Question

Three years? ago,Mario joined the MN Partnership by contributing land with a $10,000 basis and an $18,000 FMV. On January 15 of the current? year,Mario has a basis in his partnership interest of $20,000?,and none of his precontribution gain has been recognized. On January? 15, Mario receives a current distribution of a property other than the contributed land with a $15,000 basis and a $23,000 FMV.

Requirements

a.	Does Mario recognize any gain or loss on the? distribution?
b.	What is Mario?'s basis in his partnership interest after the? distribution?
c.	What is the? partnership's basis in the land Mario contributed after Mario receives this? distribution?

Answer 1

Answer a.

Because Mario does not receive cash in excess of his partnership basis, he recognizes no gain under the current distribution rules of Sec. 731.

However, Sec. 737 requires an additional step when some pre-contribution gain remains unrecognized. Mario must recognize gain equal to the lesser of:

(1)      Remaining pre-contribution gain ($8,000 = $18,000 - $10,000) or

(2)      The excess of the FMV of the property distributed over the adjusted basis of the partnership interest immediately preceding the distribution ($3,000 = $23,000 - $20,000 partnership basis).

Under Sec. 737 Mario must recognize a $3,000 gain which takes its character from the land Mario contributed to the partnership having the pre-contribution gain.

Answer b.

Under Sec. 731, his basis in his partnership interest is reduced by the carryover basis of the property distributed to him.

Mario's basis in partnership interest before the distribution                    20,000         

Add: Sec. 737 gain recognized on the distribution                                     3,000         

Less: Carryover basis of property distributed                                          (15,000)        

Remaining basis in partnership interest after the distribution                     8,000    

Because Mario recognized gain under Sec. 737, he must increase the basis of his partnership interest by the $3,000 amount

of the Sec. 737 gain. His basis is increased before reducing the basis for the distribution.

Answer c.

Because $3,000 of gain is recognized by Mario under Sec. 737, the partnership must increase its basis in the property related to the pre-contribution gain recognized. The partnership's basis in the land is increased to $13,000 ($10,000 carryover basis from Mario at the time of the contribution + $3,000 Sec. 737 gain recognized on this distribution).