Palmer Contributes Property with a Fair Market Value of $4,000,000

question 97

Essay

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 $3,000,000 of partnership debt under the liability sharing rules, giving him an initial adjusted basis for his partnership interest of $6,000,000.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.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
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?

---

Definitions:

Buying Decision Process

A series of steps a consumer goes through before, during, and after purchasing a product or service.

Prospective Buyer

A potential customer who has shown interest in a company's product or service and is considered likely to make a purchase.

FAB Selling Technique

A sales strategy emphasizing the Features, Advantages, and Benefits of a product or service to persuade potential customers.

Regular Cola

A standard, traditional flavor of cola beverage, not characterized by any unique or distinguishing ingredient adaptations.