Palmer Contributes Property with a Fair Market Value of $4,000,000

Palmer contributes property with a fair market value of $4,000,000 and an adjusted basis of $3,000,000 to AP Partnership.Palmer shares in $3,000,000 of partnership debt under the liability sharing rules, giving him an initial adjusted basis for his partnership interest of $6,000,000.One month after the contribution, Palmer receives a cash distribution from the partnership of $2,000,000.Palmer would not have contributed the property if the partnership had not contractually obligated itself to make the distribution.Assume that Palmer's share of partnership liabilities will not change as a result of this distribution.
a.Palmer will likely recognize a $500,000 [($4,000,000 - $3,000,000) × 50% ] gain on the transaction.Palmer received a cash payment equal to one-half the value
of the property he contributed.The IRS would likely treat this as a disguised sale of the property which is presumed to occur when a contractual agreement requires a contribution by a partner to be followed within two years by a
specified distribution by the partnership and the distribution is made without regard to partnership profits.Both these issues occur in this scenario.While Palmer could argue that the intent of this transaction is not to create a disguised

a.Under the IRS's likely treatment of this transaction, what is the amount of gain or loss that
Palmer will recognize because of the $2,000,000 cash distribution?
b.What is the partnership's basis for the property after the distribution?
c.If Palmer is unhappy with this result, can you suggest a possible alternative that may provide him with a better answer?