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Alex contributes property with a fair market value of $3,000,000 and an adjusted basis of $1,200,000 to AP Partnership. Alex shares in $2,000,000 of partnership debt under the liability sharing rules, giving him an initial adjusted basis for his partnership interest of $3,200,000. One month after the contribution, Alex receives a cash distribution from the partnership of $3,000,000. Alex would not have contributed the property if the partnership had not contractually obligated itself to make the distribution. Assume Alex's share of partnership liabilities will not change as a result of this distribution.

(I) Under the IRS's likely treatment of this transaction, what is the amount of gain or loss that Alex will recognize because of the $3,000,000 cash distribution?
(II) What is the partnership's basis for the property after the distribution?
(II) If Alex is unhappy with this result, can you suggest a possible alternative that may provide him with a better answer?


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