26 U.S.C. § 704

Partner’s distributive share

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(a) Effect of partnership agreement

A partner’s distributive share of income, gain, loss, deduction, or credit shall, except as otherwise provided in this chapter, be determined by the partnership agreement.

(b) Determination of distributive shareA partner’s distributive share of income, gain, loss, deduction, or credit (or item thereof) shall be determined in accordance with the partner’s interest in the partnership (determined by taking into account all facts and circumstances), if—(1) the partnership agreement does not provide as to the partner’s distributive share of income, gain, loss, deduction, or credit (or item thereof), or(2) the allocation to a partner under the agreement of income, gain, loss, deduction, or credit (or item thereof) does not have substantial economic effect.(c) Contributed property(1) In generalUnder regulations prescribed by the Secretary—(A) income, gain, loss, and deduction with respect to property contributed to the partnership by a partner shall be shared among the partners so as to take account of the variation between the basis of the property to the partnership and its fair market value at the time of contribution,(B) if any property so contributed is distributed (directly or indirectly) by the partnership (other than to the contributing partner) within 7 years of being contributed—(i) the contributing partner shall be treated as recognizing gain or loss (as the case may be) from the sale of such property in an amount equal to the gain or loss which would have been allocated to such partner under subparagraph (A) by reason of the variation described in subparagraph (A) if the property had been sold at its fair market value at the time of the distribution,(ii) the character of such gain or loss shall be determined by reference to the character of the gain or loss which would have resulted if such property had been sold by the partnership to the distributee, and(iii) appropriate adjustments shall be made to the adjusted basis of the contributing partner’s interest in the partnership and to the adjusted basis of the property distributed to reflect any gain or loss recognized under this subparagraph, and(C) if any property so contributed has a built-in loss—(i) such built-in loss shall be taken into account only in determining the amount of items allocated to the contributing partner, and(ii) except as provided in regulations, in determining the amount of items allocated to other partners, the basis of the contributed property in the hands of the partnership shall be treated as being equal to its fair market value at the time of contribution.For purposes of subparagraph (C), the term “built-in loss” means the excess of the adjusted basis of the property (determined without regard to subparagraph (C)(ii)) over its fair market value at the time of contribution.(2) Special rule for distributions where gain or loss would not be recognized outside partnershipsUnder regulations prescribed by the Secretary, if—(A) property contributed by a partner (hereinafter referred to as the “contributing partner”) is distributed by the partnership to another partner, and(B) other property of a like kind (within the meaning of section 1031) is distributed by the partnership to the contributing partner not later than the earlier of—(i) the 180th day after the date of the distribution described in subparagraph (A), or(ii) the due date (determined with regard to extensions) for the contributing partner’s return of the tax imposed by this chapter for the taxable year in which the distribution described in subparagraph (A) occurs,then to the extent of the value of the property described in subparagraph (B), paragraph (1)(B) shall be applied as if the contributing partner had contributed to the partnership the property described in subparagraph (B).(3) Other rules

Under regulations prescribed by the Secretary, rules similar to the rules of paragraph (1) shall apply to contributions by a partner (using the cash receipts and disbursements method of accounting) of accounts payable and other accrued but unpaid items. Any reference in paragraph (1) or (2) to the contributing partner shall be treated as including a reference to any successor of such partner.

(d) Limitation on allowance of losses(1) In general

A partner’s distributive share of partnership loss (including capital loss) shall be allowed only to the extent of the adjusted basis of such partner’s interest in the partnership at the end of the partnership year in which such loss occurred.

(2) Carryover

Any excess of such loss over such basis shall be allowed as a deduction at the end of the partnership year in which such excess is repaid to the partnership.

(3) Special rules(A) In general

In determining the amount of any loss under paragraph (1), there shall be taken into account the partner’s distributive share of amounts described in paragraphs (4) and (6) of section 702(a).

(B) Exception

In the case of a charitable contribution of property whose fair market value exceeds its adjusted basis, subparagraph (A) shall not apply to the extent of the partner’s distributive share of such excess.

(e) Partnership interests created by gift(1) Distributive share of donee includible in gross income

In the case of any partnership interest created by gift, the distributive share of the donee under the partnership agreement shall be includible in his gross income, except to the extent that such share is determined without allowance of reasonable compensation for services rendered to the partnership by the donor, and except to the extent that the portion of such share attributable to donated capital is proportionately greater than the share of the donor attributable to the donor’s capital. The distributive share of a partner in the earnings of the partnership shall not be diminished because of absence due to military service.

(2) Purchase of interest by member of family

For purposes of this subsection, an interest purchased by one member of a family from another shall be considered to be created by gift from the seller, and the fair market value of the purchased interest shall be considered to be donated capital. The “family” of any individual shall include only his spouse, ancestors, and lineal descendants, and any trusts for the primary benefit of such persons.

(f) Cross reference

For rules in the case of the sale, exchange, liquidation, or reduction of a partner’s interest, see section 706(c)(2).

(Aug. 16, 1954, ch. 736, 68A Stat. 240; Pub. L. 94–455, title II, § 213(c)(2), (3)(A), (d), (e), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1548, 1834; Pub. L. 95–600, title II, § 201(b)(1), Nov. 6, 1978, 92 Stat. 2816; Pub. L. 98–369, div. A, title I, § 71(a), July 18, 1984, 98 Stat. 589; Pub. L. 101–239, title VII, § 7642(a), Dec. 19, 1989, 103 Stat. 2379; Pub. L. 102–486, title XIX, § 1937(b)(1), Oct. 24, 1992, 106 Stat. 3033; Pub. L. 105–34, title X, § 1063(a), Aug. 5, 1997, 111 Stat. 947; Pub. L. 108–357, title VIII, § 833(a), Oct. 22, 2004, 118 Stat. 1589; Pub. L. 114–74, title XI, § 1102(b), Nov. 2, 2015, 129 Stat. 639; Pub. L. 115–97, title I, § 13503(a), Dec. 22, 2017, 131 Stat. 2141.)Editorial NotesAmendments

2017—Subsec. (d). Pub. L. 115–97 designated first and second sentences of existing provisions as pars. (1) and (2), respectively, inserted headings, and added par. (3).

2015—Subsec. (e). Pub. L. 114–74 substituted “Partnership interests created by gift” for “Family partnerships” in heading, redesignated pars. (2) and (3) as (1) and (2), respectively, substituted “this subsection” for “this section” in par. (2), and struck out former par. (1). Prior to amendment, text of par. (1) read as follows: “A person shall be recognized as a partner for purposes of this subtitle if he owns a capital interest in a partnership in which capital is a material income-producing factor, whether or not such interest was derived by purchase or gift from any other person.”

2004—Subsec. (c)(1)(C). Pub. L. 108–357 added subpar. (C).

1997—Subsec. (c)(1)(B). Pub. L. 105–34 substituted “7 years” for “5 years” in introductory provisions.

1992—Subsec. (c)(1)(B). Pub. L. 102–486 substituted “is distributed (directly or indirectly)” for “is distributed”.

1989—Subsec. (c). Pub. L. 101–239 amended subsec. (c) generally. Prior to amendment, subsec. (c) read as follows: “Under regulations prescribed by the Secretary, income, gain, loss, and deduction with respect to property contributed to the partnership by a partner shall be shared among partners so as to take account of the variation between the basis of the property to the partnership and its fair market value at the time of contribution. Under regulations prescribed by the Secretary, rules similar to the rules of the preceding sentence shall apply to contributions by a partner (using the cash receipts and disbursements method of accounting) of accounts payable and other accrued but unpaid items.”

1984—Subsec. (c). Pub. L. 98–369 amended subsec. (c) generally, substituting provisions directing that, under regulations prescribed by the Secretary, income, gain, loss, and deduction with respect to property contributed to the partnership by a partner be shared among partners so as to take account of the variation between the basis of the property to the partnership and its fair market value at the time of contribution, and that similar rules apply to contributions by a partner (using the cash receipts and disbursements method of accounting) of accounts payable and other accrued but unpaid items for provisions which had directed that, if the partnership agreement so provided, depreciation, depletion, or gain or loss with respect to property contributed to the partnership by a partner would under regulations prescribed by the Secretary, be shared among the partners so as to take account of the variation between the basis of the property to the partnership and its fair market value at the time of contribution, and struck out provisions which had directed that in determining a partner’s distributive share of items described in section 702(a), depreciation, depletion, or gain or loss with respect to property contributed to the partnership by a partner would, except to the extent otherwise provided, be allocated among the partners in the same manner as if such property had been purchased by the partnership and that if the partnership agreement did not provide otherwise, depreciation, depletion, or gain or loss with respect to undivided interests in property contributed to a partnership would be determined as though such undivided interests had not been contributed to the partnership.

1978—Subsec. (d). Pub. L. 95–600 struck out provisions relating to adjusted basis of a partner’s interest.

1976—Subsec. (a). Pub. L. 94–455, § 213(c)(2), substituted “except as otherwise provided in this chapter” for “except as otherwise provided in this section”.

Subsec. (b). Pub. L. 94–455, § 213(d), among other changes, substituted “Determination of distributive share” for “Distributive share determined by income or loss ratio” in heading, in provisions preceding par. (1) “the partner’s interest in the partnership (determined by taking into account all facts and circumstances)” for “his distributive share of taxable income or loss of the partnership, as described in section 702(a)(9), for the taxable year”, and in par. (2) provision relating to a lack of substantial economic effect in a partnership agreement for provisions relating to the partnership agreement’s purpose being the avoidance or evasion of taxes.

Subsec. (c)(2). Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.

Subsec. (d). Pub. L. 94–455, § 213(e), inserted provision relating to the determination of the adjusted basis of a partner’s liability where there is no personal liability and the applicability of such determination where section 465 of this title applies or the principal activity of the partnership is real estate investment.

Subsec. (f). Pub. L. 94–455, § 213(c)(3)(A), added subsec. (f).

Statutory Notes and Related SubsidiariesEffective Date of 2017 Amendment

Pub. L. 115–97, title I, § 13503(b), Dec. 22, 2017, 131 Stat. 2141, provided that: “The amendments made by this section [amending this section] shall apply to partnership taxable years beginning after December 31, 2017.”

Effective Date of 2015 Amendment

Pub. L. 114–74, title XI, § 1102(c), Nov. 2, 2015, 129 Stat. 639, provided that: “The amendments made by this section [amending this section and section 761 of this title] shall apply to partnership taxable years beginning after December 31, 2015.”

Effective Date of 2004 Amendment

Pub. L. 108–357, title VIII, § 833(d)(1), Oct. 22, 2004, 118 Stat. 1592, provided that: “The amendment made by subsection (a) [amending this section] shall apply to contributions made after the date of the enactment of this Act [Oct. 22, 2004].”

Effective Date of 1997 Amendment

Pub. L. 105–34, title X, § 1063(b), Aug. 5, 1997, 111 Stat. 947, provided that:“(1)In general.—The amendment made by subsection (a) [amending this section and section 737 of this title] shall apply to property contributed to a partnership after June 8, 1997.“(2)Binding contracts.—The amendment made by subsection (a) shall not apply to any property contributed pursuant to a written binding contract in effect on June 8, 1997, and at all times thereafter before such contribution if such contract provides for the contribution of a fixed amount of property.”

Effective Date of 1992 Amendment

Pub. L. 102–486, title XIX, § 1937(c), Oct. 24, 1992, 106 Stat. 3033, provided that: “The amendments made by this section [enacting section 737 of this title and amending this section and section 731 of this title] shall apply to distributions on or after June 25, 1992.”

Effective Date of 1989 Amendment

Pub. L. 101–239, title VII, § 7642(b), Dec. 19, 1989, 103 Stat. 2381, provided that: “The amendment made by subsection (a) [amending this section] shall apply in the case of property contributed to the partnership after October 3, 1989, in taxable years ending after such date.”

Effective Date of 1984 Amendment

Pub. L. 98–369, div. A, title I, § 71(c), July 18, 1984, 98 Stat. 589, provided that: “The amendments made by this section [amending this section and sections 613A and 743 of this title] shall apply with respect to property contributed to the partnership after March 31, 1984, in taxable years ending after such date.”

Effective Date of 1978 Amendment

Amendment by Pub. L. 95–600 and enactment of provision set out as a note under this section by section 201(b)(2) of Pub. L. 95–600 applicable to taxable years beginning after Dec. 31, 1978, see section 204(a) of Pub. L. 95–600, set out as a note under section 465 of this title.

Effective Date of 1976 Amendment

Amendment by section 213(c)(2), (c)(3)(A), (d) of Pub. L. 94–455 applicable in the case of partnership taxable years beginning after Dec. 31, 1975, see section 213(f)(1) of Pub. L. 94–455, set out as an Effective Date note under section 709 of this title.

Amendment by section 213(e) of Pub. L. 94–455 applicable to liabilities incurred after Dec. 31, 1976, see section 213(f)(2) of Pub. L. 94–455, set out as an Effective Date note under section 709 of this title.

Transitional Rule for Limitation on Allowance of Losses

Pub. L. 95–600, title II, § 201(b)(2), Nov. 6, 1978, 92 Stat. 2816, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: “In the case of a loss which was not allowed for any taxable year by reason of the last 2 sentences of section 704(d) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as in effect before the date of the enactment of this Act [Nov. 6, 1978]), such loss shall be treated as a deduction (subject to section 465(a) of such Code) for the first taxable year beginning after December 31, 1978. Section 465(a) of such Code (as amended by this section) shall not apply with respect to partnership liabilities to which the last 2 sentences of section 704(d) of such Code (as in effect on the day before the date of enactment of this Act) did not apply because of the provisions of section 213(f)(2) of the Tax Reform Act of 1976 [set out as a note under section 709 of this title].”

Notes of Decisions

Cited in 68 cases (2 in the last 5 years), 1933–2025 · leading case: Southgate Master Fund, L.L.C. Ex Rel. Montgomery Capital Advisors, LLC v. United States, 659 F.3d 466 (5th Cir. 2011).

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Southgate Master Fund, L.L.C. Ex Rel. Montgomery Capital Advisors, LLC v. United States, 659 F.3d 466 (5th Cir. 2011). · cites it 4× “See 26 U.S.C. § 704 (c)(1)(C) ("[T]he term 'built-in loss' means the éxcess of the adjusted basis of the property .”

Superior Trading, LLC v. Comm'r, 728 F.3d 676 (7th Cir. 2013). · cites it 3× “1589 , amending 26 U.S.C. §§ 704 (c), 743, the year after Rogers created Warwick.”

Southgate Master Fund, LLC Ex Rel. Montgomery Capital Advisors, LLC v. United States, 651 F. Supp. 2d 596 (N.D. Tex. 2009). · cites it 6× “Under 26 U.S.C. § 704 (c) and Treas. Reg. § 1.704-3 (a)(7) that built-in loss was allocable to the contributing partner — Cinda.”

Randall v. Loftsgaarden, 478 U.S. 647 (1986). · cites it 2× “26 U. S. C. § 704 (d). Especially attractive from the high-income investor's perspective was the fact that "in a real estate investment such as the one contemplated by Loftsgaarden, the limited partner's basis is not restricted to the amount of his actual investment (the amount…”

Comm'r v. Tufts, 461 U.S. 300 (1983). · cites it 2× “26 U. S. C. § 704 (d) (1976 ed., Supp. V); see Perry, Limited Partnerships and Tax Shelters: The Crane Rule Goes Public, 27 Tax L.”

United States v. F. Thomas Little, United States of Am. v. Peter Chernik, United States of Am. v. Harold Grutchfield, 753 F.2d 1420 (9th Cir. 1985). · cites it 2× “Furthermore, the legislative history of the 1976 Tax Reform Act also refutes appellants’ assertion that the interplay between 26 U.S.C. §§ 704 (a) and 761(c) allows for retroactive allocation in § 706(c)(2)(A) situations.”

Long Term Capital Holdings v. United States, 330 F. Supp. 2d 122 (D. Conn. 2004). · cites it 2× “” Pursuant to 26 U.S.C. § 704 (c), Portfolio allocated the losses to LTCP, and LTCP allocated them to LTCM.”

Gibson Prods. Co. Kell Blvd. v. United States, 637 F.2d 1041 (5th Cir. 1981). · cites it 2× “§ 704(d) [ 26 U.S.C. § 704 (d)], a partner’s basis includes not only the money contributed to capitalization, but also his pro rata share of nonrecourse liabilities incurred by the partnership.”

Est. of Melvin W. Ballantyne, Deceased, Jean S. Ballantyne, Indep. Jean S. Ballantyne, Court. v. Comm'r of Internal Revenue, 341 F.3d 802 (8th Cir. 2003). · cites it 3× “Because BBP was an oral partnership, the Tax Court had looked at all the facts and circumstances surrounding the formation and operation of the partnership to determine whether the oral agreement set the brothers’ respective distributive shares.”

Richard B. LeVine, Inc. v. Higashi, 2005 Cal. Daily Op. Serv. 6602 (Cal. Ct. App. 2005). “( 26 U.S.C. § 704 .) Section 704(a) provides: “A partner’s distributive share of income, gain, loss, deduction, or credit shall, except as otherwise provided in this chapter, be determined by the partnership agreement.”

William Sennett & Sandra Sennett v. Comm'r of Internal Revenue, 752 F.2d 428 (9th Cir. 1985). · cites it 2× “The Commissioner of Internal Revenue disallowed the deduction asserting inter alia that in 1969 Sennett had no basis in an interest in PPP since he had left the partnership in 1968 and is precluded by 26 U.S.C. § 704 (d) and Treas.Reg. § 1.704-l(d) from claiming any loss.”

Boca Investerings P'ship v. United States, 167 F. Supp. 2d 298 (D.D.C. 2001). · cites it 5× “(6) The allocation of the installment tax gain lacked substantial economic effect under 26 U.S.C. § 704 (b) and should be reallocated to American Home Products in accordance with the partners interests in the “partnership.”

Show all 68 citing cases →

— 26 U.S.C. § 704(c)(1)(C) — 1 case

PIMLICO, LLC v. Comm'r of Internal Revenue (2d Cir. 2025).

— 26 U.S.C. § 704(e) — 4 cases

Ray Rasmussen v. John W. Gardner, Sec'y of Health, Educ. & Welfare of the United States of Am., 374 F.2d 589 (10th Cir. 1967).

Ray D. Bateman & Helen C. Bateman v. United States of Am., Dow R. Bateman & Elaine C. Bateman v. United States, 490 F.2d 549 (9th Cir. 1973).

Nickerson v. Ribicoff, 206 F. Supp. 232 (D. Mass. 1962).

Sheerr v. Smith, 148 F. Supp. 536 (E.D. Pa. 1957).

— 26 U.S.C. § 704(e)(1) — 1 case

Ray D. Bateman & Helen C. Bateman v. United States of Am., Dow R. Bateman & Elaine C. Bateman v. United States, 490 F.2d 549 (9th Cir. 1973).

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