Question

ACCT 540

Partnership Formations Problem - This is the topic. This is for Advance Income Tax Accounting class.

Mary and Todd form the MT Partnership, with a transfer of the following properties:

                Mary                                     $1,200,000 cash

               

                Todd                                      $800,000 FMV property

                                                                $300,000 tax basis

                                               

                                                                               

Mary will receive 60% and Todd 40% of the partnership interests.

Complete the following

                                                                                                Mary                                     Todd

                Realized gain                                                      ________                           ________

                Recognized gain                                                ________                           _________

                Basis of PS interest                                          _________                         _________

                MT basis in contributed asset                     __________                       _________

VARIATION 1: return to original facts. Todd’s property is valued at $1,100,000 but is contributed subject to a $300,000 liability.   Based on the debt sharing rules of Section 752, Todd’s share of the debt is 40% after formation and Mary’s share is 60%.

Complete the following

                                                                                                Mary                                     Todd

                Realized gain                                                      ________                           ________

                Recognized gain                                                ________                           _________

                Basis of partnership interest                       _________                         _________

                MT basis in contributed asset                     __________                       _________

VARIATION 2: Same as Variation 1 except Todd’s property is valued at $1,200,000 and is contributed subject to a liability of $400,000. The debt shares are again 60/40.

Answer 1

PLEASE GV A RATING IF U LIKE MY EFFORTS, IT WILL KEEP US MOTIVATED. THANK YOU IN ADVANCE. In case u have a query post in comment column, will revert.

Ans : Generally, transferring property into a corporation in exchange for its stock is a taxable event. The transaction is treated as if you sold property to the corporation in return for cash.

The difference between the stock value received and the tax basis in the property transferred to the corporation will result in a gain or loss.

As per section 351, when cash and/or any property is transferred to C Corp. and these contributed capital by one or more of the shareholder constitues 80% or more control in the C corp. then such contributions made by shareholder will not be taxable.

As per sec 351,

Shareholder basis for stock= carryover basis of the shareholder - mortgage debt (if any)

Corporation's basis for property = Carryover basis of the shareholder

Particulars				mary	todd
Realised gain			0	0
Recognised gain			0	0
Basis of stock			1200000	300000
MT basis in contributed asset			300000

VARIATION 1:

Variation 1: -
Particulars				MARY	TODD
Realised gain			0	0
Recognised gain			0	0
Basis of stock			1200000	120000 (n1)
MT basis in contributed asset			300000

NOte 1

Basis of Property Contributed	3,00,000
Plus: Justins share of Partnership Laibility		1,20,000	Liability*psr
Less: Justins Liability Transferred to Partnership		3,00,000
					1,20,000

Variation 2: -
But exception to section 351 will be considered here as mortgage debt exceeds shareholder's adjusted basis in the property.
Also, corporate's basis for property = Carryover basis + gain recognized
Here, gain will be recognized on excess liability so that shareholder's adjusted basis is $0,
Hence, Tod's basis for stock = $300,000 - $400,000 +$100,000
MT corp's basis in the property = $300,000 + $100,000 = $400,000
Particulars				MARY	TODD
Realised gain			0	0
Recognised gain			0	100000
Basis of stock (Carryover - Mortgage debt)	1200000	0
MT basis in contributed asset			400000