Yong contributes a machine having an adjusted basis of $20,000 and an FMV of $25,000 for a 10% partnership interest. Yong had taken $10,000 of depreciation prior to the contribution. The partnership has no liabilities. As a result of the contribution, Yong must recognize
A)no gain or loss.
B)a $5,000 Sec. 1245 gain.
C)a $5,000 capital gain.
D)$10,000 ordinary income.

Question

Quizplus · Accepted Answer

Under Section 721 of the Internal Revenue Code, no gain or loss is recognized when property is contributed to a partnership in exchange for an interest in the partnership. This rule applies regardless of the property's fair market value (FMV) compared to its adjusted basis at the time of the contribution. Therefore, Yong does not recognize any gain or loss upon contributing the machine to the partnership.

Yong Contributes a Machine Having an Adjusted Basis of $20,000