Revenue Ruling 84-53: Partnership Property Contributions

Revenue Ruling 84-53 is a formal pronouncement by the Internal Revenue Service providing guidance on the tax implications when a partner contributes property encumbered by debt to a partnership. This ruling is important for determining a partner’s adjusted basis in the partnership interest and for identifying situations that could trigger a tax liability. It addresses how liabilities are treated in different contribution scenarios, which directly impacts the contributing partner’s financial standing from a tax perspective.

Core Concepts of Partnership Contributions

A partner’s initial basis in a partnership interest, often called “outside basis,” is established under Internal Revenue Code Section 722. This figure is calculated by adding the amount of any cash contributed to the adjusted basis of any property the partner contributes. The adjusted basis is the original cost of the property, adjusted for factors like depreciation.

The partnership itself also has a basis in the contributed property, known as “inside basis.” According to Section 723, the partnership assumes the same basis in the property that the contributing partner had. This is referred to as a carryover basis, meaning the property’s tax history is transferred from the individual to the partnership.

The treatment of liabilities significantly complicates these calculations. Under Section 752, a partner’s basis is increased by their share of the partnership’s liabilities. Conversely, if a partner contributes property with a liability attached, their basis is decreased by the amount of their personal liability that is now shared with the other partners.

This reduction is treated as a “deemed distribution” of cash from the partnership. According to Section 731, if this deemed distribution exceeds the partner’s basis in the partnership, the excess amount is treated as a taxable gain.

Tax Implications of Contributing Encumbered Property

Revenue Ruling 84-53 analyzes scenarios where a partner contributes property subject to a liability. When such property is contributed, the partnership is treated as having assumed the liability, regardless of whether the contributing partner remains personally liable for the debt.

The assumption of the debt by the partnership triggers a deemed cash distribution to the contributing partner. The amount of this distribution is equal to the net relief from the liability. This is calculated by taking the full amount of the liability and subtracting the portion of that same liability allocated back to the contributing partner as their share of partnership debt.

The contributing partner’s basis in the partnership starts with the adjusted basis of the contributed property. This amount is then reduced by the net relief from the liability.