ExpertHard1 markMultiple Choice
CPA · Question 39 · Area III: Entity Tax Planning
Partner A contributes land (Basis $60,000, FMV $100,000) to a partnership in Year 1. In Year 3, the partnership sells the land for $120,000. The partnership has two equal partners, A and B. How is the $60,000 tax gain allocated?
Partner A contributes land (Basis $60,000, FMV $100,000) to a partnership in Year 1. In Year 3, the partnership sells the land for $120,000. The partnership has two equal partners, A and B. How is the $60,000 tax gain allocated?
Answer options:
A.
$30,000 to A; $30,000 to B
B.
$50,000 to A; $10,000 to B
C.
$60,000 to A; $0 to B
D.
$40,000 to A; $20,000 to B
How to approach this question
1. Allocate Built-in Gain (FMV at contribution - Basis) to contributing partner. 2. Allocate remaining post-contribution gain according to profit ratios.
Full Answer
B.$50,000 to A; $10,000 to B✓ Correct
IRC §704(c). <br/>Total Gain = $120,000 - $60,000 = $60,000. <br/>Pre-contribution (Built-in) Gain = $100,000 - $60,000 = $40,000. Allocated entirely to A. <br/>Post-contribution Gain = $120,000 - $100,000 = $20,000. Split 50/50 ($10,000 each). <br/>Total A = $40,000 + $10,000 = $50,000. <br/>Total B = $10,000.
Common mistakes
Splitting the entire gain 50/50.
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