In the "old days," one partner could contribute cash, and another partner could contribute an equal value of
appreciated property with no subsequent record-keeping requirements. Future depreciation deductions and gains on sale of the property could be allocated to both partners equally, thereby shifting income from one taxpayer to another. A partner in a lower tax bracket (or with expiring net operating losses) could report the share of the gain on sale of the asset with a relatively low corresponding tax burden.
Section 704(c)(1)(A) was added to the Code to ensure that the partner contributing the property pays taxes on any built-in gain. This prevents income shifting among taxpayers and loss of revenue to the U.S. Treasury. There is no corresponding provision for S corporations—gains, losses, and depreciation expenses are allocated among the shareholders without regard to any built-in appreciation on contributed property.
Assume a new partner or shareholder owns land valued at $180,000 in which the tax basis is $120,000. How would the "incidence of taxation" differ for the entities and owners if (1) the owner (partner or shareholder) sold the property and contributed the $180,000 proceeds or if (2) the owner (partner or shareholder) contributed that same property with the entity selling it for $180,000? What theory of partnership taxation supports this difference in treatment? Further, discuss what ethical issues are present in the scenario, and provide a Biblical perspective to frame these issues.
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