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?