Final answer:
The treatment of contributed appreciated property to a partnership requires special allocation rules for the built-in gain or loss, following the substantial economic effect test or alternate tests specified by the IRS. The allocation must reflect the partners' economic agreement and interests within the partnership, and must be well-documented to comply with tax rules.
Step-by-step explanation:
The treatment of contributed appreciated property in a partnership and its corresponding special allocation of built-in gain or loss involves specific tax rules under the Internal Revenue Code. When a partner contributes property to the partnership that has appreciated in value (meaning its fair market value is greater than its tax basis), this creates a built-in gain. If the partnership were to immediately sell the contributed property, the built-in gain would typically be taxable to the contributing partner.
Any special allocation of this built-in gain or loss must be consistent with the substantial economic effect test or meet certain alternate tests. Basically, the special allocation should be made in a manner that reflects the economic arrangement agreed upon by the partners. The IRS allows some flexibility in how partnerships allocate the built-in gains and losses as long as these allocations are made in accordance with the partners' interests in the partnership.
It is crucial to properly document these allocations and ensure that they comply with the partnership agreement and IRS regulations to avoid any tax complications.