preview

The Case Of Boxes, Llc, The Distribution Occurs 4

Decent Essays
Transaction 1 Code Section 704(c)(1)(B) covers distributions of contributed property to another partner. Under this code section, if contributed property is distributed within seven years of the contribution date, the contributing partner must recognize some or all of the built in gain that was deferred at the date of contribution. In the case of Boxes, LLC, the distribution occurs 4 years after the contribution, so Bobby is subject to the recognition provisions. At the date of contribution, the land has a $350,000 built in gain. Recognition of this gain is deferred and the partnership takes a carryover basis of $250,000. When the land is distributed, the FMV of the land has increased to $870,000, increasing the built in gain to $620,000…show more content…
At the date of contribution, the partnership took a carryover holding period in the land that Bobby contributed. As a result of the distribution, Larry will also take a carryover holding period of April 14th, 2003. The character of the gain recognized by Bobby is determined by how it was used by the partnership. Capital gain property is not subject to the five year character provisions under Section 724. Assuming that Boxes held the land as a capital asset rather than inventory, the gain recognized by Bobby would be capital in nature. Because Larry is not at least a 50% owner of the partnership, his intentions for the land are irrelevant in this matter.

Transaction 2
In the event of the retirement of a partner with a disproportionate distribution, Code Section 751(b) provides guidance. In order for Section 751(b) to apply, the partnership must have both Section 751 and non-section 751 property. Section 751 assets include unrealized receivables and substantially appreciated inventory. Because the inventory has not appreciated by 120%, of its adjusted basis, the only Section 751 property that Boxes of Books has is its receivables. Because Bobby’s distribution of $845,000 exceeds his 35% share of $840,000, he will recognize a guaranteed payment of $5,000 under Section 736(a). Section 736(a) does not apply to the receivables
Get Access