There is an additional tax issue which must be addressed. Bob contributed property with anet value of $70,000 for a one-half interest in the partnership while Kate contributedproperty with a net value of only $50,000 for a one-half interest in the same partnership.The total partnership has a net value of $120,000 ($130,000 + $50,000 - $60,000liability). There must be some explanation. One possibility is that Bob has made a$10,000 gift to Kate. If this is so, both partners bases must be adjusted to reflect the gift.Alternatively, the facts suggest that Kate may be receiving some of her partnership interestC12-4
in exchange for her services in managing the business for the first year while receiving noguaranteed payment. If this is so, Kate must recognize ordinary income and increase herbasis for the value of the partnership interest she received in exchange for services. IfKate is receiving some of her partnership interest for services, the partnership mustrecognize gain or loss in the partnership assets she is deemed to receive and must adjustthe basis of the assets for her deemed recontribution. The partnership must also deductthe guaranteed payment. pp. C12-5 through C12-12.C9-21·What items qualify as organizational expenses, which are start-up expenses,and which can be expensed now?·Does the partnership want to amortize organizational expenses and/orstart-up expenses? If so, over what time period does the amortizationoccur?·When does the partnership business begin?The partnership must first characterize each expense as an organizational expense, a start-up expense (Chapter C3), another expense to be capitalized or as a current periodexpense. The costs of drawing up the partnership agreement and of establishing theaccounting system are organizational expenses. The expenses of searching for a retailoutlet is a start-up expense, and the expense of having an income statement prepared is acurrent period expense.The partnership must then decide if it wants to amortize the organizational and start-upexpenses. Usually a partnership would choose to amortize the expenses since thealternative is to let the expenses sit in an asset account until the partnership ceases to dobusiness. If the partnership decides to amortize the expenses, the election under Sec. 1125and/or Sec. 7012 must be made. Each of the accounts can be amortized over not less than60 months, but most taxpayers see no reason to amortize over any period longer than theminimum.Another issue the partnership must face is when is the partnership is considered to beginbusiness. Regulation Sec. 1.7012-2(c) states that business begins when the partnership"starts the business operation for which it was organized." Amortization of both theorganizational expenses and the start-up expense begins with the month in which businessbegins. p. C12-12.
- Spring '08