---
kind: "section"
citation: "26 U.S.C. § 704"
title: "26"
title_heading: "Internal Revenue Code"
number: "704"
heading: "Partner’s distributive share"
release: "119-102"
date: "2026-07-12"
url: "https://uscodex.org/usc/26/704"
units:
  - "Subtitle A — Income Taxes"
  - "Chapter 1 — Normal Taxes and Surtaxes"
  - "Subchapter K — Partners and Partnerships"
  - "Part I — Determination of Tax Liability"
---

# §704. Partner’s distributive share

- (a) **Effect of partnership agreement—** A [partner](/usc/26/761.md?p=b)’s distributive share of income, gain, loss, deduction, or credit shall, except as otherwise provided in this chapter, be determined by the [partnership](/usc/26/761.md?p=a) agreement.
- (b) **Determination of distributive share—** A [partner](/usc/26/761.md?p=b)’s distributive share of income, gain, loss, deduction, or credit (or item thereof) shall be determined in accordance with the [partner](/usc/26/761.md?p=b)’s [interest](/usc/26/856.md?p=f-1) in the [partnership](/usc/26/761.md?p=a) (determined by taking into account all facts and circumstances), if—
  - (1) the [partnership](/usc/26/761.md?p=a) agreement does not provide as to the [partner](/usc/26/761.md?p=b)’s distributive share of income, gain, loss, deduction, or credit (or item thereof), or
  - (2) the allocation to a [partner](/usc/26/761.md?p=b) 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](/usc/26/317.md?p=a) contributed to the [partnership](/usc/26/761.md?p=a) by a [partner](/usc/26/761.md?p=b) shall be shared among the [partners](/usc/26/761.md?p=b) so as to take account of the variation between the basis of the [property](/usc/26/317.md?p=a) to the [partnership](/usc/26/761.md?p=a) and its fair market [value](/usc/26/851.md?p=c-4) at the time of contribution,
    - (B) if any [property](/usc/26/317.md?p=a) so contributed is distributed (directly or [indirectly](/usc/26/101.md?p=a-3-B)) by the [partnership](/usc/26/761.md?p=a) (other than to the contributing [partner](/usc/26/761.md?p=b)) within 7 years of being contributed—
      - (i) the contributing [partner](/usc/26/761.md?p=b) shall be treated as recognizing gain or loss (as the case may be) from the sale of such [property](/usc/26/317.md?p=a) in an amount equal to the gain or loss which would have been allocated to such [partner](/usc/26/761.md?p=b) under [subparagraph (A)](#c-1-A) by reason of the variation described in [subparagraph (A)](#c-1-A) if the [property](/usc/26/317.md?p=a) had been sold at its fair market [value](/usc/26/851.md?p=c-4) 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](/usc/26/317.md?p=a) had been sold by the [partnership](/usc/26/761.md?p=a) to the distributee, and
      - (iii) appropriate adjustments shall be made to the adjusted basis of the contributing [partner](/usc/26/761.md?p=b)’s [interest](/usc/26/856.md?p=f-1) in the [partnership](/usc/26/761.md?p=a) and to the adjusted basis of the [property](/usc/26/317.md?p=a) distributed to reflect any gain or loss recognized under this subparagraph, and
    - (C) if any [property](/usc/26/317.md?p=a) 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](/usc/26/761.md?p=b), and
      - (ii) except as provided in regulations, in determining the amount of items allocated to other [partners](/usc/26/761.md?p=b), the basis of the contributed [property](/usc/26/317.md?p=a) in the hands of the [partnership](/usc/26/761.md?p=a) shall be treated as being equal to its fair market [value](/usc/26/851.md?p=c-4) at the time of contribution.

    For purposes of [subparagraph (C)](#c-1-C), the term “built-in loss” means the excess of the adjusted basis of the [property](/usc/26/317.md?p=a) (determined without regard to [subparagraph (C)(ii)](#c-1-C-ii)) over its fair market [value](/usc/26/851.md?p=c-4) 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](/usc/26/317.md?p=a) contributed by a [partner](/usc/26/761.md?p=b) (hereinafter referred to as the “contributing [partner](/usc/26/761.md?p=b)”) is distributed by the [partnership](/usc/26/761.md?p=a) to another [partner](/usc/26/761.md?p=b), and
    - (B) other [property](/usc/26/317.md?p=a) of a like kind (within the meaning of [section 1031](/usc/26/1031.md)) is distributed by the [partnership](/usc/26/761.md?p=a) to the contributing [partner](/usc/26/761.md?p=b) not later than the earlier of—
      - (i) the 180th day after the date of the distribution described in [subparagraph (A)](#c-2-A), or
      - (ii) the [due date](/usc/26/430.md?p=k-6-B) (determined with regard to extensions) for the contributing [partner](/usc/26/761.md?p=b)’s return of the tax imposed by this chapter for the taxable year in which the distribution described in [subparagraph (A)](#c-2-A) occurs,

    then to the extent of the [value](/usc/26/851.md?p=c-4) of the [property](/usc/26/317.md?p=a) described in [subparagraph (B)](#c-2-B), [paragraph (1)(B)](#c-1-B) shall be applied as if the contributing [partner](/usc/26/761.md?p=b) had contributed to the [partnership](/usc/26/761.md?p=a) the [property](/usc/26/317.md?p=a) described in [subparagraph (B)](#c-2-B).

  - (3) **Other rules—** Under regulations prescribed by the Secretary, rules similar to the rules of [paragraph (1)](#c-1) shall apply to contributions by a [partner](/usc/26/761.md?p=b) (using the [cash](/usc/26/856.md?p=c-5-K) receipts and disbursements method of accounting) of accounts payable and other accrued but unpaid items. Any reference in paragraph [(1)](#c-1) or [(2)](#c-2) to the contributing [partner](/usc/26/761.md?p=b) shall be treated as including a reference to any successor of such [partner](/usc/26/761.md?p=b).
- (d) **Limitation on allowance of losses—**
  - (1) **In general—** A [partner](/usc/26/761.md?p=b)’s distributive share of [partnership](/usc/26/761.md?p=a) loss (including capital loss) shall be allowed only to the extent of the adjusted basis of such [partner](/usc/26/761.md?p=b)’s [interest](/usc/26/856.md?p=f-1) in the [partnership](/usc/26/761.md?p=a) at the end of the [partnership](/usc/26/761.md?p=a) 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](/usc/26/761.md?p=a) year in which such excess is repaid to the [partnership](/usc/26/761.md?p=a).
  - (3) **Special rules—**
    - (A) **In general—** In determining the amount of any loss under [paragraph (1)](#d-1), there shall be taken into account the [partner](/usc/26/761.md?p=b)’s distributive share of amounts described in paragraphs [(4)](/usc/26/702.md?p=a-4) and [(6)](/usc/26/702.md?p=a-6) of section 702(a).
    - (B) **Exception—** In the case of a charitable contribution of [property](/usc/26/317.md?p=a) whose fair market [value](/usc/26/851.md?p=c-4) exceeds its adjusted basis, [subparagraph (A)](#d-3-A) shall not apply to the extent of the [partner](/usc/26/761.md?p=b)’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](/usc/26/761.md?p=a) [interest](/usc/26/856.md?p=f-1) created by gift, the distributive share of the donee under the [partnership](/usc/26/761.md?p=a) agreement shall be includible in his gross income, except to the extent that such share is determined without allowance of reasonable [compensation](/usc/26/414.md?p=n-5-C-iii) for services rendered to the [partnership](/usc/26/761.md?p=a) 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](/usc/26/761.md?p=b) in the earnings of the [partnership](/usc/26/761.md?p=a) 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](/usc/26/856.md?p=f-1) 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](/usc/26/851.md?p=c-4) of the purchased [interest](/usc/26/856.md?p=f-1) 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](/usc/26/761.md?p=b)’s [interest](/usc/26/856.md?p=f-1), see [section 706(c)(2)](/usc/26/706.md?p=c-2).

## Source credit

(Aug. 16, 1954, ch. 736, 68A Stat. 240; Pub. L. 94–455, title II, § 213(c)(2), (3)(A), (d), (e), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1548, 1834; Pub. L. 95–600, title II, § 201(b)(1), Nov. 6, 1978, 92 Stat. 2816; Pub. L. 98–369, div. A, title I, § 71(a), July 18, 1984, 98 Stat. 589; Pub. L. 101–239, title VII, § 7642(a), Dec. 19, 1989, 103 Stat. 2379; Pub. L. 102–486, title XIX, § 1937(b)(1), Oct. 24, 1992, 106 Stat. 3033; Pub. L. 105–34, title X, § 1063(a), Aug. 5, 1997, 111 Stat. 947; Pub. L. 108–357, title VIII, § 833(a), Oct. 22, 2004, 118 Stat. 1589; Pub. L. 114–74, title XI, § 1102(b), Nov. 2, 2015, 129 Stat. 639; Pub. L. 115–97, title I, § 13503(a), Dec. 22, 2017, 131 Stat. 2141.)

## Notes

### Editorial Notes

### Amendments

2017—Subsec. (d). Pub. L. 115–97 designated first and second sentences of existing provisions as pars. (1) and (2), respectively, inserted headings, and added par. (3).

2015—Subsec. (e). Pub. L. 114–74 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.”

2004—Subsec. (c)(1)(C). Pub. L. 108–357 added subpar. (C).

1997—Subsec. (c)(1)(B). Pub. L. 105–34 substituted “7 years” for “5 years” in introductory provisions.

1992—Subsec. (c)(1)(B). Pub. L. 102–486 substituted “is distributed (directly or indirectly)” for “is distributed”.

1989—Subsec. (c). Pub. L. 101–239 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.”

1984—Subsec. (c). Pub. L. 98–369 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.

1978—Subsec. (d). Pub. L. 95–600 struck out provisions relating to adjusted basis of a partner’s interest.

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

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

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

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

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

### Statutory Notes and Related Subsidiaries

### Effective Date of 2017 Amendment

Pub. L. 115–97, title I, § 13503(b), Dec. 22, 2017, 131 Stat. 2141, provided that: “The amendments made by this section [amending this section] shall apply to partnership taxable years beginning after December 31, 2017.”

### Effective Date of 2015 Amendment

Pub. L. 114–74, title XI, § 1102(c), Nov. 2, 2015, 129 Stat. 639, provided that: “The amendments made by this section [amending this section and section 761 of this title] shall apply to partnership taxable years beginning after December 31, 2015.”

### Effective Date of 2004 Amendment

Pub. L. 108–357, title VIII, § 833(d)(1), Oct. 22, 2004, 118 Stat. 1592, provided that: “The amendment made by subsection (a) [amending this section] shall apply to contributions made after the date of the enactment of this Act [Oct. 22, 2004].”

### Effective Date of 1997 Amendment

Pub. L. 105–34, title X, § 1063(b), Aug. 5, 1997, 111 Stat. 947, provided that: In general.—The amendment made by subsection (a) [amending this section and section 737 of this title] shall apply to property contributed to a partnership after June 8, 1997. Binding contracts.—The amendment made by subsection (a) shall not apply to any property contributed pursuant to a written binding contract in effect on June 8, 1997, and at all times thereafter before such contribution if such contract provides for the contribution of a fixed amount of property.”

### Effective Date of 1992 Amendment

Pub. L. 102–486, title XIX, § 1937(c), Oct. 24, 1992, 106 Stat. 3033, provided that: “The amendments made by this section [enacting section 737 of this title and amending this section and section 731 of this title] shall apply to distributions on or after June 25, 1992.”

### Effective Date of 1989 Amendment

Pub. L. 101–239, title VII, § 7642(b), Dec. 19, 1989, 103 Stat. 2381, provided that: “The amendment made by subsection (a) [amending this section] shall apply in the case of property contributed to the partnership after October 3, 1989, in taxable years ending after such date.”

### Effective Date of 1984 Amendment

Pub. L. 98–369, div. A, title I, § 71(c), July 18, 1984, 98 Stat. 589, provided that: “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 March 31, 1984, in taxable years ending after such date.”

### Effective Date of 1978 Amendment

Amendment by Pub. L. 95–600 and enactment of provision set out as a note under this section by section 201(b)(2) of Pub. L. 95–600 applicable to taxable years beginning after Dec. 31, 1978, see section 204(a) of Pub. L. 95–600, set out as a note under section 465 of this title.

### Effective Date of 1976 Amendment

Amendment by section 213(c)(2), (c)(3)(A), (d) of Pub. L. 94–455 applicable in the case of partnership taxable years beginning after Dec. 31, 1975, see section 213(f)(1) of Pub. L. 94–455, set out as an Effective Date note under section 709 of this title.

Amendment by section 213(e) of Pub. L. 94–455 applicable to liabilities incurred after Dec. 31, 1976, see section 213(f)(2) of Pub. L. 94–455, set out as an Effective Date note under section 709 of this title.

### Transitional Rule for Limitation on Allowance of Losses

Pub. L. 95–600, title II, § 201(b)(2), Nov. 6, 1978, 92 Stat. 2816, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: “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 [Nov. 6, 1978]), such loss shall be treated as a deduction (subject to section 465(a) of such Code) for the first taxable year beginning after December 31, 1978. 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 section 709 of this title].”