Alice, Beth, and Carl formed the ABC Partnership early in Year 1. Alice and Beth each contributed $100,000 for their partnership interest, and Carl contributed land having a $100,000 FMV and $160,000 adjusted basis. The land remained a capital asset to the partnership. Late in Year 2, Carl sold his interest in the partnership to Dan for $100,000. Shortly after that transaction, the partnership sold the land to an outside party for $100,000. The partnership has no Sec. 754 election in effect (discussed in Chapter 10). The partners have asked that you explain the consequences these transactions have to the partnership and the partners, especially Carl and Dan. At a minimum, you should consult the following resources:
IRC Sec. 704
Reg. Sec. 1-704-3(a)