Question

In the beginning of the current year, Barry and Irving formed the BI Partnership by transferring cash and property to the partnership in exchange for a partnership interest, with each having a 50% interest. Specifically, Barry transferred property having a $40,000FMV, a $26,000adjusted basis, and subject to a $7,000liability, which the partnership assumed. Irving contributed $45,000cash to the partnership. The partnership also borrowed $29,000from the bank to use in its operations. All liabilities are recourse for which the partners have an equal economic risk of loss. During the current year, the partnership earned $26,000of net ordinary income and reinvested this amount in new property.

Requirements:

What is the partnership's and each partner's gain or loss recognized on the formation of the partnership?

What is each partner's basis in his or her partnership interest at the end of the current year?

For the partnership, prepare a tax and book balance sheet at the end of the current year.

Assume instead that Barry and Irving formed a corporation rather than a partnership. What is the corporation's and each shareholder's gain or loss recognized on the formation of the corporation? What is each shareholder's basis in his or her stock at the end of the current year?

Answer 1

a) None.As per section 721, no gain or loss is recognised to a partnership or any if its partners upon contribution of property in exchange on partnership interest
b) Partners basis in partnership interest at the end of the present year.
Barris basis in partnership interest
Adjusted basis of property transferred	$26,000
Less:Liabilty assumed by partnership	$7,000
Add:Share of partnership liabilities(7000+29000)*50%	$18,000
Add:Sahre of partnership ordianry income(26,000*50%)	$13,000
Adjusted basis at the end of the year(26000+7000+18000+13000)	$64,000
Irving's basis in partnership interest
Adjusted basis of property transferred	$50000
Add:Share of partnership liabilities(7000+29000)*50%	$18,000
Add:Share of partnership ordinary income(26000*50%)	$13,000
Adjusted basis at the end ofthe year(50000+18000+13000)	$81,000
c) Tax and book balance sheet at the end of the year
Particulars	Tax	Boook
Cash(26000+7000+45000)	$78,000	$78000
Contributedproperty(45000-7000)	$38,000	$45,000
New property	$26,000	$26,000
Total assests	$142,000	$149,000
Liabilities	$29,000	$36,000
Capital accounts
Barry(40,000-26000)	$14,000	$14,000
Irving(26000+45000)	$71,000	$71,000
d) As per section 351,no gain or loss is recognised if the property is tranferred in exvchange of stock and imeediately after tranfer the transferrence control the corporation any liability assumed by corporations is not treated as boot.
Barry basis in corporation
Adjusted basis of property transferred	$26,000
Less: liability assumed by partnership	$7,000
Add: Share of partnership liabilities(7000+29000)*50%	$18,000
Adjusted basis at the end of current year(26000+18000-7000)	$37,000