Question

In: Accounting

C is offered a capital interest in a partnership whose sole asset is a commercial building...

C is offered a capital interest in a partnership whose sole asset is a commercial building with a fair market value of $150,000 and an adjusted basis of $90,000. The building has been depreciated on the straight line method. A and B have $45,000 outside bases in their respective partnership interests. C has performed real estate management services for the partnership over the past year and has agreed to perform additional services in the future.

(a) What are the tax consequences to C and to the partnership (i.e., A and B) if in year one C receives a 10% capital interest in the partnership as compensation for his management services over the past year?

(b) What result in (a), above, if C receives his capital interest in exchange for legal services performed in connection with the acquisition of the building?

(c) What result in (a), above, if C receives his interest as compensation for services to be rendered, however that if C ceases to render services before the end of the year three, C or any transferee of C must relinquish his interest in the partnership. Assume for this problem that the building will have a value of $450,000 and an adjusted basis of $90,000 at the end of year three.

(d) What result in (a), above, if C is promised that if he renders services until the end of year three, the partnership interest will be transferred to him at that time? Again, assume that the building will have a value of $450,000 and an adjusted basis of $90,000 at the end of year three.

Solutions

Expert Solution

Assets Liabilities and Patners capital
Adjusted Basis Book Value Liablility Tax Capital Book Capital
building $90000 $150000 Capital
A $45000 $75000
B $45000 $75000
$90000 $150000 $90000 $150000

a) Deduction decreased by $7500

A's and B's Basis = $45000 - $7500 = $37500

     Assets    Liabilities and Patners capital
Adjusted Basis Book Value Liablility Tax Capital Book Capital
Building    $90000 $150000 Capital
A $37500 $67500
B $37500 $67500
C $15000 $15000
$90000 $150000 $90000 $150000

c) Deduction decreased by $22500

$75000+$150000 - $22500 = $202500

  Assets    Liabilities and Patners capital
Adjusted Basis Book Value Liablility Tax Capital Book Capital
Building    $90000 $450000 Capital
A $22500 $202500
B $22500 $202500
C $45000 $45000
$90000 $450000 $90000 $450000

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