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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 that 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?
Swap Contract
A derivative contract through which two parties exchange financial instruments, such as interest rates, commodities, or foreign exchange.
Forward Contract
A non-standardized contract between two parties to buy or sell an asset at a specified future date for a price agreed upon today.
Underlying Asset
The financial asset or instrument that determines the value of a derivative instrument or contract, such as stocks, bonds, commodities, or currencies.
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