Miguel contributed substantially appreciated property to the MR Partnership in year 1. In year 4, other property was distributed to Miguel. Which one of the following statements is most likely to be true regarding the contribution and/or distribution?
A) Miguel recognizes precontribution gain in year 4 when the second property is distributed to him.
B) Miguel recognizes the precontribution gain on an amended tax return for year 1 when the second property is distributed to him.
C) The partnership recognizes the precontribution gain in year 4 and allocates that gain to all the partners.
D) The partnership recognizes the precontribution gain in year 1 and allocates that gain to Miguel.
E) Partnership contributions and distributions are tax-deferred transactions; when no cash is involved, no gain or loss is recognized.

Question

Quizplus · Accepted Answer

When a partner contributes property to a partnership and later receives a distribution of other property, the partner must recognize any precontribution gain at the time of the distribution, not at the time of the initial contribution. This rule ensures that the gain inherent in the contributed property is eventually taxed to the contributing partner if the partnership returns value to the partner in a form other than the originally contributed property.

Miguel Contributed Substantially Appreciated Property to the MR Partnership in Year