Question

Suzy contributed assets valued at $300,000 (basis of $200,000) in exchange for her 40% interest in Suz-Anna GP (a general partnership). Anna contributed land and a building valued at $640,000 (basis of $380,000) in exchange for the remaining interest. Anna's property was encumbered by a qualified nonrecourse debt of $100,000, which was assumed by the partnership. The partnership reports the following income and expenses for the current tax year:

Sales $560,000

Utilities, salaries, and other operating expenses 360,000

Shart-term capital gain 10,000

Tax-exempt interest income 4,000

Charitable contributions 8,000

Distribution to Suzy 10,000

Distribution to Anna 20,000

At the end of the year, Suz-Anna held recourse debt of $100,000 for partnership accounts payable and qualified nonrecourse debt of $200,000.

A. What is Suzy's basis in Suz-Anna after formation of the partnership? Anna's basis?

B. What income and separately stated items does Suz-Anna report on Suzy's Schedule K-1? What items does Suzy report on her tax return?

C. All partnership debts are shared porportionately. At the end of the tax year, what are Suzy's basis and amount at risk inher partnership interest?

Answer 1

(A):- Suzy’s beginning basis in her partnership interest is $240,000, calculated as follows:-

Basis in contributed business-related assets $200,000

Share of partnership nonrecourse debt 40,000

Total beginning basis $240,000

==>> Anna’s beginning basis in her partnership interest is $340,000, calculated as follows:-

Basis in contributed business-related assets $380,000

Relief of debt assumed by the partnership (100,000)

Share of partnership nonrecourse debt 60,000

Total beginning basis $340,000.

(B):- The partnership reports ordinary income of $200,000. Separately stated items include the short-term capital gain ($10,000), tax-exempt interest income ($4,000), and charitable contributions ($8,000).

=>> Suzy’s Schedule K-1 shows the following items:

Ordinary income $80,000

Short-term capital gain 4,000

Tax-exempt interest income 1,600

Charitable contributions 3,200

Distribution received by Suzy 10,000

On her tax return, Suzy reports the $80,000 of ordinary income on Schedule E. She reports the short-term capital gain ($4,000) with her capital transactions on Form 8949 and Schedule D. She reports the charitable contributions ($3,200) on Schedule A with her personal charitable contributions. The tax-exempt interest income and the distribution she receives are not taxable.

(C):- Assume that all partnerships debts are shared proportionally. At the end of the tax year, Suzy’s basis in her partnership interest is $392,400 (including a $80,000 share of partnership nonrecourse debt and a $40,000 share of partnership recourse debt),

calculated as follows:-

Beginning basis $240,000

Increase in Suzy’s share of recourse debt(40% × $100,000) =40,000

Increase in Suzy’s share of qualified nonrecourse debt[40% × ($200,000 – $100,000)] 40,000Partnership ordinary income 80,000Short-term capital gain 4,000 Tax-exempt interest income 1,600 Charitable contributions (3,200) Distribution to Suzy (10,000) Ending basis $392,400 Suzy’s amount at risk is the same as her basis in the partnership interest, because the nonrecourse debt is qualified nonrecourse financing. End of the tax year.