Question

Information given: Sally is a 25% partner in the STUV partnership. She has a tax basis in her partnership interest of $300,000. Sally also owns some land and a small building that she would like to sell to the partnership. The property has a fair market value of $500,000. Sally purchased the building for $400,000, and after taking MACRS deductions, her tax basis in the building is $350,000. In general, the realized gain or loss from a property transaction is measured by the fair market value of the property received less the tax basis of property given up. In this case, Sally will receive $500,000 in cash. Her tax basis in the property she is selling is $350,000. Her gain realized is $150,000. This gain is recognized for tax purposes and reported in taxable income unless you can find a Code section that excludes or defers the gain. Sally will recognize a gain if she sells the property to the partnership. At first glance, the lawyer’s suggestion has some merit. If Sally contributes the property to the partnership in exchange for an increased interest in the partnership, Section 721 provides that no gain of loss is recognized. Her basis in her partnership interest is increased by her basis in the property contributed to $650,000 ($300,000 + $350,000). A subsequent distribution of cash to Sally will reduce her basis in the partnership by the amount of the cash distributed to $150,000 ($650,000 - $500,000). Gain is only recognized if the distribution exceeds her basis, which it does not. It would appear that the lawyer’s suggestion will work to allow Sally to defer recognition of gain on the transaction. You discuss this conclusion with the partner in your CPA firm. She states that the substance of both transactions it the same – a transfer of property for cash, and is skeptical that the tax law would allow the form of the transaction to be respected in this case. She also remembers from her experience something about disguised sales of property to a partnership. She asks you to check it out.

Question: Do you think the lawyer’s advice will work? How long do you have to wait? Prepare a memo explaining your reasoning in a clear concise manner citing appropriate primary authority. Your memo should include quotes from the appropriate section(s) of the Code and Income Tax Regulations

Answer 1

According to the law moreover the meaning of transfer, the capital gain will result in the state of a shift of property to the organization, because the "transfer" is following.

The transfer is both the cash of $500,000 or raised interest in the company. Meanwhile both instances, the transfer is supported by evidence that makes Sally likely to pay principal profits tax on the gain of $150,000 starting on the transference of the property.

Following the disguised sale rules, specific offerings of property to a company supported by a partition to the supporting companion can be recharacterized as a trade or replacement rather than tax-free participation.

According to the Section 707-3 says that "Except as unless presented in this segment, if a transference of wealth by a companion to a business and one or more transfers of currency or additional attention by the partnership to that companion are specified in the paragraph above of this section, the transfers are handled as a deal of the goods, in full or in the frame, to the partnership. "

Utilization of masked sale laws. If a somebody indicates to shift property to a partnership in a position as a companion, the practices of this section utilize for hopes of resolving whether the property was shifted in a masked sale, still if it is ascertained later the purpose of the laws of this section that so the person is not a partner.

If following the purpose of the laws of this section to a purported transferal of property to a partnership, it is concluded that no partnership endures because the property held actually marketed, or it is differently defined that the shared property is not maintained by the company for tax proposals, the transferor of the assets is handled as producing marketed the goods to the personage that obtained control of the property for tax proposals. "

Finally, using the above quotations and reasoning provided says that the lawyer's advice will not work.