ExpertMedium1 markMultiple Choice
CPA · Question 54 · Area III: Entity Tax Planning
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?
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:
A.
Tax-free contribution and distribution.
B.
Disguised Sale.
C.
Guaranteed Payment.
D.
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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