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:

$0 gain recognized.

$10,000 gain recognized.

$15,000 gain recognized.

$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

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.

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