1. Contribution of Property - In general, Sec. 721 provides that no gain or loss is recognized by a partnership or a contributing partner who transfers property to a partnership solely in exchange for a partnership interest (capital and/or profits). There is no 80% ownership test (as is true with corporations under Sec. 351, discussed later), and there are no limits on the type of property contributed. These rules apply to any partnership contributions, not just those in forming the partnership.
Example – Allen Ford contributes property with an adjusted basis of $20,000 and a fair market value of $30,000 to a ABCD partnership for a 25% partnership interest. Allen recognizes no gain on the transfer, Allen’s basis in the partnership interest is $20,000, and the partnership’s basis in the property is $20,000. Note the parallels to the like-kind exchange rules discussed earlier.
The partner’s basis in the partnership interest will equal the basis of the property contributed, and the property will have the same tax basis to the partnership. As was true with corporations, holding periods generally tack.
2. Contribution of Services - The contribution of services to a partnership is a taxable event, and the contributing partner will be taxed on the value of the interest received. This in turn provides a basis of the partnership interest equal to the services income recognized.
Example – Sue Clark contributes services worth $30,000 to the ABCD partnership in exchange for a 25% partnership interest. Sue must report the $30,000 as compensation income, and the basis of her partnership interest is $30,000. The partnership also has a basis of $30,000 to either deduct as compensation or capitalize and possibly amortize as an organization cost.