IRC 704(c) for Tax Counsel: Structuring Partnership Agreements for Contributions of Built-In Gain or Loss Property

Avoiding 704(c) and 737 Gain or Loss Shifting Pitfalls, Navigating Complex Basis Adjustment Rules


Conducted on Tuesday, January 24, 2017

Recorded event now available

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Program Materials

This CLE/CPE webinar will provide tax counsel and advisers with a comprehensive and practical guide to navigating the complex requirements of IRC Section 704(c) in structuring partnership agreements. The panel will offer practical drafting tools, including sample language, for ensuring that partnership operating documents meet the allocation provisions for property with built-in gains or losses.


An often difficult and frequently overlooked challenge for tax counsel and partnership advisers is negotiating the Section 704(c) contribution rules. Section 704(c) operates to prevent the shifting of tax liabilities associated with built in gains and losses among/between partners when a partner or member contributes property that has a fair market value different from the basis the partnership would take in the contributed property. Tax counsel must ensure that partnership agreements and contribution structures consider the provisions of Section 704(c) to avoid costly tax consequences.

The key provision to Section 704(c) requires contributing partners to recognize gain or loss on the partnership sale of built-in gain/loss property within seven years of the contribution. Section 704(c)(1)(B) works in tandem with Section 737, which requires recognition of precontribution gain by a contributing partner in case of certain distributions. The goals of the Sections are to prevent contributing partners from shifting built-in gains to another partner.

Tax counsel must not only understand the rules but also the practical implications of Section 704(c) in negotiating and drafting partnership agreements. Failure to take the anti-abuse rules into account when structuring contributions result in unnecessary tax issues for the individual partners.




  1. Key aspects of Sect. 704(c)
    1. Applies whenever a partner contributes appreciated or depreciated property to a partnership, or when a new partner is admitted
    2. Income, gain, loss or deduction for property contributed must be shared among partners
    3. Parties must account for any variance between basis of property and fair market value at time of contribution over the life of the partnership
    4. If property is depreciable or subject to depletion, then taxpayers are granted broad authority to determine how to account for this variance over the life of the partnership
    5. Simple Traditional Method Example
    6. Ceiling Rule Limit
    7. Simple Traditional with Curatives Example
    8. Simple Remedial Example
  2. Forward and reverse allocations under Sect. 704(c)
    1. Elections available to choose allocation method
    2. Forward allocations
      1. Book vs. tax basis
      2. Traditional, curative, remedial methods
    3. Reverse allocations
      1. Issues with revaluation of capital accounts
      2. Aggregation elections
  3. Structuring and drafting partnership operating documents to conform to Section 704(c) rules
    1. Timing of Making Forward 704(c) Election and Possible State law issues
      1. Should you select a method in the agreement upon inception?
      2. Should you give someone (manager, BOD, etc.) power to select a method later?
      3. State law breach of fiduciary duties issues with “2”
    2. Timing of Making Reverse Section 704(c) Election and Possible State law issues
      1. Should you elect to revalue?
      2. Should you grant someone (manager, BOD, etc.) the power to elect to revalue later?
      3. Do the regulations allow the drafter to grant someone the power to elect to revalue at later time (or must the drafter either elect to revalue or not at the time of inception)?


The panel will discuss these and other important topics:

  • Preparing partnership and operating agreements with specific language to conform with Sect. 704(c) allocation restrictions
  • Identifying various elections to adopt an appropriate allocation method
  • What are the specific events and conditions under which a reverse revaluation is allowed under Section 704(c)
  • Understanding reverse 704(c) revaluations in the context of partnership termination/reformation


Fowler, Lynn
Lynn E. Fowler

Kilpatrick Townsend & Stockton

Mr. Fowler's practice specializes in tax-efficient strategies for a variety of business entity formation,...  |  Read More

Brock, Noel
Professor Noel P. Brock

Assistant Professor
Eastern Michigan University

Mr. Brock is an assistant professor at Eastern Michigan University, where he teaches and researches in the...  |  Read More

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