Question

Jack, Sarah and Dave establish CLEAN as a general partnership at the beginning of the current year. Jack contributes $60,000 in cash and equipment with a fair market value of $90,000 (basis of $60,000), and receives 40% ownership. Bill contributes a building with a fair market value of $150,000 (basis of $70,000), and receives 40% ownership. This building was subject to a non-recourse loan of $40,000, which CLEAN assumes. Dave contributes his legal and accounting services in running a business with a liquidation value of $40,000. Dave receives a capital interest for his service and a profit interest, 20% ownership.

During the year, CLEAN received dividend income of $6,000, and made cash distributions of $80,000 (in total) to the partners. It sold the equipment for $110,000. CLEAN also reports the following for the year: gross income of $200,000, operating expenses of $300,000 including a guaranteed payment of $50,000 to Dave.

Assuming all the partners actively participate in CLEAN, what is each partner’s (1) initial outside basis in CLEAN at the formation and (2) adjusted outside basis in CLEAN at the end of the year? If any partner has any income or carryforward consequences, you must mention it. Make sure to show ALL of your work.

Answer 1

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