Structuring Contributions of Appreciated Property to Partnerships: Avoiding Tax Recognition on Built-In Gain Assets

For partnerships and their tax advisers, the contribution of appreciated property to an entity in exchange for a partnership or LLC ownership shares presents specific tax challenges. While in most cases the exchange of assets for partnership interests is not a recognition event, a contribution of appreciated property can have significant consequences for both partnership operations and distributions.

An exception to the nonrecognition rule of Section 721 occurs when the contributed property is encumbered by debt, and the contributing partner is deemed to have been relieved of debt in an amount in excess of his basis in the contributed property. In these situations, the partnership must adjust its basis in the contributed asset to reflect the current gain recognition.

Currently, partnerships that receive appreciated property face specific Code provisions on distributing the appreciated asset and rules that require recognition when other partnership property is distributed to the contributing partner under the "seven-year rule" of Section 737. However, recently proposed tax law changes can significantly impact or repeal this rule. Tax advisers must have a firm grasp of the rules governing the contribution of appreciated property to partnerships to avoid unforeseen tax and penalties resulting from incorrect distributions or allocations.

Listen as our experienced panel provides a comprehensive and practical guide to the tax consequences and rules of contributing appreciated property to partnerships.

I. General nonrecognition rules

II. Current tax consequences for the contribution of appreciated property with debt encumbrance

III. Basis adjustments required by the partnership

IV. Impact of distributions to contributing partner

V. Impact of recently proposed tax law changes

The panel will discuss these and other important topics:

• Under what circumstances would contribution of appreciated property not qualify for nonrecognition under Section 721?
• What is the "seven-year rule" of Section 737, and how does it impact distributions to partners who have previously contributed appreciated property subject to debt encumbrance?
• What is the impact on the contributing partner when the partnership distributes the appreciated property to other partners?
• What impact will the recently proposed tax law changes have on these rules?

Learning Objectives

After completing this course, you will be able to:

• Recognize when a contribution of appreciated property with an encumbrance can result in gain recognition
• Identify distributions to partners who contributed appreciated property that can result in gain recognition
• Discern when a property contribution risks reclassification as a disguised sale

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite:

  Three years+ business or public firm experience at mid-level within the organization, preparing complex tax forms and schedules, supervising other preparers/accountants. Specific knowledge and understanding of partnership structure, operating agreements and distibutions, including partner capital accounts, allocation and distributions; familiarity with the disguised sale rules.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).