Question

Han Solo and Chewbacca are forming HC, LLC. Han contributes $600,000 cash and Chewie contributes nondepreciable property with an adjusted basis of $400,000 and a fair market value of $750,000. The property is subject to a $150,000 liability, which is also transferred into the partnership and is shared equally by the partners for basis purposes. Han and Chewie share in all partnership profits and losses equally except for any precontribution gain, which must be allocated.

a. What is Han and Chewie’s adjusted tax bases for their partnership interests immediately after the partnership is formed?

b. What is the partnership’s adjusted basis for the property contributed by Chewie?

c. If the partnership sells the property contributed by Chewie, how is the tax gain allocated between the partners?

Answer 1

Answer:

Han Solo's adjusted basis for their partnership interests immediately after the partnership is formed = $675,000

Chewbacca's adjusted basis for their partnership interests immediately after the partnership is formed = $325,000

Workings:

Answer b:

Adjusted basis for the property contributed by Chewbacca = $400,000

Answer c:

Out of the total gain, recognize gain realized that existed at the contribution date and allocate this to Chewbacca.

Share balance gain equally between Han Solo and  Chewbacca.

For example if the non-depreciable property is sold at $800,000, then

1. Allocate pre-contribution gain of ($750,000 - $400,000 =) $350,000 to Chewbacca.

2. Share balance $50,000 equally between Hans Solo ($25,000) and  Chewbacca ($25,000).