Question

QUESTION 3

The XYZ partnership has been operating for several years. All of its assets were purchased by the partnership, and at the end of the current year it’s balance sheet, which has been expanded to show the current fair market value of assets and capital, is as follows:

	Assets		Liabilities & Capital
	AB/Book	FMV	Liabilities
Cash	$600	$600	None
Accts. Rec.	0	200
Equipment	100	200
Stock	500	1000
Land	300	1000
Total	$1500	$3000
			Capital Accounts
			Tax/Book	FMV
		X	$500	$1000
		Y	500	1000
		Z	500	1000
			$1500	$3000

On the last day of the current year, W joins the partnership. In exchange for a contribution of $1000 cash, she receives a 25% interest in partnership profits, losses, and capital.

Reconstruct the balance sheet of the partnership following W’s admission to the partnership, assuming, in the alternative:

The partnership does not elect to revalue its assets under § 1.704- 1(b)(2)(iv)(f), or

The partnership does elect to revalue its assets under the regulations.

If W had purchased X’s interest in the partnership instead of acquiring an interest through a contribution to the partnership, would the partnership be permitted to revalue its assets under the regulations? Why or why not?

Answer 1

As W joins he will recognize one fourth of the fair market value of the partnership capital or $3000/4

$750 as ordinary income.

Therefore W basis in the partnership interest will be equal to the amount of income he reports or $750.

Immedaitely after W admission into the partnership the partnership Balance Sheet will be appear as follows:

                                  XYZ Partnership

                                   Balance Sheet

                                    Tax Basis                704(b)/FMV

Assets

Cash                              $600                         600

Land                              $300    1000

Inventory    $500    1000

Accounts Rece                $0 200

Equipment $100    200

Total    $1500 3000

Capital  

Capital-X                       $250                         750

Capital-Y                       $250                         750

Capital-Z                       $250                         750

Capital-W                      $750                         750

Total                             $1500                       3000

Esentially the tax capital and 704(b) capital accounts for both X,Y and Z are deducted of the compensation expense the partnership will deduct for the capital interest W receives.

If W only receives the profit interest he will not recognize any income he receives a profit allocation from the partnership.