Question

Aaron, Deanne, and Keon formed the Blue Bell General Partnership at the beginning of the current year. Aaron and Deanne each contributed $110,000 and Keon transferred an acre of undeveloped land to the partnership. The land had a tax basis of $70,000 and was appraised at $180,000. The land was also encumbered with a $70,000 nonrecourse mortgage for which no one was personally liable. All three partners agreed to split profits and losses equally. At the end of the first year, Blue Bell made a $7,000 principal payment on the mortgage. For the first year of operations, the partnership records disclosed the following information:

Sales revenue	$	470,000
Cost of goods sold	$	410,000
Operating expenses	$	70,000
Long-term capital gains	$	2,400
§1231 gains	$	900
Charitable contributions	$	300
Municipal bond interest	$	300
Salary paid as a guaranteed payment to Deanne (not included in expenses)	$	3,000

Required:

1. a. Compute the adjusted basis of each partner’s interest in the partnership immediately after the formation of the partnership.

2. b. List the separate items of partnership income, gains, losses, and deductions that the partners must show on their individual income tax returns that include the results of the partnership’s first year of operations.

3. d. What are the partners’ adjusted bases in their partnership interests at the end of the first year of operations?

Answer 1

Computation of adjusted basis of each partner’s interest in the partnership immediately after the formation of the partnership would be as follows

Particulars	Aaron	Deanne	Keon
Cash contribution	$110,000	$110,000	$0
Tax basis of Land contributed	0.0	0.0	$70,000
Debt collected to partners	$23,333.33	$23,333.33	$23,333.34
Non recourse mortage	0.00	0.00	(70,000)
Gain	0.00	0.00	0.00
Initial tax basis	$133,333.33	$133,333.33	$23,333.34

(b) calculation of partnership gain or loss

Particulars	Amount
Sales Revenue	$470,000
Less:Cost of goods sold	$410,000
Gross profits	$60,000
Less: operating expenses	$70,000)
Less:Salary payment to Deanne	$3,000
Business loss	($13,000)

List the separate items of partnership income, gains, losses, and deductions that the partners must show on their individual income tax returns that include the results of the partnership’s first year of operations.

Particulars	Total	Aaron	Deanne	Keon	Comment
Initial tax basis	$290,000	$133,333.33	$133,333.33	23,333.34	Part (a)
Partnership Firm loss	($13000)	($4,333.33)	($4,333.33)	($4,333.34)	split 1/3 each
Long term capital gain	$2,400	$8,00	$8,00	$8,00	Split 1/3 each
section 1231 gain	$9,00	$3,00	$3,00	$3,00	split 1/3 each
Munciple bond interest	$3,00	$1,00	$1,00	$1,00	Split 1/3 each
Charitable contribution	($3,00)	($1,00)	($1,00)	($1,00)	Split 1/3 each
Morgtage reduction	($7,000)	($2,333.33)	($2,333.33)	($2,333.34)	Split 1/3 each
Salary payment to Deanne	$3,000		$3,000
Ending tax basis	$273,200	$127,766.67	$127,766.67	$17,666.67

(d).

in the present question Adjusted basis for Aaron $127,766.67 for Deanne $127,766.67 and for Keon $17666.67