Course: Partnership Taxation: TAX-504-2108
Assignment: Assignment 1 (based on classes 2 and 3)
A, B, and C are equal general partners in the ABC Partnership. On formation of the partnership, A contributes $50,000 cash, B contributes land (Parcel #1) with a basis of $40,000 and a fair market value of $50,000, and C contributes securities with a basis and fair market value of $50,000. Prepare the partnership’s opening balance sheet and then reconstruct the balance sheet to account for each of the following (cumulative) subsequent events:
(a) The partnership leases Parcel #1 for $15,000 and sells the securities for $50,000. Remember to compute and allocate both book gain and tax gain.
(b) The partnership borrows $300,000 and then buys more land (Parcel #2) for $330,000. As we’ll learn next week, the liability will increase each partner’s outside basis by his share of it. Assume the partners divide the liability among them equally. And remember, liabilities do not affect capital!
(c) The partnership distributes $20,000 each to A, B, and C. Distributions are tax-free to the partners so long as cash distributed doesn’t exceed outside basis (Section 731). Outside basis is then reduced (but never below zero) by the amount of money and adjusted basis of property distributed (Section 733).
(d) The partnership sells Parcel #1 for $65,000. Remember, compute both book and tax gain. Remember too that per Section 704(c), Partner B must be allocated his pre-contribution gain (the partners cannot share that gain), with any remaining tax gain divided among the partners per their agreement (here, equally).
(e) When Parcel #2 has a value of $420,000, the assets and capital accounts are restated to current value, and new partner D contributes $70,000 cash to the partnership in exchange for a 25% general partnership interest. Remember to re-allocate the liability now that there’s a fourth partner.
After (e), sell Parcel #2 for $420,000 and repay the liability. Do you have $280,000 in cash left?