Question

Attorney, a cash method unincorporated sole practitioner, joins a cash method partnership of 3 other attorneys all of whom own an equal 25% interest of the partnership after Attorney joins the firm. Attorney transfers some accounts receivable for services with a zero basis and a $20,000 face value to the partnership as part of her contribution in exchange for her partnership interest. The partnership also assumes $6,000 of Attorney’s accounts payable. What are the tax consequences of the transaction to attorney? See Internal Revenue Code Section 704(c)(3).

Answer 1

As per the 704(c)(1)(A) its deals with the special provision regarding artificial transfer of tax consequance in between the partners with respect to pre conditioned gain or loss for shifting of tax consequances. The said section also states about the tax treatment and taxability of various transfer. In case of partnership the various partners have various type of tax liability. To avoid the tax evasion the section is formed.

If the property is transfer by the partners to the partnership then in that case the gain or loss occured due to such transfer is taxable in the hands of the transfering partners and the fair value of the consideration is considered the market value of the property on the date of tansfer. So as per the provison if the gain or loss arises due to any transfer of assets or liabilities then the same is taxable in the hands of the partner and in the hands of the partnership firm. The reason behind such provision is, it will be unjustified if the gain or loss is taxable in the hands of the partnership firm. The partners are not responsible and they will not enjoy the gain or loss of such transfer. Such gain or loss is enjoyed by the partner who transfer the same.

In the instant case Attorny transfer his receivable face value of $20,000 to the partnership firm and also the liability of $6,000 genertated in the name of Attorny. So the advantage was taken by Attorny. As per the said section of theh ferderal taxation of the commssion of income tax the said advantages are taxable in the hands of Attorny and not in the hands of partnership firm.