Smith, Jones, and Green are to be equal general partners in the SJG partnership.
ID: 2601438 • Letter: S
Question
Smith, Jones, and Green are to be equal general partners in the SJG partnership. Smith transferred land with an adjusted basis of $820,000 and a FMV of $1,800,000 to the partnership. At the time of transfer, the land was encumbered by a $1,200,000 recourse debt, which had been incurred 7 years earlier. Jones contributed cash of $600,000 and Green contributed cash of $450,000 to the partnership.
a. What is the partnership's inside basis in the land?
b. What is Smiths capital account balance and his outside basis in his partnership interest?
c. What is Jones capital account balance and his outside basis in his partnership interest?
d. What amount of gain or loss, if any, must Smith recognize as a consequence of the above transfer?
Assume instead that the liability was a non-recourse debt
e. What is Smiths capital account balance and his outside basis in his partnership interest?
f. What is Greens capital account balance and his outside basis in his partnership interest?
g. What amount of gain or loss, if any, must Smith recognize as a consequence of the above transfer?
Explanation / Answer
a.
Partnership's inside basis in Land = Adjusted basis of land = $820,000
b.
Smiths capital account balance = FMV of Land - Recourse Debt = $1,800,000 - $1,200,000 = $600,000
Smith's adjusted basis (transfer of land) = $820,000
Share of recoursed debt of each partner = $1,200,000 / 3 = $400000
So, Deemed cash distrubution = ($400000 x 2) = $800,000
Smith outside basis = $820,000 - $800,000 = $20000
c.
Jones capital account balance = Contribution in cash = $600,000
Jones contributed cash of $600,000
Add: Share of Debt = $400,000
Jones outside Basis = $1,000,000
d.
There is no gain because deemed cash distribution does not exceeds Smith's outside basis but Smith's basis will be reduced from $820.000 to $20000
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