ExpertHard1 markMultiple Choice
CPA · Question 50 · Area III: Entity Tax Planning
A partnership has two partners, A and B. Partner A contributes Property X (Basis $10,000, FMV $20,000). Partner B contributes Cash of $20,000. Three years later, the partnership sells Property X for $24,000. How is the $14,000 tax gain allocated?
A partnership has two partners, A and B. Partner A contributes Property X (Basis $10,000, FMV $20,000). Partner B contributes Cash of $20,000. Three years later, the partnership sells Property X for $24,000. How is the $14,000 tax gain allocated?
Answer options:
A.
A: $7,000; B: $7,000
B.
A: $12,000; B: $2,000
C.
A: $10,000; B: $4,000
D.
A: $14,000; B: $0
How to approach this question
§704(c) Rule: Pre-contribution gain ($10k) must be allocated to the contributing partner (A). Post-contribution gain ($24k - $20k = $4k) is allocated according to profit ratios (50/50).
Full Answer
B.A: $12,000; B: $2,000✓ Correct
B
IRC §704(c). The first $10,000 of gain (FMV at contribution - Basis) is allocated to A. The remaining $4,000 gain is shared equally.
Common mistakes
Splitting total gain equally.
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