Partner A contributes property (FMV $100,000, Basis $40,000) to a partnership. One month later, the partnership distributes $90,000 cash to Partner A. The cash did not come from a loan. How is this transaction likely treated?

Answer options:

Tax-free contribution and distribution.

Disguised Sale.

Guaranteed Payment.

Loan.

How to approach this question

Identify Disguised Sale (IRC §707). Transfers within 2 years are presumed to be a sale. Partner A effectively sold the property for $90k.

Full Answer

B.Disguised Sale.✓ Correct

IRC §707(a)(2)(B). A contribution followed by a distribution is treated as a disguised sale if the transfers are related. Within 2 years creates a presumption of sale.

Common mistakes

Treating it as two separate tax-free transactions.

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