I have a question about a built-in loss and a subsequent sale resulting in a gain of a contributed asset.

Say an 80% partner contributed an asset with a basis of $10 and a FMV of $9. The partnership then later sells asset for $14. What would be the recognized gain to the partnership?

1. Treat as a related party transaction and use the basis determined by the subsequent selling price (which was higher). In this case it would be 4 (14-10).

or

2. When the partner contributed there was a built-in loss. When assets are sold by the partnership, the initial built-in gain/loss at contribution is allocated to the contributed partner. The rest of the gain/loss is split among the partners according to their percentages. Answer would be 5?

My 2 cents...

Option Item-1:  Although the partner has an 80% interest (over 50% rule), I would not judge this to be a related party transaction since it sounds like the asset was sold to a 3rd Party (unrelated).

Option Item-2:  I'll have to check my Corp Tax Textbook tonight, but I know for C-Corp formation, if the FMV at contribution is lower than Adjusted Basis, the C-Corp's basis is the FMV due to the built in loss.  However, not sure if this applies to Partnerships because the general rule is that NBV carries over when forming a partnership.  But, Becker says that any built-in Gain(Loss) contributed to a partner is allocated to the contributing partner.  BUT, since the property subsequently appreciated in value and was sold at a gain, I would think the built in loss can no longer be recognized by the contributor since it was practically a wash.  Now, the 4 Gain would be allocated 80% to the partner and the other 20% to the other partners.