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Correct Answer:(a.) True. (b.) True. (c.) True. (d.) False. A partnership agreement normally does not have to be in writing, although the partners are best served by having a written partnership agreement. The rules which allow certain unincorporated organizations to elect partial or total exclusion from the partnership provisions of the Internal Revenue Code do not alter the fact that partnership agreements do not have to be in writing. Reg. Sec. 1.761-2(b)(2) contains the mechanics for making the election.92. Mr. Williams and Mr. Lily have operated separate sole proprietorships for several years. Both of the proprietorships are service businesses, and they are on the cash basis of accounting for federal income tax purposes. On January 1, they contribute the net assets of their separate proprietorships to a new partnership in which they will conduct business. Each has an equal capital and profits interest in the new partnership. Mr. Williams contributes the followingitems: Cash, $6,000; Accounts Receivable, zero basis, fair market valueof $15,000; Equipment, $5,000 basis, fair market value of $14,000; and Accounts Payable, zero basis, $30,000 face value. Mr. Lily contributes cash of $5,000 in exchange for his 50 percent interest. What amount of gain must Mr. Williams recognize, and what is the basis of his partnership interest after the contribution? Correct Answer:Mr. Williams recognizes no gain, and the basis of his interest is $11,000. The accounts payable of cash-basis contributors are not considered liabilities for purposes of determining a partner's basis for a partnership interest. Consequently, Mr. Williams is not deemed toreceive a $15,000 distribution because of the contribution of the $30,000 accounts payable to a partnership in which he has a 50% interest. The basis of his partnership interest equals the total
$11,000 basis of property he contributes: $6,000 of cash, zero-basis accounts receivable, and $5,000 basis of equipment.