Cheryl and Nina formed a partnership. Cheryl received a 40% interest in partners

Question

Cheryl and Nina formed a partnership. Cheryl received a 40% interest in partnership capital and profits in exchange for land with a basis of $60,000 and a fair market value of $80,000. Nina received a 60% interest in partnership capital and profits in exchange for $120,000 of cash. Three years after the contribution date, the land contributed by Cheryl is sold by the partnership to a third party for $90,000. How much taxable gain will Cheryl recognize from the sale?

a.

$4,000.

b.

$12,000.

c.

$24,000.

d.

$30,000.

e.

None of the above.

a.

$4,000.

b.

$12,000.

c.

$24,000.

d.

$30,000.

e.

None of the above.

Explanation / Answer

c. $24,000

Section 704(c)(1)(A) requires that any pre-contribution gain must be allocated entirely to Cheryl. Therefore, Cheryl is allocated the $20,000 pre-contribution (“built-in”) gain and 40% ($4,000) of the$10,000 post-contribution gain.

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