General

Question 1

For the purposes of “property” contributed in exchange for interest, the following are excluded:

Answer 1

The interpretation of “property” for § 721 has been deemed analogous to § 351*. As such, § 351(d) excludes

(1) services,
(2) unsecured indebtedness of the transferee, and
(3) interest on indebtedness of the transferee which accrued on or after the beginning of the transferor’s holding period for the debt.

• See, e.g., Stafford v. United States, 611 F.2d 990, 995–997 (5th Cir. 1980)

Question 2

Nonrecognition

Answer 2

§ 721 protects both the partnership and its partners from recognizing any gain or loss on the transfer of property to a partnership in exchange for an interest in the partnership.

Question 3

Outside Basis

Answer 3

Under § 722, each contribution partner takes as her basis in the partnership interest received an amount equal to the sum of the adjusted basis she had in any contributed property, plus any cash contributed.

Question 4

Inside Basis

Answer 4

Under § 723, the partnership takes a transferred basis in contributed property equal to that of the contributing partner, and can tack the partners’ holding periods to its own under § 1223(2).

Question 5

Three characterization rules for gain or loss recognized on contributed property:

Answer 5

(1) Unrealized receivables — § 724(a)
(2) Inventory items — § 724(b)
(3) Capital loss property — § 724(c)

Question 6

Unrealized Receivables

Answer 6

Under § 724(a), if contributed property is an “unrealized receivable” under § 751(c) in the contributing partner’s hands, any gain or loss recognized by the partnership on the disposition of that property is ordinary, regardless of how long it is held by the partnership.

Question 7

Inventory Items

Answer 7

Under § 724(b), if contributed property is an “inventory item” under § 751(d) in the contributing partner’s hands, any gain or loss recognized by the partnership on that property within 5 years of contribution is ordinary.

Question 8

Capital Loss Property

Answer 8

Under § 724(c), if contributed property is a capital asset in the contributing partner’s hands and has a built-in loss, then—to the extent of that built-in loss—any loss recognized by the partnership on that property within 5 years of contribution is capital.