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?

---

Definitions:

Substitute Good

A product or service that a consumer can use in place of another to satisfy the same need or desire.

LRMC

Long-Run Marginal Cost, which refers to the change in total production costs that comes from producing one additional unit of a good or service when all inputs are variable.

SRMC

Short-Run Marginal Cost (SRMC) is the cost to produce one additional unit of output when some inputs are fixed.

Grocery Store

A retail establishment that sells food and other household items.