US Code

Public Law 119-73 (01/23/2026)

26 U.S.C. § 704

Partner’s distributive share

(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 share

A 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 general

Under 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 partnerships

Under 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. 73668A Stat. 240Pub. L. 94–455, title II, § 213(c)(2)90 Stat. 1548Pub. L. 95–600, title II, § 201(b)(1)92 Stat. 2816Pub. L. 98–369, div. A, title I, § 71(a)98 Stat. 589Pub. L. 101–239, title VII, § 7642(a)103 Stat. 2379Pub. L. 102–486, title XIX, § 1937(b)(1)106 Stat. 3033Pub. L. 105–34, title X, § 1063(a)111 Stat. 947Pub. L. 108–357, title VIII, § 833(a)118 Stat. 1589Pub. L. 114–74, title XI, § 1102(b)129 Stat. 639Pub. L. 115–97, title I, § 13503(a)131 Stat. 2141(, ; , (3)(A), (d), (e), title XIX, § 1906(b)(13)(A), , , 1834; , , ; , , ; , , ; , , ; , , ; , , ; , , ; , , .)

Editorial Notes

Amendments

Pub. L. 115–972017—Subsec. (d). designated first and second sentences of existing provisions as pars. (1) and (2), respectively, inserted headings, and added par. (3).

Pub. L. 114–742015—Subsec. (e). 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.”

Pub. L. 108–3572004—Subsec. (c)(1)(C). added subpar. (C).

Pub. L. 105–341997—Subsec. (c)(1)(B). substituted “7 years” for “5 years” in introductory provisions.

Pub. L. 102–4861992—Subsec. (c)(1)(B). substituted “is distributed (directly or indirectly)” for “is distributed”.

Pub. L. 101–2391989—Subsec. (c). 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.”

Pub. L. 98–3691984—Subsec. (c). 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.

Pub. L. 95–6001978—Subsec. (d). struck out provisions relating to adjusted basis of a partner’s interest.

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

Pub. L. 94–455, § 213(d)Subsec. (b). , 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.

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

Pub. L. 94–455, § 213(e)section 465 of this titleSubsec. (d). , 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 applies or the principal activity of the partnership is real estate investment.

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

Statutory Notes and Related Subsidiaries

Effective Date of 2017 Amendment

Pub. L. 115–97, title I, § 13503(b)131 Stat. 2141

“The amendments made by this section [amending this section] shall apply to partnership taxable years beginning after .”
, , , provided that:

Effective Date of 2015 Amendment

Pub. L. 114–74, title XI, § 1102(c)129 Stat. 639

section 761 of this title“The amendments made by this section [amending this section and ] shall apply to partnership taxable years beginning after .”
, , , provided that:

Effective Date of 2004 Amendment

Pub. L. 108–357, title VIII, § 833(d)(1)118 Stat. 1592

“The amendment made by subsection (a) [amending this section] shall apply to contributions made after the date of the enactment of this Act [].”
, , , provided that:

Effective Date of 1997 Amendment

Pub. L. 105–34, title X, § 1063(b)111 Stat. 947

“(1)

In general .—

section 737 of this titleThe amendment made by subsection (a) [amending this section and ] shall apply to property contributed to a partnership after .
“(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 , and at all times thereafter before such contribution if such contract provides for the contribution of a fixed amount of property.”
, , , provided that:

Effective Date of 1992 Amendment

Pub. L. 102–486, title XIX, § 1937(c)106 Stat. 3033

section 737 of this titlesection 731 of this title“The amendments made by this section [enacting and amending this section and ] shall apply to distributions on or after .”
, , , provided that:

Effective Date of 1989 Amendment

Pub. L. 101–239, title VII, § 7642(b)103 Stat. 2381

“The amendment made by subsection (a) [amending this section] shall apply in the case of property contributed to the partnership after , in taxable years ending after such date.”
, , , provided that:

Effective Date of 1984 Amendment

Pub. L. 98–369, div. A, title I, § 71(c)98 Stat. 589

“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 , in taxable years ending after such date.”
, , , provided that:

Effective Date of 1978 Amendment

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

Effective Date of 1976 Amendment

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

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

Transitional Rule for Limitation on Allowance of Losses

Pub. L. 95–600, title II, § 201(b)(2)92 Stat. 2816Pub. L. 99–514, § 2100 Stat. 2095

section 709 of this title“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 []), such loss shall be treated as a deduction (subject to section 465(a) of such Code) for the first taxable year beginning after . 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 ].”
, , , as amended by , , , provided that: