TAX 5015 (Spring 2011) – Chapter review exercise #7
Topic review: Partnership formation and operations
Due date: March 23/24, 2011
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.
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.
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
(b) Adjusted basis –beginning
Less: Nonrecourse debt
(c) At-risk amount – beginning
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. •
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?
(e) Suspended under the at-risk limits
(e) Partnership loss deducted in 2010
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
Sec. 1231 gain
Pre-contribution gain – land
Pre-contribution gain – building
1/2 post contribution gain ($17,000)
(f) Total Sec. 1231 gain
Note: Some is “unrecaptured” Sec. 1250 gain
(amount related to MACRS (8,000 + 2,000) taken on
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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