Eric Contributes Property with a Fair Market Value of $5,000,000

question 34

Essay

Eric contributes property with a fair market value of $5,000,000 and an adjusted basis of $2,000,000 to EK Partnership.Eric shares in $2,500,000 of partnership debt under the liability sharing rules,giving him an initial adjusted basis for his partnership interest of $4,500,000.One month after the contribution,Eric receives a cash distribution from the partnership of $2,500,000.Eric would not have contributed the property if the partnership had not contractually obligated itself to make the distribution.Assume Eric'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 Eric will recognize because of the $2,500,000 cash distribution?
b.What is the partnership's basis for the property after the distribution?
c.If Eric is unhappy with this result, can you suggest a possible alternative that may provide him with a better answer?

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Definitions:

Foreseeable Misuse

The misuse of a product or service in a manner that could reasonably be predicted by the manufacturer or provider, potentially leading to harm or liability.

Limit Liability

means to legally restrict the amount of money a person or organization can be responsible for paying in the case of a lawsuit or debt.

Injuries

Physical or emotional harm caused to a person or damage to property.

Defective Product

A product that is unsafe, dangerous, or fails to meet normal standards of quality and performance, potentially causing harm to users.