1.Unlike a subchapter C corporation, a partnership is subject to only one level of taxation and can often liquidate in a tax-deferred manner.
A partnership is a flow-through entity subject to only one level of taxation. Liquidation of the partnership is generally tax-deferred.
PTS:1REF:p. 21-2 | p. 21-3
2.Section 721 provides that no gain or loss is recognized on contribution of property to a partnership in exchange for an interest in the partnership. An exception might apply if the taxpayer receives a cash distribution from the partnership soon after the property contribution.
A contribution of property to a partnership followed by a distribution soon thereafter may be recharacterized as a disguised sale of the property by the partner to the partnership. A disguised sale does not receive tax-deferred treatment under § 721.
3.Jim and Nancy formed an equal partnership on June 1 of the current year. Jim contributed $10,000 cash and land with a basis of $8,000 and a fair market value of $6,000. Nancy contributed equipment with a basis of $14,000 and a value of $16,000. Nancy’s tax basis in her interest is $14,000; Jim’s tax basis is $18,000.
Jim’s basis includes the $8,000 substituted basis for the contributed land plus $10,000 cash, for a total of $18,000. Nancy’s basis is $14,000, a substituted basis from the contributed equipment.
PTS:1REF:Example 7 | Example 14
4.Rachel and Barry formed the equal RB Partnership during the current year, with Rachel contributing $100,000 in cash and Barry contributing land (basis of $60,000, fair market value of $80,000) and equipment (basis of $0, fair market value of $20,000). Barry recognizes a $40,000 gain on the contribution and his basis in his partnership interest is $100,000.
Under § 721, neither the partnership nor a partner will generally recognize gain or loss on contribution of property to a partnership. Barry’s substituted basis in his partnership interest is his $60,000 basis in the assets contributed ($60,000 basis in land plus $0 basis in equipment).
PTS:1REF: Example 8 | Example 9
5.John and Ken formed the equal JK Partnership during the current year, with John contributing $50,000 in cash and Ken contributing land (basis of $30,000, fair market value of $20,000) and equipment (basis of $0, fair market value of $30,000). Ken recognizes no gain or loss on the contribution and his basis in his partnership interest is $30,000.
Under § 721, neither the partnership nor a partner will generally recognize gain or loss on contribution of property to a partnership. Ken’s basis in his partnership interest is the $30,000 basis in the assets contributed ($30,000 basis in land plus $0 basis in equipment).
PTS:1REF: Example 8 | Example 9
6.Julie is a real estate developer and owns property that is treated as inventory (not a capital asset) in her business. She contributed a parcel of this land (basis $60,000; fair market value $58,000) to a partnership, which will also hold it as inventory. After three years, the partnership sells the land for $56,000. The partnership will recognize a $4,000 ordinary loss on sale of the property.
Since the property was not a capital asset in Julie’s hands, the partnership is not subject to the requirement that precontribution losses (realized and recognized by the partnership within five years of contribution) be treated as capital losses.
7.The XYZ Partnership, a calendar year taxpayer, was formed on April 1 of the current year. It incurred $23,000 of legal fees on formation. XYZ may deduct $5,000 and amortize the remaining $18,000 over 180 months, for $900 in the current year.
All organization costs incurred by the end of the first taxable year of the partnership may be expensed (up to $5,000) and the balance amortized over 180 months...