ExpertHard1 markMultiple Choice
CPA · Question 36 · Area 3: Entity Tax Compliance
Partner X contributes property with a FMV of $100,000 and a basis of $60,000 to a partnership. Two years later, the partnership sells the property for $120,000. How is the gain allocated under Section 704(c)?
Partner X contributes property with a FMV of $100,000 and a basis of $60,000 to a partnership. Two years later, the partnership sells the property for $120,000. How is the gain allocated under Section 704(c)?
Answer options:
A.
Gain of $60,000 split equally among partners.
B.
Gain of $40,000 to Partner X; remaining $20,000 split per agreement.
C.
Partner X is allocated the first $40,000 of gain; the remaining $20,000 is shared among partners.
D.
Partner X recognizes $40,000 gain at contribution; $20,000 gain on sale shared.
How to approach this question
1. Identify Built-in Gain (BIG): $100,000 FMV - $60,000 Basis = $40,000.<br/>2. Total Tax Gain on Sale: $120,000 Sale - $60,000 Basis = $60,000.<br/>3. Allocation Rule (704(c)): The BIG ($40,000) must be allocated to the contributing partner (X).<br/>4. Remaining Gain: $60,000 - $40,000 = $20,000. This is allocated according to the partnership agreement (shared).<br/>5. Result: X gets $40,000 + share of $20,000.
Full Answer
C.Partner X is allocated the first $40,000 of gain; the remaining $20,000 is shared among partners.✓ Correct
C
Under Section 704(c), the pre-contribution gain ($40,000) is allocated entirely to Partner X. The post-contribution appreciation ($20,000) is shared among the partners.
Common mistakes
Splitting the entire gain according to profit ratios.
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