Partnership Book-Ups

Section 704(c)(1)(A) governs the taxation of unrealized appreciation and loss in property contributed to a partnership. The principles underlying §704(c)(1)(A) also apply to property held by a partnership when additional property is contributed to the venture or existing property is distributed in exchange for a partnership interest. In Notice 2009-70, the Service solicited comments on the proper application of §704(c)(1)(A) to contributed property and on the application of §704(c)(1)(A) principles in appropriate circumstances to existing property of a partnership.Part I responds to Notice 2009-70 with three technical changes to the application of §704(c) principles, each of which will better conform the application of §704(c) principles to economic reality. The first two technical proposals limit the ability of a partnership to exploit §704(c) principles when doing so would be inconsistent with the economic arrangement among the partners or would emasculate the alternate test for economic effect under §704(b). The third technical proposal expands the use of §704(c) principles when their use would allow the books of a partnership to more closely reflect the economics underlying the partners' economic positions.Part II proposes three broad changes to the application of §704(c) principles to partnership dispositions and distributions. In many cases, the existing rules allow the partial sale of a partnership interest or a partnership distribution to shift the recognition of income among partners in ways that are easily manipulated. The proposals offered in part II will in most situations eliminate the shifting of income resulting from these transactions and thereby reduce the opportunity to exploit partnership dispositions and distributions in tax minimizing ways