Section 721 Case Study

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The general rule of Internal Revenue Code Section 721 contains that no gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership.(1. 721(a)). This rule applies when partners make contribution to the partnership. In this section, the property includes various types of assets. Such as cash, inventory, land, equipment, obligations, etc. During the time when two or more partners form a partnership, partners may contribute property to the partnership to exchange for interest. Even the partnership has existed or in operation, partners may also contribute property for the return of interest. In this situation, the section 721 …show more content…
But in different situation, the court made different decisions. This is because of the section 721 has limitation and exemption on the general rule.
In the first case, Petitioner received 2% of Crescent Holding’s capital interest and provide service as CEO. According to Section 721 (a), when partner transfer property to the partnership, there is no gain or loss should be recognized. The service is not a kind of property and contribution of service does not meet Section 721(a). Also base on Section 721(b), when partner provide service to partnership in exchange for interest should recognize gain or loss during the transaction. So in case one, Petitioner should recognize the gain or loss at the fair market value of the 2% interest of income.
In case two, how do we know if the gain or loss should be recognized? We have to find out whether this transaction is a sale or contribution. According to section 721(b), if partners transfer property to partnership result any kind receipt such as cash or other promise of payment, then this transaction should not be considered as contribution. Instead, it should be treated as a sale. Any gain or loss occur in the sales should be recognized. JWC transfer property to partnership, cash receipt directly received after transaction. Which means JWC exchange property for cash, it’s a sales transaction between partner and partnership. Also when JWC sold interest
…show more content…
The Petitioner severed as CEO but still need to report the gain or loss allocated to the 2% interest of partnership. In the situation when partners sell property to the partnership for certain price or the partner allow partnership to use the property but still keep ownership. In these cases, the section 721 could not apply and gain or loss realized in such transaction will be realized. For example in the second case and the last case, partner receive cash payment after transfer, the gain was recognized case two but not in case three. The main difference is the type of transaction. When partner receive cash after transfer property in Jacobson case, it treated as sale and the gain or loss need to be recognize. Unlike case two, partner only receive cash payment as reimbursement for development cost in Park Realty case, nonrecognition rule still applied because the land was contributed to partnership by

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