Question

1. What is a partner’s or partnership’s interest in contributed property?

2.How is gain or loss calculated on contributed property?

3. What are the implications of contributing property that is encumbered by a liability?

4. What are the tax consequences of contributing service rather than property?

Answer 1

Answer 1:

What is a partner’s or partnership’s interest in contributed property?

Sometimes partners contribute properties to the partnership in exchange of interest. The partnership’s interest would be the same as the partners interest in the property. The basis what the partner had in the property would become the basis the partnership gets in the property and the basis what the partner gets in the partnership interest. contributed property to a partnership in exchange for a partnership interest will take an initial basis in the partnership equal to the amount of any money contributed and the adjusted basis of the contributed property

Answer 2:

How is gain or loss calculated on contributed property?

When a property is contributed to partnership generally there is no loss or gain on contributed property. However, gain could be recognized if the contributed property is subject to debt. Your liability towards the debt linked to the contributed property would be only to the extent of partnerships interest as the debt is taken over by the partnership along with the asset. But as a partner you will have the liability to the extent of the partnerships interest. There would be no gain on the deemed cash distribution because it does not exceed your basis in her interest. Gain would be there only when the debt relief would exceed the contributing partners total basis in his interest and vice-versa.

Answer 3:

What are the implications of contributing property that is encumbered by a liability?

Contribution of encumbered property to a partnership can result in gain recognition if there is a distribution of money, actual or deemed, to the Contributing Partner which exceeds its basis in the Partnership. The gain is recognized to the extent that any money distributed exceeds the adjusted basis of the partner's interest in the partnership immediately before the distribution. In analysing whether a distribution by a partnership to a partner exceeds the partner's basis in its partnership interest, the amount of any "deemed distribution" of money under Code See. 752(b) must be considered.

Answer 4:

What are the tax consequences of contributing service rather than property?

When partner renders service instead of property the partners basis could come in either capital interest or profits interests. Generally, contribution of services in exchange for a partnership interest will not qualify for tax-free treatment. As a result, the interest received is taxable to the partner. The timing of the income recognition depends on whether the partner’s right to withdraw from the partnership or dispose of the partnership interest is restricted and other facts and circumstances. But if a person receives a mere profits interest for the provision of services to or for the benefit of a partnership in a partner capacity or in anticipation of becoming a partner, the Internal Revenue Service will not treat the receipt of such an interest as a taxable event for the partner or the partnership, if:

• the profits interest does not relate to a substantially certain and predictable stream of income from partnership assets, such as income from high-quality debt securities or a high-quality net lease;
• within two years of receipt, the partner does not dispose of the profits interest; or
• the profits interest is not a limited partnership interest in a “publicly traded partnership”

A “profits interest” is one that does not give the owner any interest in the current assets or the entity or the right to receive distributions on liquidation.