94–12, set out as an Effective Date note under section 613A of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91–172 applicable with respect to exploration expenditures paid or incurred after Dec. 31, 1969, see section 504(d)(1) of Pub. L. 91–172, set out as an Effective Date note under section 243 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89–570 applicable to taxable years ending after Sept. 12, 1966, but only in respect of expenditures paid or incurred after such date, see sec- tion 3 of Pub. L. 89–570, set out as an Effective Date note under section 617 of this title. APPLICABILITY OF CERTAIN AMENDMENTS BY PUB. L. 99–514 IN RELATION TO TREATY OBLIGATIONS OF UNITED STATES For applicability of amendment by section 701(e)(4)(E) of Pub. L. 99–514 notwithstanding any trea- ty obligation of the United States in effect on Oct. 22, 1986, with provision that for such purposes any amend- ment by title I of Pub. L. 100–647 be treated as if it had been included in the provision of Pub. L. 99–514 to which such amendment relates, see section 1012(aa)(2), (4) of Pub. L. 100–647, set out as a note under section 861 of this title. § 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 other- wise 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 Page 1866 TITLE 26—INTERNAL REVENUE CODE § 704 be determined in accordance with the partner’s interest in the partnership (determined by tak- ing into account all facts and circumstances), if— (1) the partnership agreement does not pro- vide 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 substan- tial economic effect. (c) Contributed property (1) In general Under regulations prescribed by the Sec- retary— (A) income, gain, loss, and deduction with respect to property contributed to the part- nership 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 dis- tributed (directly or indirectly) by the part- nership (other than to the contributing part- ner) 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 prop- erty 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 distribu- tion, (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 contrib- uting partner’s interest in the partnership and to the adjusted basis of the property distributed to reflect any gain or loss rec- ognized 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 contrib- uted property in the hands of the partner- ship shall be treated as being equal to its fair market value at the time of contribu- tion. For purposes of subparagraph (C), the term ‘‘built-in loss’’ means the excess of the ad- justed basis of the property (determined with- out 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 part- nerships Under regulations prescribed by the Sec- retary, 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 dis- tribution described in subparagraph (A), or (ii) the due date (determined with regard to extensions) for the contributing part- ner’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 Sec- retary, 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 ref- erence in paragraph (1) or (2) to the contrib- uting partner shall be treated as including a reference to any successor of such partner. (d) Limitation on allowance of losses (1) In general 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. (2) Carryover 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. (3) Special rules (A) In general In determining the amount of any loss under paragraph (1), there shall be taken into account the partner’s distributive share of amounts described in paragraphs (4) and (6) of section 702(a). (B) Exception In the case of a charitable contribution of property whose fair market value exceeds its adjusted basis, subparagraph (A) shall not apply to the extent of the partner’s distribu- tive share of such excess. (e) Partnership interests created by gift (1) Distributive share of donee includible in gross income In the case of any partnership interest cre- ated by gift, the distributive share of the Page 1867 TITLE 26—INTERNAL REVENUE CODE § 704 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 por- tion of such share attributable to donated cap- ital is proportionately greater than the share of the donor attributable to the donor’s cap- ital. The distributive share of a partner in the earnings of the partnership shall not be dimin- ished because of absence due to military serv- ice. (2) Purchase of interest by member of family For purposes of this subsection, an interest purchased by one member of a family from an- other 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 indi- vidual 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, liq- uidation, or reduction of a partner’s interest, see section 706(c)(2). (Aug. 16, 1954, ch. 736, 68A Stat. 240; Pub. L. 94–455, title II, § 213(c)(2), (3)(A), (d), (e), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1548, 1834; Pub. L. 95–600, title II, § 201(b)(1), Nov. 6, 1978, 92 Stat. 2816; Pub. L. 98–369, div. A, title I, § 71(a), July 18, 1984, 98 Stat. 589; Pub. L. 101–239, title VII, § 7642(a), Dec. 19, 1989, 103 Stat. 2379; Pub. L. 102–486, title XIX, § 1937(b)(1), Oct. 24, 1992, 106 Stat. 3033; Pub. L. 105–34, title X, § 1063(a), Aug. 5, 1997, 111 Stat. 947; Pub. L. 108–357, title VIII, § 833(a), Oct. 22, 2004, 118 Stat. 1589; Pub. L. 114–74, title XI, § 1102(b), Nov. 2, 2015, 129 Stat. 639; Pub. L. 115–97, title I, § 13503(a), Dec. 22, 2017, 131 Stat. 2141.) Editorial Notes AMENDMENTS 2017—Subsec. (d). Pub. L. 115–97 designated first and second sentences of existing provisions as pars. (1) and (2), respectively, inserted headings, and added par. (3). 2015—Subsec. (e). Pub. L. 114–74 substituted ‘‘Partner- ship interests created by gift’’ for ‘‘Family partner- ships’’ in heading, redesignated pars. (2) and (3) as (1) and (2), respectively, substituted ‘‘this subsection’’ for ‘‘this section’’ in par. (2), and struck out former par. (1). Prior to amendment, text of par. (1) read as follows: ‘‘A person shall be recognized as a partner for purposes of this subtitle if he owns a capital interest in a part- nership in which capital is a material income-pro- ducing factor, whether or not such interest was derived by purchase or gift from any other person.’’ 2004—Subsec. (c)(1)(C). Pub. L. 108–357 added subpar. (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 distrib- uted’’. 1989—Subsec. (c). Pub. L. 101–239 amended subsec. (c) generally. Prior to amendment, subsec. (c) read as fol- lows: ‘‘Under regulations prescribed by the Secretary, income, gain, loss, and deduction with respect to prop- erty 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 part- nership and its fair market value at the time of con- tribution. Under regulations prescribed by the Sec- retary, rules similar to the rules of the preceding sen- tence shall apply to contributions by a partner (using the cash receipts and disbursements method of ac- counting) 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 contrib- uted 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 ac- counting) 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 con- tributed 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 vari- ation between the basis of the property to the partner- ship and its fair market value at the time of contribu- tion, 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 pur- chased by the partnership and that if the partnership agreement did not provide otherwise, depreciation, de- pletion, or gain or loss with respect to undivided inter- ests 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, § 213(c)(2), sub- stituted ‘‘except as otherwise provided in this chapter’’ for ‘‘except as otherwise provided in this section’’. Subsec. (b). Pub. L. 94–455, § 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, § 1906(b)(13)(A), struck out ‘‘or his delegate’’ after ‘‘Secretary’’. Subsec. (d). Pub. L. 94–455, § 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 sec- tion 465 of this title applies or the principal activity of the partnership is real estate investment. Subsec. (f). Pub. L. 94–455, § 213(c)(3)(A), added subsec. (f). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2017 AMENDMENT Pub. L. 115–97, title I, § 13503(b), Dec. 22, 2017, 131 Stat. 2141, provided that: ‘‘The amendments made by this section [amending this section] shall apply to partner- ship taxable years beginning after December 31, 2017.’’ EFFECTIVE DATE OF 2015 AMENDMENT Pub. L. 114–74, title XI, § 1102(c), Nov. 2, 2015, 129 Stat. 639, provided that: ‘‘The amendments made by this sec- Page 1868 TITLE 26—INTERNAL REVENUE CODE § 705 tion [amending this section and section 761 of this title] shall apply to partnership taxable years beginning after December 31, 2015.’’ EFFECTIVE DATE OF 2004 AMENDMENT Pub. L. 108–357, title VIII, § 833(d)(1), Oct. 22, 2004, 118 Stat. 1592, provided that: ‘‘The amendment made by subsection (a) [amending this section] shall apply to contributions made after the date of the enactment of this Act [Oct. 22, 2004].’’ EFFECTIVE DATE OF 1997 AMENDMENT Pub. L. 105–34, title X, § 1063(b), Aug. 5, 1997, 111 Stat. 947, provided that: ‘‘(1) IN GENERAL.—The amendment made by sub- section (a) [amending this section and section 737 of this title] shall apply to property contributed to a part- nership after June 8, 1997. ‘‘(2) BINDING CONTRACTS.—The amendment made by subsection (a) shall not apply to any property contrib- uted 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 contribu- tion of a fixed amount of property.’’ EFFECTIVE DATE OF 1992 AMENDMENT Pub. L. 102–486, title XIX, § 1937(c), Oct. 24, 1992, 106 Stat. 3033, 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 Pub. L. 101–239, title VII, § 7642(b), Dec. 19, 1989, 103 Stat. 2381, 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 Pub. L. 98–369, div. A, title I, § 71(c), July 18, 1984, 98 Stat. 589, provided that: ‘‘The amendments made by this section [amending this section and sections 613A and 743 of this title] shall apply with respect to prop- erty 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 provi- sion set out as a note under this section by section 201(b)(2) of Pub. L. 95–600 applicable to taxable years be- ginning 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 appli- cable to liabilities incurred after Dec. 31, 1976, see sec- tion 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 Pub. L. 95–600, title II, § 201(b)(2), Nov. 6, 1978, 92 Stat. 2816, as amended by Pub. L. 99–514, § 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 Rev- enue Code of 1986 [formerly I.R.C. 1954] (as in effect be- fore 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].’’ § 705. Determination of basis of partner’s interest (a) General rule The adjusted basis of a partner’s interest in a partnership shall, except as provided in sub- section (b), be the basis of such interest deter- mined under section 722 (relating to contribu- tions to a partnership) or section 742 (relating to transfers of partnership interests)— (1) increased by the sum of his distributive share for the taxable year and prior taxable years of— (A) taxable income of the partnership as determined under section 703(a), (B) income of the partnership exempt from tax under this title, and (C) the excess of the deductions for deple- tion over the basis of the property subject to depletion; (2) decreased (but not below zero) by dis- tributions by the partnership as provided in section 733 and by the sum of his distributive share for the taxable year and prior taxable years of— (A) losses of the partnership, and (B) expenditures of the partnership not de- ductible in computing its taxable income and not properly chargeable to capital ac- count; and (3) decreased (but not below zero) by the amount of the partner’s deduction for deple- tion for any partnership oil and gas property to the extent such deduction does not exceed the proportionate share of the adjusted basis of such property allocated to such partner under section 613A(c)(7)(D). (b) Alternative rule The Secretary shall prescribe by regulations the circumstances under which the adjusted basis of a partner’s interest in a partnership may be determined by reference to his propor- tionate share of the adjusted basis of partner- ship property upon a termination of the partner- ship. (Aug. 16, 1954, ch. 736, 68A Stat. 242; Pub. L. 94–455, title XIX, § 1906(b)(13)(A), title XXI, § 2115(c)(3), Oct. 4, 1976, 90 Stat. 1834, 1909; Pub. L. 98–369, div. A, title VII, § 722(e)(1), July 18, 1984, 98 Stat. 974.) Editorial Notes AMENDMENTS 1984—Subsec. (a)(3). Pub. L. 98–369 substituted ‘‘for any partnership oil and gas property to the extent such deduction does not exceed the proportionate share of the adjusted basis of such property allocated to such partner under section 613A(c)(7)(D)’’ for ‘‘under section 611 with respect to oil and gas wells’’. 1976—Subsec. (a)(3). Pub. L. 94–455, § 2115(c)(3), added par. (3). Subsec. (b). Pub. L. 94–455, § 1906(b)(13)(A), struck out ‘‘or his delegate’’ after ‘‘Secretary’’.