Question

U.S Tax laws apply

Kevin, Gerald and Robb formed HyperTech Systems, LLC. No election was made as to the status of this entity, as they wanted to leave it as a partnership. Kevin and Robb contributed $245,000 to the partnership. Gerald contributed the following assets:

Asset	Basis	Fair Market Value
Cash	$15,000	$15,000
Land	$120,000	$440,000
	$135,000	$445,000

1. What is the tax basis of Kevin and Robb in the partnership?

2. Assume Gerald is asking for an equal part in the partnership in terms of capital? What will be the tax effects to Gerald?

3. Assume Gerald is asking for an equal share in the partnership in terms of profits and losses only. What are the tax effect to Kevin, Robb and Gerald?

Answer 1

Answers:

a) The tax basis of a partnership is always equal to the adjusted basis of the contribution the partners gave to the partnership in form of cash or property. The adjusted amount paid by Kevin and Robb was $245,000 and the adjusted cash and assets contributed by Gerald was $445,000. Te tax basis of Kevin and Robb will be based on $245,000 of the total partnership contribution of $690,000. The profit shared that will be taxed on Kevin and Robb's personal accounts will base on 245,000:690,000 ratio.

b) If Gerald asks for an equal part in the partnership, the taxes will reduce from the initial amount contributed to a lower amount due to having an equal measure. Under normal operations, Gerald would have had a bigger share of the returns.

c) If Gerald asks for an equal share of the profits and losses only, the tax effect to Kevin and Robb will reduce due to the increased amount of income that will be received from the partnership. They will pay higher taxes.