Question

Organization of business as partnership or corporation¬¬¬ On May 31, six brothers decided to form the Grimm Brothers Partnership to publish and print children’s stories. The contributions of the brothers and their partnership interests are listed below. They share the economic risk of loss from liabilities according to their partnership interests. Individual Asset Basis to Pr FMV Partnership Interest Al Cash 15,000 15,000 15% Bob Accts Receivable -0- 20,000 20% Clay Office Equipment 13,000 15,000 15% Dave Land 50,000 15,000 15% Ed Building 15,000 150,000 20% Fred Services ? 15,000 15% The following other information about the contributions may be of interest: • Bob contributes accounts receivable from his proprietorship, which uses the cash method of accounting. • Clay uses the office equipment in a small business he owns. When he joins the partnership, he sells the remaining business assets to an outsider. He has claimed $8,000 of MACRS depreciation on the office equipment. • The partnership assumes a $130,000 mortgage on the building Ed contributes. Ed claimed $100,000 of straight-line MACRS depreciation on the commercial property. • Fred, an attorney, drew up all the partnership agreements and filed the necessary paperwork. He receives a full 15% capital and profits interest for his services. 1. How much gain, loss, or income must each partner recognize as a result of the formation? 2. How much gain, loss, or income must the partnership recognize as a result of the formation? 3. What is each partner’s basis in his partnership interest? 4. What is the partnership’s basis in its assets? 5. What is the partnership’s initial book value of each asset? 6. What effects do the depreciation recapture provisions have on the property contributions? 7. What are the tax consequences to the partners and the partnership when the partnership sells for $9,000 the land contributed by Dave? Prior to the sale, the partnership held the land as an investment for two years.

Now answer the same questions assuming that this is the organization of a corporation instead of a partnership.

Answer 1

1. How much gain, loss, or income must each partner recognize as a result of the formation?

Fred recognised a income of $15000. Others do not recognise any gain or income

2. How much gain, loss, or income must the partnership recognize as a result of the formation?

There is no gain loss or income in partnership.

3.What is each partner’s basis in his partnership interest?

Al:	$15000	Cash contribution
	19500	Mortgage allocated to partner
	$34500	Basis of partnership interest
Bob:	$0	Accounts receivable basis to Bob
	26000	Mortgage allocated to partner
	$26000	Basis of partnership interest
Clay:	$13000	Equipment basis to Clay
	19500	Mortgage allocated to partner
	$32500	Basis of partnership interest
Dave:	$50000	Land basis to Dave
	19500	Mortgage allocated to partner
	$69500	Basis of partnership interest
Ed:	$15000	Building basis to Ed
	(130000)	Mortgage contributed to partnership
	26000	Mortgage allocated to partner
	($89000)	Tentative basis (amt of gain recognised)
	$0	Actual basis
Fred:	$15000	Service contributed by Fred
	19500	Mortgage contributed to partner
	$34500	Basis of partnership interest

4. What is the partnership’s basis in its assets?

Assets	Amount
Cash	15,000
Accounts receivable	0
Land	50,000
Office equipment	13,000
Building	15,000
Organisational expenses	15,000