ACC610 Week 3 Discussion 1 Property Contribution

Week 3 - Discussion 1

Jonathan owns the property (basis of $200,000, value of $300,000). He plans to contribute the property to the JJG Partnership in exchange for a 25% interest.

1. What issues arise if the partnership distributes $150,000 cash to Jonathan three months after the property contribution?

One interpretation is that this is a covert purchase. The $150,000 distribution occurred within two years of the transfer and three months after the transfer was made. Thus, Jonathan had to account for the fifty thousand dollar profit he made from selling his property. If the partnership were to pay Johnathan a cash distribution three months after he contributed property, this would be seen as a disguised transaction and cause complications. When a partner makes a contribution of appreciated assets to a company and then receives a dividend from the partnership, this is known as a disguised sale. Due to the disguised sale regulation, complications arise because the distribution occurred three months after the asset contribution.

2. How can the risk of adverse tax consequences be minimized?

To minimize tax repercussions, the partnership may prefer to make the payout two years after Jonathan’s contribution. They may also choose to lend instead of sell. The association must release cash after two years to minimize tax repercussions. They won’t be considered a camouflaged sale and can realize a gain or loss. 721 states that when a partner adds a property to a partnership, neither the partner nor the partnership acknowledges any realized gain or loss. This applies when the property is provided for a partnership stake at entity establishment or later.