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