Question

4). Andrew contributes property with a fair market value of $6,000,000 and an adjusted basis of $2,000,000 to AP Partnership. Andrew shares in $3,000,000 of partnership debt under the liability sharing rules, giving him an initial adjusted basis for his partnership interest of $5,000,000. One month after the contribution, Andrew receives a cash distribution from the partnership of $3,000,000. Andrew would not have contributed the property if the partnership had not contractually obligated itself to make the distribution. Assume Andrew'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 Andrew will recognize because of the $3,000,000 cash distribution? b. What is the partnership's basis for the property after the distribution? c. If Andrew is unhappy with this result, can you suggest a possible alternative that may provide him with a better answer?

Answer 1

a. Andrew received the Cash distribution ($3m) as was agreed with the Partnership prior to his contribution of property. The property was valued for an adjusted basis of $2m.

IRS is likely to treat the property as having been disposed for $5m (3m cash + 2m basis) while the FMV was $6m. Thus, $1m can be taken as a loss incurred upon the transaction.

b. The Partnership shall take the property for the basis of $5m (=3m +2m)

c. As an alternative, Andrew could offer the property at a lesser value and could have undertaken a higher amount of Liability to arrive at the same basis amount. Thus, his loss recognition amount could have been higher yielding him tax benefits.