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Can a husband and wife form a family investment partnership on a tax-free basis, if each contributes appreciated securities?

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Michael Cohen
If each contributes his/her own appreciated securities, it is a taxable event because of the investment company rules under §721(b), unless each spouse is contributing a diversified portfolio (no more than 25% of the value in one security and no more than 50% of the value in five or fewer securities). This trap can be avoided by one spouse being the sole contributor, creation of a joint tenancy between spouses prior to the contribution, or the spouses exchanging securities between themselves so that each is contributing an identical portfolio.

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