Question

Tax Research Assignment 1

Howard purchased raw (undeveloped) land three years ago for $1,500,000 to develop into lots and sell to individuals planning to build their dream homes. Howard intended to treat this property as inventory, like his other development properties. Before completing the development of the property, however, he decided to contribute it to Counterpart Investors LLC when it was worth $2,500,000, in exchange for a 10 percent capital and profits interest. Counterpart's strategy is to hold land for investment purposes only and then sell it later at a gain.

Issue 1. If Counterpart sells the property for $3,000,000 four years after Howard's contribution, how much gain or loss is recognized and what is its character? [Hint: See IRC §724.]

Issue 2. If Counterpart sells the property for $3,000,000 five and one-half years after Howard's contribution, how much gain or loss is recognized and what is its character?

Your memo should be in the format demonstrated in the Tax Research Instruction section. Do not deviate from that format. The memo should be no more than three pages long, and should include an EMBEDDED excel spreadsheet showing the comparison of tax treatment under the two scenarios above. Importantly, be sure to attach the authorities (documents you referred to) to your file and be sure to cite/reference your authorities in the memo.

This assignment is due Monday, July 20 at 11:59 p.m. You should be able to complete the memo within four hours.

Answer 1

a.         Under Section 724(b), any gain or loss on contributed property that was treated as inventory by the contributing partner and sold by the partnership during the five year period beginning on the date of contribution is treated as ordinary gain or loss. Thus, the entire $1,500,000 gain from the sale of the land will be treated as ordinary gain.

b.         Section 724(b) only applies if contributed property is sold during the five year period beginning on the date of contribution. Because Counters park sold the land after the expiration of this time period and held the land as investment property, it should recognize $1,500,000 of capital gain.