In the beginning of the curren
In the beginning of the current year, Barry and Irving formedthe BI Partnership by transferring cash and property to thepartnership in exchange for a partnership interest, with eachhaving a 50% interest. Specifically, Barry transferred propertyhaving a $40,000FMV, a $26,000adjusted basis, and subject to a$7,000liability, which the partnership assumed. Irving contributed$45,000cash to the partnership. The partnership also borrowed$29,000from the bank to use in its operations. All liabilities arerecourse for which the partners have an equal economic risk ofloss. During the current year, the partnership earned $26,000of netordinary income and reinvested this amount in new property.
Requirements:
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What is the partnership’s and each partner’s gain or lossrecognized on the formation of the partnership? |
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What is each partner’s basis in his or her partnership interestat the end of the current year? |
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For the partnership, prepare a tax and book balance sheet at theend of the current year. |
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Assume instead that Barry and Irving formed a corporation ratherthan a partnership. What is the corporation’s and eachshareholder’s gain or loss recognized on the formation of thecorporation? What is each shareholder’s basis in his or her stockat the end of the current year? |
Answer:
| a) None.As per section 721, no gain or loss is recognised to apartnership or any if its partners upon contribution of property inexchange on partnership interest | ||
| b) Partners basis in partnership interest at the end of thepresent year. | ||
| Barris basis in partnership interest | ||
| Adjusted basis of property transferred | $26,000 | |
| Less:Liabilty assumed by partnership | $7,000 | |
| Add:Share of partnership liabilities(7000+29000)*50% | $18,000 | |
| Add:Sahre of partnership ordianry income(26,000*50%) | $13,000 | |
| Adjusted basis at the end of theyear(26000+7000+18000+13000) | $64,000 | |
| Irving’s basis in partnership interest | ||
| Adjusted basis of property transferred | $50000 | |
| Add:Share of partnership liabilities(7000+29000)*50% | $18,000 | |
| Add:Share of partnership ordinary income(26000*50%) | $13,000 | |
| Adjusted basis at the end ofthe year(50000+18000+13000) | $81,000 | |
| c) Tax and book balance sheet at the end of the year | ||
| Particulars | Tax | Boook |
| Cash(26000+7000+45000) | $78,000 | $78000 |
| Contributedproperty(45000-7000) | $38,000 | $45,000 |
| New property | $26,000 | $26,000 |
| Total assests | $142,000 | $149,000 |
| Liabilities | $29,000 | $36,000 |
| Capital accounts | ||
| Barry(40,000-26000) | $14,000 | $14,000 |
| Irving(26000+45000) | $71,000 | $71,000 |
| d) As per section 351,no gain or loss is recognised if theproperty is tranferred in exvchange of stock and imeediately aftertranfer the transferrence control the corporation any liabilityassumed by corporations is not treated as boot. | ||
| Barry basis in corporation | ||
| Adjusted basis of property transferred | $26,000 | |
| Less: liability assumed by partnership | $7,000 | |
| Add: Share of partnership liabilities(7000+29000)*50% | $18,000 | |
| Adjusted basis at the end of currentyear(26000+18000-7000) | $37,000 |
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