Category: Partnerships & LLCs; Charitable Contributions
Subject: Donation of Partnership Interest
Title: Part Gift, Part Sale--Donation of Encumbered Partnership Interest
IRC Sections: 751, 1011(b)
Filename: 1258.html
Date Produced: 08/95

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Background
The taxpayers invested in a limited partnership prior to 1986. At present the taxpayers have negative tax capital accounts and substantial shares of partnership nonrecourse liabilities.

Assume the following is a typical partner profile.

Cash invested $10,000
Aggregate deductions 20,000
Capital account (10,000)
Share of debt 100,000
Gross value of interest 150,000

Issue
What happens if the interest as described above is donated to a qualified charity?

Answer
Assuming the charity takes the partnership interest subject to the limited partner's share of partnership debt, the partner will recognize gain in the amount of $40,000 and be entitled to a charitable contribution of $50,000. The gain may or may not be capital gain depending on the operation of Section 751.

Discussion
It is very clear that a charitable contribution of a debt-encumbered asset is treated in part as a contribution and in part as a sale. See Revenue Ruling 75-194, 1975-1 CB 80.

The charitable deduction is the excess of the fair market value of the property over the debts to which it is subject.

The sale portion is driven by the amount of debt on the property. The seller/contributor is deemed to have realized an amount equal to any debt assumed by the donee or subject to which the donee takes the property. In this case, the seller/contributor would have proceeds of $100,000, his share of partnership liabilities.

In addition, the seller's basis must be allocated as between the sale and the contribution as per the amount of debt relieved versus the total value of the contribution. IRC Section 1011(b) and Regulation Section 1.1011-2.

Given the facts set forth above, the seller/contributor would offset his $100,000 sale proceeds against basis of $60,000 producing a gain of $40,000. The allocation of basis is as follows.

$90,000 total basis x $100,000 debt ÷ $150,000 FMV = $60,000.

Collateral Issue
Suppose the partnership interest is subject to debt in excess of its fair market value.

Clearly, there would be no charitable contribution in that case because the partnership would be deemed to have paid more than fair market value for the property. In addition, Section 1011(b) and its related regulation would no longer apply. Accordingly, there would be no need to allocate basis as between a sale and a contribution.

Suppose that the value of the interest in the above example were $90,000 instead of $150,000 and all other factors remained the same. The taxpayer would have a gain of $10,000 equal to the $100,000 debt relief less the taxpayer's basis of $90,000.