Question

Alice, Beth and Carl formed the ABC Partnership early in Year 1. Alice and Beth each contributed $100,000 for their partnership interests, and Carl contributed land having a $100,000 FMV and $160,000 adjusted basis. The land remained a capital asset to the partnership. Late in Year 2, Carl sold his interest in the partnership to Dan for $100,000. Shortly after that transaction, the partnership sold the land to an outside party for $100,000. The partnership has no Sec. 754 election in effect (discussed in Chapter C:10). The partners have asked that you explain the consquences these transactions have to the partnership and the partners, especially Carl and Dan. At a minimum, you should consult the following resources: -IRC Sec. 704 -Reg. Sec. 1.704-3(a)

Answer 1

• Section 1.704-3(a)  (1) states that the purpose of section704(c) is to prevent the shifting of tax consequences among partners with respect to precontribution gain or loss.

• Under section 704(c), a partnership must allocate income, gain, loss, and deductions with respect to property contributed by a partner to the partnership so as to take into account any variation between the adjusted tax basis of the property and its fair market value at the time of contribution.

• This allocation must be made using any reasonable method that is consistent with the purpose of section 704(c).

• Carl will have a built in loss of $60000 ($100000-$160000).
• Soi it will be recognized as loss to Carl.

When Dan becomes partner there is no built in loss as he has paid cash for the partnership interest.

Now when the land is sold than the partnership will recognize $60000 loss.