Helpful Reverse 704(c) Guidance from the IRS
"When a partner contributes property to a partnership which has increased or decreased in value, the property has an inherent built-in gain or built-in loss that arose during the period in which the partner owned the property outside of the partnership. Thus, at the time of contribution, the property has a tax basis to the partnership that differs from its fair market value (FMV). As was discussed in Chapter 1, the property’s FMV at the time of contribution is what is called the “book value.” Where the “book value” (FMV at contribution) and the “tax basis” (basis carried over from the contributing partner) differ, the property is referred to as “section 704(c) property.”
"The goal of IRC section 704(c) is to prevent the shifting of tax consequences (gain, loss, and deductions) with respect to appreciated or depreciated property contributed by a partner to a partnership. It upholds the assignment of income principle by requiring the contributing partner to be taxed on the portion of the gain or loss that arose prior to the property’s contribution to the partnership."
http://www.irs.gov/businesses/partnerships/article/0,,id=134692,00.html