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

question 89

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. 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:

Scienter

In legal contexts, scienter is the knowledge or intent to deceive, defraud, or violate statutes or regulations.

Representations

Statements or assertions made by one party to another, often regarding the condition or status of something, which can impact agreements or contracts.

Innocent Misrepresentation

A misrepresentation made without fault or knowledge of its falsity, which may allow the misled party to void the contract but not claim damages.

Intentionally Deceptive

Deliberately misleading actions or statements designed to make someone believe something that is not true.