Question

If Joan, an individual, sells appreciated property to a partnership, she would likely recognize a taxable gain on this transaction under U.S. Federal tax law. However, if the same property was contributed to the partnership, under IRC Reg. Sec. 1.721-2(f), no gain would be recognized by Joan. Consider why the tax law provides this, seemingly, disparate treatment. Describe a reason why you think this outcome makes sense. Please come up with a reason different than your classmates.

Answer 1

When an individual who sells and asset outside the purview of the partnership, the increase in price is taxable because the profit goes to individual rather than the partnership. On the other hand if property was contibuted to partnership no sale has taken place and property is with the partnership since no sale has taken place there shall be no tax consequences. In future if the partnership seels the property then it shall be taxable.

If Joan has received some share in partnership in place of contributed property, then the partnership taxes paid on property appreciation along with other profits made shall be taxable on a pro rated basis.