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

question 2

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 $1,000,000 of partnership debt under the liability sharing rules, giving him an initial adjusted basis for his partnership interest of $4,000,000. 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:

Ownership

The state or fact of exclusive rights and control over property, which can be an object, land/real estate, intellectual property, or some other kind of property.

Debit Balance

An accounting balance where the sum of debits exceeds the sum of credits, typical for assets and expenses.

Sales Tax

A tax paid to a governing body for the sales of certain goods and services usually collected by the retailer at the point of purchase.

Account Receivable

A financial record of the money owed to a business by its customers for goods or services delivered on credit.