Identify the tax consequences of disguised sales. Determine the tax consequences of death or retirement of a partner.
14.1: Partner A in the ABC partnership (an equal partnership between A, B, and C) sells some land to the partnership. A’s basis in the land is $200,000, and the FMV and sales price is $300,000. A had held the land for investment, but ABC is a developer, so the land is inventory to it. What is the character of the gain? What would your answer be if B is A’s sister? What would your answer be if B is A’s aunt?
14.2: Partner D of the equal DEF partnership contributes property (FMV = $100,000, basis = $60,000) to the partnership. One year later, the partnership distributes $50,000 cash to partner D. How is the original contribution and the later distribution treated if it is not a disguised sale? How are they treated if it is a disguised sale?
14.3: 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?
14.4: Christy contributes land (FMV = $50,000, basis = $30,000) to the ABC partnership, and four years later gets a distribution (that was not assured at the time of the original contribution) of another piece of land (FMV = $60,000, basis = $50,000). Her basis in the partnership interest immediately before the distribution is only $55,000. Assume that she has not contributed any more properties to the partnership, so her net precontribution gain is still $20,000 (the unrealized appreciation on the property she contributed), and has been for four years. How much gain will she have to realize, what will be her basis in the partnership after the distribution, and what will the partnership’s basis in the original contributed property be?
14.5: Sybil transfers land (FMV = $200,000, basis = $120,000 to the Eve Partnership, in which she is a 1/3 partner. Twenty months later the partnership distributes property (FMV = $150,000, basis = $50,000) to Sybil, and her basis in her partnership interest immediately before the distribution (and before the addition of any gain under Section 737) is $120,000 Which would this set of transactions be taxed under, Code Section 707 or 737? If, at the time of the contribution, it was relatively certain that the distribution would be made, what are the tax effects of these transactions? Assume that at the time of the contribution the distribution was not assured in any way. How would these transactions be taxed? For more information on Tax Consequences of Retired Partner see this: https://www.britannica.com/topic/taxation
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