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Partner and partnership's holding periods in contributed property.


On Mar. 1, 1992, Louise, Diane and Mia formed Allenwood Hardware, a small retail business. Louise contributed cash, Diane contributed equipment that she had owned for two years, and Mia contributed inventory she had acquired three months earlier. Louise is now considering selling her partnership interest to Mia at a profit, and the partnership is considering selling some of the equipment contributed by Diane. They asked a tax adviser to help them determine whether the timing of these transactions had any tax significance, and, if so, when they should complete the transactions.


What is Louise's holding period for her partnership interest? What is Allenwood Hardware's holding period for the equipment contributed by Diane?


A partner's holding period for a partnership interest received in exchange for a contribution of property depends on the character of the contributed property. If the contributed property was a capital asset or property used in a trade or business (within the meaning of Sec. 12311 immediately prior to the contribution, the partner's holding period for the partnership interest will include the holding period of the contributed property. If the partnership interest was received for money or other property, the partner's holding period will commence on the date the interest was acquired, i.e., the date of the contribution. The partnership's holding period for the contributed property will include the contributor's holding period.

There is no clear rule for determining a partner's holding period when the partnership interest was acquired for contributions of more than one type of property or contributions at different times. In such situations the partner may have a split holding period for the partnership interest. For this reason, if the holding period of a partnership interest becomes relevant, the tax adviser should suggest that the transaction be structured so that determining the exact length of the holding period will not be necessary (i.e., in the case of a transfer of an interest, the transfer should occur when the shortest possible holding period would be long enough to be "long-term").

On Mar. 1, 1992, Allenwood Hardware had a two-year holding period for the equipment contributed by Diane. Because this holding period exceeds any threshold relevant to a sale of the equipment, the adviser can advise the partners that an immediate sale would pose no problems.

Because their contributions consisted of cash and inventory (neither of which is a capital asset or Sec. 1231 property), Louise's and Mia's holding periods for their Allenwood Hardware interest began Mar. 1, 1992--the date of their contribution to the partnership. As of that date, Diane had a two-year holding period in the interest she received in exchange for her contribution of Sec. 1231 property.


A partnership's holding period for contributed property includes the holding period of the contributor. A partner's holding period for a partnership interest may include the holding period of contributed property. Louise's holding period in her partnership interest began on Mar. 1, 1987. Allenwood Hardware's holding period for the equipment included Diane's two-year holding period at the time of her contribution.

Editor's note: This case study has been adapted/rom PPC Tax Planning Guide-- Partnerships, 6th edition, by Grover A. Cleveland, William D. Klein, Richard D. Thorsen and Philip H. Welch, published by Practitioners Publishing Company, Fort Worth, Tex., 1992.
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Article Details
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Author:Ellentuck, Albert B.
Publication:The Tax Adviser
Date:Nov 1, 1992
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