Question

1. James Michaels invested $25,000 for a one-third interest in the Jabo Partnership on January 1 of the current year. The partnership purchased a building site on February 5 at a cost of $200,000, paying $50,000 as a down payment and obtaining a mortgage of $150,000 at 12 percent annual interest for only three years, then full payment of principal. Because of an unexpected rezoning of the property, it substantially increased in value. Jabo Partnership broke exactly even for the current year since their income was exactly the same as their expenses. On December 31 James sold his one-third interest to Joe Hammer, receiving $62,500 in cash. What was James’s basis for his interest in the partnership immediately prior to the sale? What was the sales price of the interest? What is the character of James’s gain upon the sale of his interest?

2. Assume the same facts as in problem 33 except that Ned’s basis in the building is only $20,000. Determine each partner’s adjusted basis in his partnership interest. Does either partner recognize any gain on the transfer to the partnership? What is JN’s basis in the assets?

3. Marvin Bridges is a 25 percent partner in the Munson partnership. On November 23, 2017, Marvin contributes property with an adjusted basis of $75,000 and a fair market value of $250,000 to the Munson partnership. On March 15, 2018, Marvin receives a $187,500 cash distribution from the partnership. a) Why would the IRS seek to classify the transactions as a disguised sale? b) . Assume that the IRS is successful in classifying the transactions as a disguised sale. Outline the income tax consequences to Marvin

4. On September 1, 2013, Leonard contributed land held for investment with a fair market value of $200,000 and an adjusted basis to him of $120,000 for a 20 percent interest in the income and capital of Office Complex Partnership. The land was intended for use as a building site for the partnership. The partnership opted to rent facilities and on September 2, 2018, sold the contributed land for $500,000. Assuming the partnership agreement was silent with respect to this particular asset, how much gain must Leonard report for this partnership sale?

5. On January 17 of the current year, the Bamber Partnership was formed by Bob Miller, Carl Penn, and Don Allen. Each partner has an equal interest in the capital and profits of the partnership. The Bamber partnership will report on the basis of a calendar year. The following contributions were made when the partnership was formed.

Parter	Property	Basis to Partner	FMV
Bob	Cash	15,000	15,000
Carl	Inventory	9,000	15,000
Don	Captial Asset	35,000	15,000

Both the inventory and capital asset are inventory to the Bamber partnership. On May 22 the partnership sells the inventory for $27,000. On July 19 the partnership sells the capital asset which Don contributed for $9,000. The partnership agreement is silent regarding the property contributed by the partners. Without regard to the sale of the contributed properties, the Bamber partnership reports $60,000 of ordinary income for its current tax year. As a result of partnership transactions, what does each partner report on his individual tax return for the current year?

6. Because it was anticipated that Bob Short would devote more time to the partnership than would his equal partner Jack Long, it was agreed that Bob would receive a “salary” of $12,000 per year. Bob and Jack agreed to divide the remaining partnership income equally. For the current year, prior to consideration of Bob’s salary, the partnership income was composed of $6,000 long-term capital gain, $2,000 tax-exempt interest, and $8,000 loss from operations. Determine the amount and character of income (loss) reportable by Bob and Jack for the current year.

7. In 2018 the XYZ Partnership incurred the following expenses:

Expenses of selling partnership interests	$10,000
Attorney's fees for drafting partnership agreement	30,000
Exoenses of transferring title of property to partnersip	8,000
Accounting fees to organize partnership	22,000

If XYZ began business on August 1, 2018, how much in total of these expenses could XYZ deduct (including amortization)?

Answer 1

1.

A partner’s initial basis is determined as:

Cash: Amount invested.

Property: Net Book Value of the property

Service rendered: Fair market value of the service provided.

Liabilities: Other partner’s liabilities assumed by the new coming partner

(Liabilities): New partner’s liabilities assumed by existing partners is going to reduce the basis of partnership interest.

After initial formation, a partner’s basis will be increased by his pro rata share of income and increase of partnership liabilities. It will be decreased by pro rata share of losses and decrease in partnership liabilities.

James Basis in Jado Partnership:

Beginning capital account                                             $25000

Income                                                                                 $0

Ending capital account                                                   $25000

Add: 1/3^rd of Liabilities $150000                                  $50000

Year-end basis                                                             $75000

James’s basis in the partnership immediately prior to the sale is $75000

Assuming James is only getting cash as consideration for selling his partnership interest to Joe, sales price will be $62500.

2.

Since problem 33 is not provided here, I am trying to provide the answer on the basis of the available information. Generally no gain or loss is recognized on contributing a property to the partnership in return for a partnership interest.

The partnership’s basis in the contributed property is the contributor’s basis plus any gain recognized by the incoming partner if a special election is made. The basis of asset contributed by partner will be carried over and should be the basis of the assets in the hands of the partnership.

3.

Marvin Bridges is a 25% partner in Munson Partnership by contributing a property having an adjusted basis of $75000 along with a FMV of $250000. Following the roll-over cost principle, Marvin’s basis in the partnership is $75000. Cash distribution from Munson is $187500 which is quite above his basis in the partnership.

Generally, distributions of cash from a partnership to a partner are generally not taxable unless the cash distributed exceeds the partner’s basis in its partnership interest. In the given scenario, Marvin is subject to tax as the distribution is overlapping and hence taxable. However, if IRS proves it to be a disguised sale, Marvin would be subjected to a tax which is coming out of the excess of cash distributions over the adjusted basis of the property (FMV is not considered).

Taxable gain on the transfer / Disguised Sale: $187500 - $75000 = $112500