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:

Historical Background

The historical context or past events leading to the current state or understanding of a subject, providing insight into its development and changes over time.

Regulation

The act of controlling, governing, or managing activities, especially through rules and standards set by authorities or bodies.

Pricing Algorithms

Computer-based methods used to determine the selling price of goods or services, often based on factors such as demand, competition, and cost.

Price-fixing

An agreement among competitors to raise, lower, or stabilize prices or competitive terms.