# P3 defect 13, named regression 5 (built_in_gain_is_fixed_at_contribution_not_book_cost).
id = "assets-built-in-gain-fixed-at-contribution"
title = "The §704(c) built-in gain is fixed at contribution, whatever the book cost becomes"
rule = "The built-in gain on contributed property is the excess of its book value (its fair market value) over the contributing partner's adjusted tax basis upon contribution; correcting the book cost later never changes the figure at contribution."
status = "AUTHORITY"
sources = [
  "Treas. Reg. §1.704-3(a)(3)(i)-(ii)",
]
tags = ["fixed-assets", "tax-basis", "704c"]

[setup]
currency = "USD"
fiscal_year_start = "01-01"
basis = "accrual"
rounding = "half-away-from-zero"

[[setup.accounts]]
code = "1500"
name = "Equipment"
type = "asset"

[[setup.accounts]]
code = "1510"
name = "Accumulated Depreciation"
type = "asset"

[[setup.accounts]]
code = "3000"
name = "Capital"
type = "equity"

[[setup.accounts]]
code = "6200"
name = "Depreciation Expense"
type = "expense"

# A press contributed from business use: worth 1,000.00, held by the member
# at an adjusted basis of 400.00. (Nothing rounds here.)
[[setup.assets]]
id = "press"
description = "Press"
cost = "1000.00"
salvage = "0.00"
life_months = 36
in_service = "2026-01-01"
method = "straight_line"
cost_account = "1500"
accumulated_account = "1510"
expense_account = "6200"
acquired_by = 1
basis = { rule = "carryover_723", contributor_adjusted_basis = "400.00", fmv_at_contribution = "1000.00" }

[[events]]
date = "2026-01-01"
description = "Press contributed at its value"
lines = [
  { account = "1500", side = "debit", amount = "1000.00" },
  { account = "3000", side = "credit", amount = "1000.00" },
]

# Hand check: §723 basis 400.00, depreciated from (carryover); built-in
# gain 1,000.00 - 400.00 = 600.00.
[[expect]]
query = "asset_basis"
asset = "press"
after = 1
values = { tax_basis_723 = "400.00", depreciable_basis = "400.00", built_in_gain_704c = "600.00" }

# The book cost corrected to 1,100.00 (costs to bring it to use): the gain
# at contribution stays 1,000.00 - 400.00 = 600.00, not 700.00.
[[changes]]
after = 1
correct_asset = { asset = "press", cost = "1100.00", reason = "costs to bring it to use" }

[[expect]]
query = "asset_basis"
asset = "press"
values = { tax_basis_723 = "400.00", fmv_at_contribution = "1000.00", built_in_gain_704c = "600.00" }