Question

Suppose Joe contributes land (basis = $40,000, FMV = $50,000) to a partnership in exchange for a partnership interest and three years later the partnership distributes the land to Susan (at the time of the distribution the land’s basis = $40,000, and FMV = $70,000). The land is a capital asset to Joe and the partnership, but an ordinary asset to Susan. Joe and Susan are both partners in the partnership. If Joe owns 25% and Susan owns 60% of the partnership at the time of the distribution, how much gain will Joe have to recognize, what will its character be, what will be Joe’s basis in his partnership interest, and what is Susan’s basis in the property (assume Susan’s basis in the partnership interest before the distribution is $100,000)? Would your answer be any different if Susan only owned 40%? What would your answer be if Susan owned 40% and the FMV at the time of the distribution was only $45,000? What would your answer be if the property’s FMV at the time of the contribution was only $35,000, Susan owned 40% of the partnership, and the FMV at the time of the distribution was only $30,000? What would your answer be if Susan owned 60% of the partnership?

Answer 1

The gain to be recognized by Joe
Fair market value at the time of distribution	70000
Less: Land's Basis	40000
Total gain	30000
	Gain
Share of Joe	7500
Joe's basis in the partnership interest
Share of partnership	4500
Joe's basis in the partnership	1500
Susan's Basis in the partnership	3000
In case Susan only owned 40%
The FMV at the time of distribution is $45000
Net gain
FMV	45000
Less: Land's Basis	40000
Total gain	5000
Share of Joe's gain @20% being half of Susan's as per the capital base	1000
Share of Susan's gain @40%	2000
FMV at the time of distribution $30000
FMV	30000
Less: Land's Basis	40000
Total gain / (loss)	(10,000.00)