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

question 127

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 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?

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Definitions:

Current Liabilities

Current liabilities are short-term financial obligations that a company is expected to pay within one year.

Leased Assets

Items of property or equipment that a company or individual rents under a lease agreement, rather than owns outright.

Current Assets

Assets that are expected to be converted into cash, sold, or consumed within one year or within the normal operating cycle of a business.

Operating Activities

Activities that relate to the day-to-day functions of a company involved in producing and selling its goods and services.