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Rev. Rul. 75-194
Charitable contribution of limited partnership interest. Income tax consequences are given for a limited partner's charitable contribution of his entire interest in a limited partnership having liabilities that were not personally assumed by the partnership or any of the partners.
Advice has been requested concerning the Federal income tax consequences of the contribution of an interest in a limited partnership to a charitable organization in the situation described below.
L became a limited partner in a partnership on its formation in 1971. In 1974, L contributed his entire limited partnership interest to a charitable organization described in section 170(c) of the Internal Revenue Code of 1954. On that date all of the partnership liabilities were liabilities on which neither L, the other partners, nor the partnership had assumed any personal liability. Also on that date, L's proportionate share of the value of the partnership assets was greater than his proportionate share of the partnership liabilities and because of partnership losses L's adjusted basis for his partnership interest was less than his proportionate share of the partnership liabilities. At the time of the contribution the partnership had no unrealized receivables or inventory items described in section 751.
Section 170(a) of the Code provides the general rule that there shall be allowed as a deduction any "charitable contribution" (as defined in section 170(c)) payment of which is made within the taxable year.
Section 1.170A-1(c) of the Income Tax Regulations provides, in part, that if a contribution is made in property other than money, the amount of the contribution is the fair market value of the property at the time of the contribution reduced as provided in section 170(e)(1) of the Code.
Section 741 of the Code provides, in pertinent part, that in the case of a sale or exchange of an interest in a partnership, gain or loss shall be recognized to the transferor partner and shall be considered gain or loss from the sale or exchange of a capital asset, except as otherwise provided in section 751.
Section 752(c) of the Code provides that for purposes of section 752, a liability to which property is subject shall, to the extent of the fair market value of such property, be considered as a liability of the owner of the property.
Section 1.752-1(e) of the regulations provides, in part, that where none of the partners have any personal liability with respect to a partnership liability (as in the case of a mortgage on real estate acquired by the partnership without assumption by the partnership or any of the partners of any liability on the mortgage), then all partners, included limited partners, shall be considered as sharing such liability under section 752(c) of the Code in the same proportion as they share the profits.
Section 752(d) of the Code and section 1.752-1(d) of the regulations provide that where there is a sale or exchange of an interest in a partnership, liabilities shall be treated in the same manner as liabilities in connection with the sale or exchange of property not associated with partnerships. For example, if a partner sells his interest in a partnership for $750 cash and at the same time transfers to the purchaser his share of partnership liabilities amounting to $250, the amount realized by the seller on the transaction is $1,000. See also Rev. Rul. 74-40, 1974-1 C.B. 159.
Section 1011(b) of the Code provides the rules for allocating adjusted basis in the case of a "bargain sale" to a charitable organization where a deduction is allowable under section 170 by reason of such sale. Section 1.170A-4(c)(2)(iii) of the regulations defines a "bargain sale" as a transfer of property which is in part a sale or exchange of the property and in part a charitable contribution, as defined in section 170(c), of the property. Sections 1.170A-4(c) and 1.1011-2 contain rules and examples with respect to the computation of gain and the amount of the charitable contribution in the case of a "bargain sale." Section 1.1011-2(a)(3) of the regulations provides that if property is transferred subject to an indebtedness, the amount of the indebtedness must be treated as an amount realized for purposes of determining whether there is a sale or exchange to which section 1011(b) of the Code and section 1.1011-2 apply, even though the transferee does not agree to assume or pay the indebtedness.
Since the value of L's share of the partnership assets at the time he transferred his partnership interest exceeded his share of partnership liabilities at that time, a charitable contribution deduction is allowable under section 170 of the Code, subject to the reductions and limitations set forth therein. At the same time, pursuant to sections 752(d) and 1011(b), the amount of L's share of partnership liabilities at the time of the transfer constitutes an amount realized by L. Based on the foregoing, a bargain sale within the meaning of sections 170 and 1011(b) has occurred.
Accordingly, in the instant case, L has a recognized gain on the transfer equal to the excess of the amount realized by L over that portion of the adjusted basis of L's partnership interest (at the time of the transfer) allocable to the sale under section 1011(b) of the Code. Since the partnership had no unrealized receivables or appreciated inventory items described in section 751, the gain is considered a gain from the sale of a capital asset under section 741.
/1/ Also released as TIR-1372, dated May 5, 1975.