At the beginning of the current? year, Barry and Irving formed the BI Partnershi
ID: 2408020 • Letter: A
Question
At the beginning of the current? year, Barry and Irving formed the BI Partnership by transferring cash and property to the partnership in exchange for a partnership? interest, with each having a? 50% interest.? Specifically,Barry transferred property having a $70,000 ?FMV, a $38,000 adjusted? basis, and subject to a $9,000 ?liability, which the partnership assumed.Irving contributed $35,000 cash to the partnership. The partnership also borrowed $32,000 from the bank to use in its operations. All liabilities are recourse for which the partners have an equal economic risk of loss. During the current? year, the partnership earned $26,000 of net ordinary income and reinvested this amount in new property.
a.
What is the? partnership's and each? partner's gain or loss recognized on the formation of the? partnership?
b.
What is each? partner's basis in his or her partnership interest at the end of the current? year?
c.
For the? partnership, prepare a tax and book balance sheet at the end of the current year.
d.
a.
What is the? partnership's and each? partner's gain or loss recognized on the formation of the? partnership?
b.
What is each? partner's basis in his or her partnership interest at the end of the current? year?
c.
For the? partnership, prepare a tax and book balance sheet at the end of the current year.
d.
Assume instead that Barry and Irving formed a corporation rather than a partnership. What is the? corporation's and each? shareholder's gain or loss recognized on the formation of the? corporation? What is each? shareholder's basis in his or her stock at the end of the current? year?Explanation / Answer
a. None. As per section 721, no gain or loss is recognized to a partnership or any of its partners upon contribution of property in exchange on partnership interest. b. Partners' basis in partnership interest at the end of the current year Barry's basis in partnership interest Adjusted basis of property transferred $38,000 Less: Liability assumed by partnership ($9,000) Add: Share of partnership liabilities (9000+32000) x 50% $20,500 Add: Share of partnership ordinary income (26000 x 50%) $13,000 Adjusted basis at the end of current year $62,500 Irving's basis in partnership interest Adjusted basis of property transferred $50,000 Add: Share of partnership liabilities (9000+32000) x 50% $20,500 Add: Share of partnership ordinary income (26000 x 50%) $13,000 Adjusted basis at the end of current year $83,500 c. Tax and book balance sheet at the end of current year Particulars Tax Book Cash $82,000 $82,000 Contributed property $29,000 $38,000 New property $26,000 $26,000 Total Assets $137,000 $146,000 Liabilities $32,000 $41,000 Capital accounts: Barry $42,000 $42,000 Irving $63,000 $63,000 d. As per section 351, no gain or loss is recognized, if the property is transferred in exchange of stock,and immediately after transfer the transferree control the corporation. Any liablity assumed by corporation is not treated as boot. Barry's basis in corporation Adjusted basis of property transferred $38,000 Less: Liability assumed by partnership ($9,000) Add: Share of partnership liabilities (9000+32000) x 50% $20,500 Adjusted basis at the end of current year $49,500
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