Palmer Contributes Property with a Fair Market Value of $4,000,000

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The Answer is d. Palmer will likely recognize a $500,000 [($4,000,000 - $3,000,000) × 50% ] gain on the transaction. Palmer received a cash payment equal to one-half the value of the property he contributed. The IRS would likely treat this as a disguised sale of the property. A disguised sale is presumed to occur when a contractual agreement requires a contribution by a partner to be followed within two years by a specified distribution by the partnership, and the distribution is made without regard to partnership profits. Both these issues occur in this scenario. While Palmer could argue that the intent of this transaction is not to create a disguised sale, it is doubtful that he would be successful.
e. The partnership's total basis for the property is $3,500,000. Its basis for the purchased property is the $2,000,000 cost of the property (the partnership is deemed to have paid for the property). In addition, the partnership has a $1,500,000 carryover basis for the portion of the property that was not "purchased."
f. If Palmer can wait for more than two years to receive the distribution and if the distribution is not contractually guaranteed, the contribution and distribution transactions will be presumed not to be a disguised sale. The distribution will be treated as a normal distribution that will not create capital gain for Palmer unless the distribution amount exceeds the adjusted basis for his partnership interest when the distribution is made.

Palmer Contributes Property with a Fair Market Value of $4,000,000

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Palmer Contributes Property with a Fair Market Value of $4,000,000

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