TAX 9863 Lecture Notes - Lecture 36: Internal Revenue Code

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14 Feb 2020
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PROBLEM SET FOR PARTNERSHIP TAXATION
COURSE NUMBER: TAX 9868
SECTION: M54A
Unit I Partnership Formation
Problems
1. Jerry and Elaine form a 50-50 partnership. Jerry contributes a building with a $30 tax
basis and a $60 fair market value and inventory (in Jerry’s hands) with a $25 tax basis
and a $40 fair market value. Elaine contributes land with a $40 tax basis and an $80 fair
market value and $20 of cash. Elaine has owned the land since 1998. Jerry purchased
the building four months prior to the formation of the partnership. The partnership
spends $5 of its cash on legal and filing fees for organizing the partnership.
a. Is gain recognized upon the formation of the partnership?
No gain is recognized upon the formation of the partnership according to Section
721 of the Internal Revenue Code. This section discusses the nonrecognition
rule which states, “Except in the case of certain investment partnerships,
S721 protects both the partnership and its partners from recognizing any
gain or loss on the transfer of property to a partnership in exchange for an
interest in the partnership.
b. What is the partnership’s tax basis in the building? In the inventory? In the land?
According to Section 723, the partnership takes a transferred basis in the
contributed property equal to that of the contributing partner. The
partnership is also entitled to tack on the partner’s holding periods to its
own.
The basis in the building is equal to $30.
The basis in the inventory is same as it was in Jerry’s hands equal to $24.
Lastly the carryover basis of land from Elaine is equal to $40 tax basis.
c. What are Jerry’s and Elaine’s bases in their partnership interests?
According to Section 722, each contributing partner takes as her basis in the
partnership interest received as an amount equal to the sum of the adjusted
basis she had in any contributed property plus any cash contributed.
Jerry’s basis is equal to $30 (A/B of building) + $25 (A/B of inventory) equal to $55.
Elaines basis is equal to $40 (A/B of land) + $20 (cash) equal to 60.
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