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contributing partner’s adjusted basis in the property at the time
of the contribution. Sec. 723. Each partner’s proportionate
share of the partnership’s basis in its property is referred to
as “inside basis.” Cf. Gindes v. United States, 228 Ct. Cl. 632,
661 F.2d 194, 197 n.9 (1981).
Under section 704(c)(1)(A), items of income, gain, loss, and
deduction with respect to property contributed to a partnership
by a partner are specially allocated among the partners so as to
take account of any variation between the partnership’s basis in
the contributed property and its fair market value at the time of
contribution (this variation is sometimes referred to as built-in
gain or loss). See sec. 1.704-3, Income Tax Regs. (providing
special rules for allocating items between noncontributing and
contributing partners). This rule is generally designed to
prevent transfers of built-in gain or loss from the contributing
partner to the other partners.
If the contributing partner transfers his partnership
interest, built-in gain or loss must be allocated to the
transferee partner as it would have been allocated to the
transferor partner. Sec. 1.704-3(a)(7), Income Tax Regs.
If the partnership has made a one-time election under section
754, adjustments are made with respect to the transferee
partner’s inside basis, essentially so as to approximate the
result of a direct purchase of the property by the transferee
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