PARTNERSHIPS AND LIMITED LIABILITY COMPANIES
CASE STUDY 1AO
Burt Blue (age 60) has practiced ophthalmology as a sole proprietor.
Greg Green (age 45) was in an HMO which just disbanded.
In the breakup, he was allowed to take the ophthalmologic patients and the
Herb Hazel (age 30), also an ophthalmologist, has been an employee of Burt's.
The three doctors decide to form a limited liability partnership, "Associated
Ophthalmologists, LLP," to commence business in rented offices at the beginning of
Burt and Greg are to contribute the assets as set forth below; Herb is to contribute
Due from patients
Partnership Interests (%)
The furniture is five year MACRS property. Burt had purchased all of it in 1998 for $50,000
and had depreciated it using the half-year convention.
In exchange for the assets contributed, Burt is to receive 60% of the capital and profits
interests, and Greg 40 % .
However, for services performed, at the end of 2001, Herb is to receive a 10 % capital
and profits interest, and an additional 10% interest at the end of 2002; Burt's and
Greg's interests will be reduced proportionately.
The partnership books are to be kept on the accrual method and with recognition of
the values of the contributed assets, but tax returns are to be filed on the cash method.
Both proprietors had used the cash method of accounting. The accounts payable are due
to vendors of services to Burt’s practice, and are not related to the Furniture and
The doctors, all of whom file their individual returns on a calendar-year basis, are
indifferent to the choice of a fiscal year.
This exercise is intended to fortify your existing knowledge that no gain or loss is
recognized on the contribution of property to a partnership in exchange for a
partnership interest [Section 721(a)], that the initial basis of the partnership interest