Question

Eric contributes property with a fair market value of $5,000,000 and an adjusted basis of $2,000,000 to a Partnership for a 20% Partnership interest. Eric shares in $2,500,000 of partnership debt under the liability sharing rules, giving him an initial adjusted basis for his partnership interest of $4,500,000. One month after the contribution, Eric receives a cash distribution from the partnership of $2,500,000. Eric would not have contributed the property if the partnership had not contractually obligated itself to make the distribution. Assume Eric’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 Eric will recognize because of the $2,500,000 cash distribution?

b. What is the partnership’s basis for the property after the distribution? What is Eric’s basis in his partnership interest after the distribution?

c. If Eric is unhappy with this result, can you suggest a possible alternative that may provide him with a better answer?

Answer 1

a. The amount of gain or loss that Eric will recognize because of the $2500000 cash distribution.
Cash Distributed	$2,500,000
Adjusted basis of Eric for property contributed	$2,000,000
Gain on distribution	$500,000
As the cash distribution exceed the adjusted basis of Eric in Partnership,
Eric will recognize gain on distribution
b. The Partnership's basis for the property after the distribution
Adjusted basis of property	$2,000,000
Gain on distribution	$500,000
Partnership's basis for the property after the distribution	$2,500,000
Eric's basis in his partnership interest after the distribution
Adjusted basis for partnership interest before distribution	$4,500,000
Less: Cash distribution	$2,500,000
Adjusted basis for partnership interest after distribution	$2,000,000

c. Eric could have sold the property to the partnership