Asked by Nachelle Culpepper on Jun 06, 2024
Verified
Doug,Geoffrey,and Fredrick form a partnership and contribute the following assets:
FMV Basis Partnership % Doug’s inventory $45,000$20,00033.3% Geoffrey’s building. $175,000$150,00033.3% Fredrick’s acctrecv. $50,00C$033.3%\begin{array}{lrrrr}&FMV&\text { Basis }&\text { Partnership }\%\\\text { Doug's inventory } & \$ 45,000 & \$ 20,000 & 33.3 \% \\\text { Geoffrey's building. } & \$ 175,000& \$ 150,000 & 33.3 \% \\\text { Fredrick's acctrecv. } & \$ 50,00 \mathrm{C} & \$ 0 & 33.3 \%\end{array} Doug’s inventory Geoffrey’s building. Fredrick’s acctrecv. FMV$45,000$175,000$50,00C Basis $20,000$150,000$0 Partnership %33.3%33.3%33.3% Geoffrey's building has a mortgage of $135,000 which the partnership assumes.
a.Do any of the partners recognize any gain? If so,how much and why?
b.What is each partner's basis in his or her partnership interest?
c.What is the basis to the partnership in each asset?
d.What are the holding periods to the partnership for each asset?
e.How would your answer change with respect to Geoffrey if his basis in the building was $85,000?
Acctrecv.
Short for "accounts receivable," this term denotes money owed to a company by its customers for goods or services delivered but not yet paid for.
Mortgage
A loan secured by the collateral of specified real estate property that the borrower is obliged to pay back with a predetermined set of payments.
Holding Periods
The length of time an investment is held before being sold, affecting the tax treatment of any gains or losses.
- Understand the procedure and outcomes associated with establishing a partnership, encompassing contributions and allocations.
- Gain an understanding of how partnership basis is determined and its criticality for tax implications.
- Understand the effect of asset contributions on the basis of both the partners and the partnership.
Verified Answer
CP
Cassie PoulainJun 12, 2024
Final Answer :
a.None of the partners recognize any gain on the formation.
b.
Doug Geoffrey Fredrick Beg basis $20,000$150,000$0Liabilities released (135,000) Share of liabilities$45,000$45,000$45,000 Ending basis$65,000$60,000$45,000\begin{array}{lr}&\text { Doug } & \text { Geoffrey } & \text { Fredrick } \\\text {Beg basis }&\$ 20,000 & \$ 150,000&\$0\\\text {Liabilities released }&&(135,000)\\\text { Share of liabilities}&\$45,000&\$45,000&\$45,000\\\text { Ending basis}&\$65,000&\$60,000&\$45,000\\\end{array}Beg basis Liabilities released Share of liabilities Ending basis Doug $20,000$45,000$65,000 Geoffrey $150,000(135,000)$45,000$60,000 Fredrick $0$45,000$45,000
c.
Basis Inventory $20,000 Building $150,000 Accounts receivable $0 Total Basis $170,000\begin{array}{lrr} &&{\text { Basis }} \\\text { Inventory } & \$ & 20,000 \\\text { Building } & \$ & 150,000 \\\text { Accounts receivable } & \$ & 0 \\\text { Total Basis } & \$ & 170,000\end{array} Inventory Building Accounts receivable Total Basis $$$$ Basis 20,000150,0000170,000
d.Inventory - the holding period starts the day of the contribution.
Building - the holding period would include Geoffrey's holding period.
Accounts receivable - the holding period starts the day of the contribution.
e.
Basis Beg. Basis $85,000 Release of liability $(135,000) Share of liability $45,000$(5,000) Gain recognized 5,000 Ending basis 0\begin{array}{lrr}&\text { Basis }\\\text { Beg. Basis } & \$ 85,000 \\\text { Release of liability } & \$(135,000) \\\text { Share of liability } & \$ 45,000\\&\$(5,000)\\\text { Gain recognized }&5,000\\\text { Ending basis }&0\end{array} Beg. Basis Release of liability Share of liability Gain recognized Ending basis Basis $85,000$(135,000)$45,000$(5,000)5,0000 There would be a $5,000 gain recognized by Geoffrey.When a release of liability causes the basis to go below zero,a gain would be recognized to raise the basis to zero.
b.
Doug Geoffrey Fredrick Beg basis $20,000$150,000$0Liabilities released (135,000) Share of liabilities$45,000$45,000$45,000 Ending basis$65,000$60,000$45,000\begin{array}{lr}&\text { Doug } & \text { Geoffrey } & \text { Fredrick } \\\text {Beg basis }&\$ 20,000 & \$ 150,000&\$0\\\text {Liabilities released }&&(135,000)\\\text { Share of liabilities}&\$45,000&\$45,000&\$45,000\\\text { Ending basis}&\$65,000&\$60,000&\$45,000\\\end{array}Beg basis Liabilities released Share of liabilities Ending basis Doug $20,000$45,000$65,000 Geoffrey $150,000(135,000)$45,000$60,000 Fredrick $0$45,000$45,000
c.
Basis Inventory $20,000 Building $150,000 Accounts receivable $0 Total Basis $170,000\begin{array}{lrr} &&{\text { Basis }} \\\text { Inventory } & \$ & 20,000 \\\text { Building } & \$ & 150,000 \\\text { Accounts receivable } & \$ & 0 \\\text { Total Basis } & \$ & 170,000\end{array} Inventory Building Accounts receivable Total Basis $$$$ Basis 20,000150,0000170,000
d.Inventory - the holding period starts the day of the contribution.
Building - the holding period would include Geoffrey's holding period.
Accounts receivable - the holding period starts the day of the contribution.
e.
Basis Beg. Basis $85,000 Release of liability $(135,000) Share of liability $45,000$(5,000) Gain recognized 5,000 Ending basis 0\begin{array}{lrr}&\text { Basis }\\\text { Beg. Basis } & \$ 85,000 \\\text { Release of liability } & \$(135,000) \\\text { Share of liability } & \$ 45,000\\&\$(5,000)\\\text { Gain recognized }&5,000\\\text { Ending basis }&0\end{array} Beg. Basis Release of liability Share of liability Gain recognized Ending basis Basis $85,000$(135,000)$45,000$(5,000)5,0000 There would be a $5,000 gain recognized by Geoffrey.When a release of liability causes the basis to go below zero,a gain would be recognized to raise the basis to zero.
Learning Objectives
- Understand the procedure and outcomes associated with establishing a partnership, encompassing contributions and allocations.
- Gain an understanding of how partnership basis is determined and its criticality for tax implications.
- Understand the effect of asset contributions on the basis of both the partners and the partnership.
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