Reference no: EM131821375

Andrew contributes property with a fair market value of $6,000,000 and an adjusted basis of $2,000,000 to AP Partnership. Andrew shares in $3,000,000 of partnership debt under the liability sharing rules,giving him an initial adjusted basis for his partnership interest of$5,000,000. One month after the contribution, Andrew receives a cash distribution from the partnership of $3,000,000. Andrew would not have contributed the property if the partnership had not contractually obligated itself to make the distribution. Assume Andrew's share of partnership liabilities will not change as a result of this distribution.

a. Under the IRS's likely treatment of this transaction, what is the amount of gain or loss that Andrew will recognize because of the $3,000,000 cash distribution?

b. What is the partnership's basis for the property after the distribution?

c. If Andrew is unhappy with this result, can you suggest a possible alternative that may provide him with a better answer?