Exercise 64 : Audra acquired a 50% interest in a partnership by contributing property that had an adjusted basis of $20,000 and a fair market value of $50,000. The property was subject to a liability of $44,000, which the partnership assumed for legitimate business purposes. Which of the following statements is CORRECT? A. Audra must include a gain from the sale or exchange of a capital asset on her individual return, and her basis in her partnership interest increases. B. Audra must include a gain on her individual return, and her basis in her partnership interest is zero. C. Audra is NOT required to include a gain on her individual return, and her basis in her partnership interest is zero. D. Audra is NOT required to include a gain on her individual return, but the gain increases her basis in her partnership interest. B. Audra must include a gain on her individual return, and her basis in her partnership interest is zero. When encumbered property is contributed to a partnership, a partner recognizes gain to the extent the partner is deemed to be relieved of a portion of the debt. Audra has a $42,000 basis upon contribution ($20,000 property basis plus $22,000, which is half the $44,000 debt). She is also deemed to
IRS ENROLLED AGENT WORK BOOK PART 2 - SOLE PROPRIETORSHIPS & PARTNERSHIPS Dynasty School ( ) 2-106 receive a cash distribution of $44,000 (the amount of the debt), creating a gain of $2,000. This gain does not affect Audra’s basis in her partnership interest. C. A partner's share of partnership liabilities depends on whether the liability is recourse or nonrecourse. 1. A liability is recourse liability to the extent that any partner or related person has an economic risk of loss for that liability. The partner's share of such liabilities equals the partner's share of the economic risk of loss. 2. A liability is a nonrecourse liability if no partner or related party has an economic risk of loss for that liability. A partner's share of such liability generally is determined by the partner's ratio for sharing partnership profits. VII. Basis of Property A. The partner's basis of property, other than money, distributed by a partnership (other than in liquidation) is the partnership's adjusted basis immediately before the distribution. 1. The basis of the property received may not be more than the adjusted basis of the partner's interest reduced by any money received in the same transaction. 2. The holding period for distributed property to the partner includes the period the property was held by the partnership. B. The partner's basis of property received in a complete liquidation of the partner's interest is equal to the adjusted basis of the partner's interest reduced by any money received. The basis of the interest is allocated among the assets received in proportion to the adjusted basis of the assets to the partnership in the following order: 1. Allocation is first made to unrealized receivables and substantially appreciated inventory items. The adjusted basis for inventory items and unrealized receivables will offset the partner's basis dollar for dollar.
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