Final answer:
Clark is considering how to contribute property to a partnership and is looking for the best tax alternative. The options are to transfer, not recognize the built-in loss, or sell and contribute cash. For potential tax benefits, selling the property to recognize the loss may be the better choice.
Step-by-step explanation:
The student is seeking guidance on the best tax alternative for Clark, who is preparing to contribute property to a partnership. The property has a value of $5,000 and a basis of $20,000. When considering this situation, it is essential to understand that a partnership is subject to little government regulation, and each partner pays taxes on their share of the income, as the business itself does not pay taxes.
Option A would mean Clark would transfer the property in exchange for a partnership interest, potentially deferring the recognition of the loss. Option B suggests that the built-in loss will not have to be recognized immediately if he proceeds with the contribution as it is. Option C implies that Clark should sell the property, recognize the loss, and then contribute the cash from the sale, which may be beneficial tax-wise as it enables the recognition of the loss.
A limited liability partnership would limit Clark's liability to his investment in the company, which is another factor he might consider in the context of risk management. However, for the best tax alternative, it seems option C would allow Clark to realize the loss, providing a potential tax benefit.