the partnerships inside basis in the contributed assets even though it DOES

The partnerships inside basis in the contributed

This preview shows page 12 - 19 out of 34 pages.

the partnership’s inside basis in the contributed assets, even though it DOES increases the outside basis of the contributing partner in her partnership interest. Chapter 16, Exhibit 17
Image of page 12
Outside Basis Computations Gain recognized by partner on services contributed + Share of “separately stated items” +/– Share of P/S’s taxable income or loss under Code Sec. 702(a)(8) (i.e., earned income/loss, both active and Passive) +/– Basis in contributed property + How is the partner’s outside basis in the partnership (P/S) determined? Code Sec. 722 and related regulations provide the following formula: Chapter 16, Exhibit 18 Partner’s outside basis of partnership interest. = Basis of property distributions, including cash Debt relief Share of P/S losses Share of debt assumption (if recourse debt, % share is based on % share of P/S loss, if nonrecourse debt, % share is based on % share of P/S profits). Both % are usually the same. + Gain recognized by partner on excess debt relief +
Image of page 13
IRC 721 — Example 2 0 5,000 Basis 15,000 15,000 Agreed upon FMV Building Land Property Contributed: Jill Jack FACTS: Jack and Jill form a P/S by contributing the property listed below. QUESTION: What are the tax consequences to Jack, Jill and the P/S? 0 5,000 P/S inside basis in the assets 15,000 10,000 Built-in gains 0 5,000 P’s outside basis in P/S int. 0 (Code Sec. 721) 0 (Code Sec. 721) Recognized gain on contribution: 15,000 10,000 Realizable gain on contribution:
Image of page 14
IRC 721 — Example 3 10% 11,000 10,000 Equipment Cal 60% 20,000 70,000 Land Bob 30% $ 0 $ 30,000 Services Ann P’s % int. in P/S: Adjusted Basis FMV Contribution Partner FACTS: Ann, Bob and Cal decide to pool their efforts and form a partnership. They make the following contributions to the partnership: A. Does this transfer of assets qualify for Code Sec. 721 treatment? B. What is each partner’s gain or loss on contributions to the partnership? C. What is the resulting basis of each partner in the P/S (“outside basis”)? D. What is the P/S’s basis in the assets received (“inside basis”)? Bob’s land is subject to a $10,000 mortgage that the partnership assumes. The FMV of the P/S is $100,000 [$110,000 FMV assets - $10,000 debt assumed.] 100% $110,000 TOTALS Chapter 16, Exhibit 14a
Image of page 15
SOLUTION A. Does this transfer of assets qualify for Code Sec. 721 treatment? Ann’s transfer of services falls outside the scope of Code Sec. 721. However, Bob and Cal’s transfers still qualify for Code Sec. 721 IRC 721 — Example 3 treatment, since they represent property contributions. Chapter 16, Exhibit 14b
Image of page 16
IRC 721 — Example 3 Recognition of Gain (1,000) 50,000 30,000 Realized gain (c) = (a) – (b) (11,000) (20,000) 0 Basis in asset contributed: (b) 10,000 70,000 30,000 AR (FMV of Partnership’s interest received) (a) Cal (Equipment) Bob (Land) Ann (Services) Formula Sec. 721 (Nonrecog. rule) Sec. 721 (Nonrecog. rule) Sec. 83(a) Disguised compensation for services Reason for tax treatment: 0 0 30,000 Ordinary income recognized on service contribution: (d) = (c) from services (loss):
Image of page 17
0 0 30,000 Gain on service cont’n: (l) = (d) 11,000 20,000 0 Basis in asset contributed: (k) = (b) Cal (Equipment) Bob (Land) Ann (Services) Formula IRC 721 — Example 3 Inside Basis Sec. 732 P/S basis in assets is same as P’s before contribution Sec. 732 P/S basis in assets is same as P’s before
Image of page 18
Image of page 19

You've reached the end of your free preview.

Want to read all 34 pages?

  • Fall '14
  • fabioambrosio
  • Accounting, Corporation, basis, Types of business entity, partner, Code Sec.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes