Question

1.The equal XYZ Partnership has the following balance sheets:

			Basis	FMV
Property A			$39,000	$54,000
Property B			$60,000	$42,000
Inventory A			$3,000	$15,000
Inventory B			$15,000	$12,000
			$117,000	$123,000
Capital, X			$35,000	$41,000
Capital, Y			$41,000	$41,000
Capital, Z			$41,000	$41,000
			$117,000	$123,000

XYZ has a Code Section 754 election in effect, and X sells her interest to W for $41,000 cash. The two Properties are both capital assets. Inventory A was contributed by X at a time when its unrealized appreciation was $6,000. At the time of the transfer, X’s share of the partnership’s basis in partnership assets is $35,000.

i.    How much is the Code Sec. 743(b) adjustment to each asset?

ii.   How much income would be allocated to each partner if, one year later, Property A is sold for $60,000?

Answer 1

(i)

The total adjustment will be W’s basis, $41,000, minus W’s share of the partnership’s basis in partnership assets (or previously taxed capital), $35,000, equals $6,000. This will be allocated first to the inventory as follows:

				Built-in		Adjusted
		Basis	FMV	Gn/Loss	W's share	Basis
Inventory A		$3,000	$15,000	$12,000	$8,000	$11,000
Inventory B		$15,000	$12,000	-$3,000	-$1,000	$14,000
		$18,000	$27,000	$9,000	$7,000	$25,000

It would then be allocated to the Properties as follows:

				Built-in		Adjusted
		Basis	FMV	Gn/Loss	W's share	Basis
Property A		$39,000	$54,000	$15,000	$5,000	$44,000
Property B		$60,000	$42,000	-$18,000	-$6,000	$54,000
		$99,000	$96,000	-$3,000	-$1,000	$98,000

(ii) If Property A is sold for $60,000, the total gain will be $60,000 - $44,000 = $16,000. However, W’s share of the basis in Property A equals 1/3($39,000) + $5,000 = $18,000. W’s share of the gain is therefore 1/3($60,000 sales price) - $18,000 = $2,000. The other partners’ shares of the gain are 1/3($60,000 sales price) – 1/3($39,000 common basis) = $7,000. The total gain will be $2,000 (for W) + $7,000 (for Y) + $7,000 (for Z) = $16,000. The basis adjustment only has an effect on the gain or loss of the transferee partner.

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