Luke, Ben, Rey, and Leia decided they want to start a new business together that
ID: 2476989 • Letter: L
Question
Luke, Ben, Rey, and Leia decided they want to start a new business together that involved developing software which provided encryption for various mobile devices. Luke and Ben each intended to contribute $110,000 in cash and Rey planned to transfer a small office building that would be used in the business. The land had a tax basis of $70,000 and was appraised at $180,000. The land was also encumbered with a $70,000 nonrecourse mortgage for which no one was personally liable. Leia did not have any assets to contribute to the business, but was going to provide a substantial portion of her time to develop the software, including early uses to generate revenue. They agreed that each individual should receive a 25% share in the future profits and losses of the business.
a. Determine the amount of gain or loss, if any, recognized by each individual and each individual’s initial basis in their ownership interest in the business immediately after formation if the business is treated as a general partnership.
Explanation / Answer
Answer:
Description Luke Ben Rey Leia Explanation 1) basis in contributed land 70000 2) cash contributed 110000 110000 3) debt allocated to partners 17500 17500 17500 17500 70000/4 4) relief from nonrecourse mortgage -70000 5) gain recognized 0 0 0 0 (1)+(4) 6) partner's initial tax basis 127500 127500 17500 17500 sum of (1) to (5)Related Questions
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