On December 15, 2020, Donald contributed a Picasso painting to Kennedy, LLC that was valued at $100,000 (basis of $5,000) in exchange for a 50% capital and profits interest in the LLC. Joe contributed $100,000 in cash and received a 50% interest in the LLC. On December31, Donald withdrew $50,000 in cash from the LLC and then on January 15, 2021, Joe purchased Donalds entire interest in the LLC for $50,000 and the partnership distributed the painting to Joe on February 14, 2021.

What adjustments if any might the IRS make?

Explain the consequences of such an adjustment to Joe & Donald and how this could have been prevented.