Tax 5015 (Spring 2011) – Chapter Review Exercise #7

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TAX 5015 (Spring 2011) – Chapter review exercise #7
Topic review: Partnership formation and operations
Due date: March 23/24, 2011
Name(s): SOLUTION
Part 1: Partnership formation. In January of 2010, Jason and Jesse contribute the following assets to become equal partners in the J&J General Partnership.

Partner
Jason
Jesse

Property contributed
Cash
Office equipment
Land
Building1

Cost

MACRS
depreciation taken

49,000
17,000
52,000

15,000
8,000

Fair value
25,000
75,000
35,000
75,000

Note: (1) The building is subject to a nonrecourse liability of $10,000, which is assumed by the partnership. The partnership will use all of these assets in its business. Subsequent to forming the partnership, J&J secures a nonrecourse loan in the amount of $18,000 from a private individual using the land as security. No payments are due on the loan until 2013. The partnership agreement states that the partners will share profits, losses, and all liabilities equally. Additionally, Jesse and Jason are both material participants in all partnership activities.

Required:
a. What is the amount and character of the gain/loss recognized on the transfer by Jason? and by Jesse? Under Sec. 721, no gain or loss is recognized by either partner. b. What initial bases do Jason and Jesse have in their partnership interests (after taking into consideration liabilities)? A substituted basis + share of liabilities. c. What are their at-risk amounts? Adjusted basis less nonrecourse liabilities. Jason

Jesse

25,000
34,000

17,000
44,000

59,000
5,000
9,000

61,000
(10,000)
5,000
9,000

(b) Adjusted basis –beginning

73,000

65,000

Less: Nonrecourse debt

(5,000)
(9,000)

(5,000)
(9,000)

(c) At-risk amount – beginning

59,000

51,000

AB property contributed

Less: Debt relief for Jesse
Plus: 1/2 Jesse's debt assumed by each partner
Plus: 1/2 additional debt taken on by partnership

d. What are the partnership’s bases in the contributed property? A carryover basis. •



Equipment:
Land:
Building:

$34,000
$17,000
$44,000
$95,000

e. During 2010, the J&J General Partnership sustains an operating loss of $140,000. How much, if any, of this loss can Jason and Jesse deduct on their individual tax returns (assume they have substantial income from other sources)? How much is suspended under (1) the basis rules, and (2) the at-risk limitations?

Jason

Jesse

70,000
(73,000)

70,000
(65,000)

0

5,000

70,000
(59,000)

65,000
(51,000)

(e) Suspended under the at-risk limits

11,000

14,000

(e) Partnership loss deducted in 2010

59,000

51,000

Share of partnership loss
Amount deductible under the basis rules
(e) Suspended under the basis rules
Amount carried forward to the at-risk limits
Amount deductible under the at-risk limits

f. In 2012, the land and building that Jesse contributed is sold for $120,000 (with $30,000 being allocated to the land). Assume that an additional 2,000 of MACRS depreciation has been recognized. What is the amount and character of the partnership gain (loss) that Jesse and Jason, respectively, should report? Land

Building

Selling price
Cost
Less: MACRS

30,000

90,000

Adjusted basis

(17,000)

(42,000)

Sec. 1231 gain

13,000

48,000

Pre-contribution gain

18,000

31,000

52,000
(8,000)
(2,000)

Jason

Jesse

Pre-contribution gain – land

13,000

Pre-contribution gain – building

31,000

1/2 post contribution gain ($17,000)

8,500

8,500

(f) Total Sec. 1231 gain

8,500

52,500

Note: Some is “unrecaptured” Sec. 1250 gain
1,000
(amount related to MACRS (8,000 + 2,000) taken on
building)

9,000

Part 2: Partnership operations. Magic Company is a general partnership with two equal partners, Nelson and Howard. At the beginning of 2010, the partnership had $20,000 in liabilities. Nelson’s beginning of year basis in his partnership...
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