Question

Suzy contributed assets valued at $360,000 (basis of$200,000)in exchange for her 40% interest in Suz-Anna GP (a general partner-ship in which both partners are active owners). Anna contributed land and a building valued at $640,000 (basis of $380,000) in exchange for the remaining 60% interest. Anna's property was encumbered by qualified nonrecourse financing of 100,000, which was assumed by the partnership.

The partnership reports the following income and expenses for the current tax year.

Sales $560,000

Utilities salaries, depreciation, and other operating expenses 360,000

Short-term capital gain Tax-exempt interest income 4,000

Charitable contributions (cash) 8000 Distribution to Suzy 10,000

Distribution to Anna 20,000

During the current tax year, Suz-Anna refinanced the land and building (i.e., the original $100,000 debt was repaid and replaced with new debt). At the end of the year, Suz-Anna held recourse debt of $100,000 for partnership accounts payable (recourse to the partnership but not personally guaranteed by either of the partners) and qualified nonrecourse financing of $200,000.

a. What is Suzy's basis in Suz-Anna after formation of the partnership? Anna's basis?

b. What income and separately stated items does the partnership report on Suzy's Schedule K-1? What income, deduction, and taxes does Suzy report on her tax return? What additional information is needed?

c. Assume that all partnership debts are shared proportionately. At the end of the tax year, what are Suzy's basis and amount at risk in her partnership interest?

Answer 1

ANSWER:

a.         Suzy’s beginning basis in her partnership interest is $240,000, calculated as follows:

Basis in contributed business-related assets	$200,000
Share of partnership nonrecourse debt	40,000
Total beginning basis	$240,000

Anna’s beginning basis in her partnership interest is $340,000, calculated as follows:

Basis in contributed business-related assets	$380,000
Relief of debt assumed by the partnership	(100,000)
Share of partnership nonrecourse debt	60,000
Total beginning basis	$340,000

b.The partnership reports ordinary income of $200,000. Separately stated items include the short-term capitalgain($10,000),taxexempt interest income ($4,000), and charitable contributions ($8,000). Suzy’s Schedule K–1 shows the following items:

Ordinary income	$80,000
Short-term capital gain	4,000
Tax-exempt interest income	1,600
Charitable contributions	3,200
Distribution received by Suzy	10,000

On her tax return, Suzy reports the $80,000 of ordinary income on Schedule E. She reports the short-term capital gain ($4,000) with her capital transactions on Form 8949 and Schedule D. She reports the charitable contributions($3,200) on Schedule A with her personal charitable contributions. The tax-exempt interest income and the distribution she receives are not taxable, although they affect her basis (as shown below).

(Although,not-taxable,thetaxexempt interest income is reported as an information item on Suzy’s Schedule B and line 8b of her Form 1040.)

c.         At the end of the tax year, Suzy’s basis in her partnership interest is $392,400 (including an $80,000 share of partnership nonrecourse debt and a $40,000 share of partnership recourse debt), calculated as follows:

Beginning basis Increase in Suzy’s share of recourse debt (40% × $100,000)	$240,000 40,000
Increase in Suzy’s share of qualified nonrecourse debt [40% × ($200,000 – $100,000)]	40,000
Partnership ordinary income	80,000
Short-term capital gain	4,000
Tax-exempt interest income	1,600
Charitable contributions	(3,200)
Distribution to Suzy	(10,000)
Ending basis	$392,400

Suzy’s amount at risk is the same as her basis in the partnership interest, because the nonrecourse debt is qualified nonrecourse financing.