ExpertHard1 markMultiple Choice
CPA · Question 33 · Area III: Entity Tax Planning
A taxpayer contributes property (Basis $20,000, FMV $30,000) to a partnership for a 10% interest. Three years later, the partnership distributes this specific property to another partner when its FMV is $35,000. What is the tax consequence to the contributing partner?
A taxpayer contributes property (Basis $20,000, FMV $30,000) to a partnership for a 10% interest. Three years later, the partnership distributes this specific property to another partner when its FMV is $35,000. What is the tax consequence to the contributing partner?
Answer options:
A.
$0 gain recognized.
B.
$10,000 gain recognized.
C.
$15,000 gain recognized.
D.
$5,000 gain recognized.
How to approach this question
Identify 'Mixing Bowl' transaction. If you put property in and the partnership gives it to someone else within 7 years, you pay tax on the gain you brought to the table.
Full Answer
B.$10,000 gain recognized.✓ Correct
$10,000 gain recognized.
IRC §704(c)(1)(B). If §704(c) property is distributed to a partner other than the contributing partner within 7 years of contribution, the contributing partner recognizes gain equal to the amount that would have been allocated to them if the property had been sold at FMV. Pre-contribution gain = $10,000.
Common mistakes
Thinking the distribution is tax-free because it's a partnership.
Practice the full CPA TCP Practice Exam 2
68 questions · hints · full answers · grading
More questions from this exam
Q01In Year 1, an executive receives an Incentive Stock Option (ISO) to purchase 1,000 shares of stoc...MediumQ02A taxpayer is calculating their Alternative Minimum Tax (AMT) liability for Year 1. They claimed ...MediumQ03On January 1, Year 1, a corporation lends $500,000 to a shareholder at a 0% interest rate. The Ap...HardQ04A U.S. citizen accepts a permanent assignment in France on January 1, Year 1. In Year 1, they ear...MediumQ05A 12-year-old child has $5,000 of interest income and no earned income in Year 1. The standard de...Medium