B what is the partnerships adjusted basis for the

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South-Western Federal Taxation 2020: Corporations, Partnerships, Estates and Trusts
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Chapter 11 / Exercise 5
South-Western Federal Taxation 2020: Corporations, Partnerships, Estates and Trusts
Raabe/Young/Nellen/Hoffman
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b. What is the partnership’s adjusted basis for the property contributed by James? c. If the partnership sells the property contributed by James for $800,000, how is the tax gain allocated between the partners?
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South-Western Federal Taxation 2020: Corporations, Partnerships, Estates and Trusts
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Chapter 11 / Exercise 5
South-Western Federal Taxation 2020: Corporations, Partnerships, Estates and Trusts
Raabe/Young/Nellen/Hoffman
Expert Verified
b. Partnership’s basis (carryover basis) is $400,000. c. James is allocated $375,000 of the gain and George is allocated gain of $25,000.
84. Palmer contributes property with a fair market value of $4,000,000 and an adjusted basis of $3,000,000 to AP Partnership. Palmer shares in $1,000,000 of partnership debt under the liability sharing rules, giving him an initial adjusted basis for his partnership interest of $4,000,000. One month after the contribution, Palmer receives a cash distribution from the partnership of $2,000,000. Palmer would not have contributed the property if the partnership had not contractually obligated itself to make the distribution. Assume Palmer’s share of partnership liabilities will not change as a result of this distribution. a. Under the IRS’s likely treatment of this transaction, what is the amount of gain or loss that Palmer will recognize because of the $2,000,000 cash distribution? b. What is the partnership’s basis for the property after the distribution? c. If Palmer is unhappy with this result, can you suggest a possible alternative that may provide him with a better answer?
a. Palmer will likely recognize a $500,000 [($4,000,000 – $3,000,000) ´ 50% ] gain on the transaction. Palmer received a cash payment equal to one-half the value of the property he contributed. The IRS would likely treat this as a disguised sale of the property. A disguised sale is presumed to occur when a contractual agreement requires a contribution by a partner to be followed within two years by a specified distribution by the partnership, and the distribution is made without regard to partnership profits. Both these issues occur in this scenario. While Palmer could argue that the intent of this transaction is not to create a disguised sale, it is doubtful that he would be successful. b. The partnership’s total basis for the property is $3,500,000. Its basis for the purchased property is the $2,000,000 cost of the property (the partnership is deemed to have paid for the property). In addition, the partnership has a $1,500,000 carryover basis for the portion of the property that was not “purchased.” c. If Palmer can wait for more than two years to receive the distribution and if the distribution is not contractually guaranteed, the contribution and distribution transactions will be presumed not to be a disguised sale. The distribution will be treated as a normal distribution that will not create capital gain for Palmer unless the distribution amount exceeds the adjusted basis for his partnership interest

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