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TITLE 26-INTERNAL REVENUE CODE after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455. set out as an Effective Date of 1976 Amendment note under section 2 of this title. Amendment of subsec. (a)(2)(O) by section 2115(c)(2) of Pub. L. 94-455 effective on Jan. 1, 1975 and applicable to taxable years ending after Dec. 31, 1974, see section 2115(f) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 613A of this title. ErrEcrIVE DATE OF 1975 Aim:E wrr Amendment by Pub. L. 94-12 effective on Jan. 1, 1975, to apply to taxable years ending after Dec. 31, 1974, see section 501(c) of Pub. L. 94-12, set out as an Effective Date note under section 613A of this title. Er ncxvE DATE or 1969 AMmNDrNT Amendment by Pub. L. 91-172 applicable with re- spect to exploration expenditures paid or incurred after Dec. 31, 1969, see section 504(d)(1) of Pub. L. 91- 172, set out as an Effective Date note under section 243 of this title. E crIvT DATE OF 1966 AMEmmENT Amendment of section by Pub. L. 89-570 applicable to taxable years ending after Sept. 12, 1966, but only in respect of expenditures paid or incurred after such date, see section 3 of Pub. L, 89-570, set out as an Ef- fective Date note under section 617 of this title. CRoss REFERmNcEs Determination of basis of partner's interest, see sec- tion 705 of this title. SECTION REFERRED TO IN OTHE SECTIONS This section is referred to in section 705, 901 of this title. § 704. Partner's distributive share (a) Effect of partnership agreement A partner's distributive share of income, gain, loss, deduction, or credit shall, except as other- wise provided in this chapter, be determined by the partnership agreement. (b) Determination of distributive share A partner's distributive share of income, gain, loss, deduction, or credit (or item thereof) shall be determined in accordance with the partner's interest in the partnership (determined by taking into account all facts and circum- stances), if-- (1) the partnership agreement does not pro- vide as to the partner's distributive share of income, gain, loss, deduction, or credit (or item thereof), or (2) the allocation to a partner under the agreement of income, gain, loss, deduction, or credit (or item thereof) does not have sub- stantial economic effect. (c) Contributed property (1) General rule In determining a partner's distributive share of items described in section 702(a), de- preciation, depletion, or gain or loss with re- spect to property contributed to the partner- ship by a partner shall, except to the extent otherwise provided in paragraph (2) or (3), be allocated among the partners in the same manner as if such property had been pur- chased by the partnership. (2) Effect of partnership agreement If the partnership agreement so provides, depreciation, depletion, or gain or loss with respect to property contributed to the part- nership by a partner shall, under regulations prescribed by the Secretary, be shared among the partners so as to take account of the vari- ation between the basis of the property to the partnership and its fair market value at the time of contribution. (3) Undivided interests If the partnership agreement does not pro- vide otherwise, depreciation, depletion, or gain or loss with respect to undivided inter- ests in property contributed to a partnership shall be determined as though such undivided interests had not been contributed to the partnership. This paragraph shall apply only if all the partners had undivided interests in such property prior to contribution and their interests in the capital and profits of the partnership correspond with such undivided interests. (d) Limitation on allowance of losses A partner's distributive share of partnership loss (including capital loss) shall be allowed only to the extent of the adjusted basis of such partner's interest in the partnership at the end of the partnership year in which such loss oc- curred. Any excess of such loss over such basis shall be allowed as a deduction at the end of the partnership year in which such excess is repaid to the partnership. For purposes of this subsection, the adjusted basis of any partner's interest in the partnership shall not include any portion of any partnership liability with re- spect to which the partner has no personal li- ability. The preceding sentence shall not apply with respect to any activity to the extent that section 465 (relating to limiting deductions to amounts at risk in case of certain activities) ap- plies, nor shall it apply to any partnership the principal activity of which is investing in real property (other than mineral property). (e) Family partnerships (1) Recognition of interest created by purchase or gift A person shall be recognized as a partner for purposes of this subtitle if he owns a cap- ital interest in a partnership in which capital is a material income-producing factor, wheth- er or not such interest was derived by pur- chase or gift from any other person. (2) Distributive share of donee includible in gross income In the case of any partnership interest cre- ated by gift, the distributive share of the donee under the partnership agreement shall be includible in his gross income, except to the extent that such share is determined without allowance of reasonable compensa- tion for services rendered to the partnership by the donor, and except to the extent that the portion of such share attributable to do- nated capital is proportionately greater than the share of the donor attributable to the donor's capital. The distributive share of a partner in the earnings of the partnership shall not be diminished because of absence due to military service. (3) Purchase of interest by member of family For purposes of this section, an interest purchased by one member of a family from § 704 Page 484