Consider three people with three different partnership interests, and determine
ID: 2455885 • Letter: C
Question
Consider three people with three different partnership interests, and determine each individual’s basis for partnership interest in the following three independent situations. In each situation, the individual shares the economic risk of loss from recourse liabilities according to his or her partnership interests. Analyze the tax implications for each scenario in the following case study. Apply the IRS codes to determine the outside basis of ownership in partnership interests. Support your conclusions with reference to specific IRS codes and regulations.
Joanie receives her 20% partnership interest for a contribution of property having a $14,000 basis and a $17,000 fair market value (FMV). The partnership assumes her $10,000 recourse liability but has no other debts.
Henry receives his 20% partnership interest as a gift from a friend. The friend’s basis (without considering partnership liabilities) is $34,000. The FMV of the interest at the time of the gift is $36,000. The partnership has liabilities of $100,000 when Henry receives his interest. No gift tax was paid with respect to the transfer.
Laura inherits her 20% interest from her mother. Her mother’s basis was $140,000. The FMV of the interest is $120,000 on the date of death and $160,000 on the alternate valuation date. The partnership has no liabilities. When valuing the estate, should the executor choose the date of death or the alternate valuation date? Why?
Explanation / Answer
Consider three people with three different partnership interests, and determine each individual’s basis for partnership interest in the following three independent situations. In each situation, the individual shares the economic risk of loss from recourse liabilities according to his or her partnership interests. Analyze the tax implications for each scenario in the following case study. Apply the IRS codes to determine the outside basis of ownership in partnership interests. Support your conclusions with reference to specific IRS codes and regulations.
1. Joanie receives her 20% partnership interest for a contribution of property having a $14,000 basis and a $17,000 fair market value (FMV). The partnership assumes her $10,000 recourse liability but has no other debts.
Solution:
Joanie receives 20% partnership interest for a contribution of property $14000 (IRS-541).
Adjusted basis of contributed property
$14,000
Part of liability by other partners (10000*80%)
$8,000
Basis of Joanie partnership interest
$6,000
2. Henry receives his 20% partnership interest as a gift from a friend. The friend’s basis (without considering partnership liabilities) is $34,000. The FMV of the interest at the time of the gift is $36,000. The partnership has liabilities of $100,000 when Henry receives his interest. No gift tax was paid with respect to the transfer.
Solution:
Henry receives 20% partnership interest as gift from a friend. (Sec.704)
Adjusted basis of contributed gift
$34,000
Add: Henry share of income (34000*20%)
$6,800
$40,800
Less: Henry deemed distribution from repayment of partnership liability (100000*20%)
$20,000
Henry's recognised liability
$14,000
3. Laura inherits her 20% interest from her mother. Her mother’s basis was $140,000. The FMV of the interest is $120,000 on the date of death and $160,000 on the alternate valuation date. The partnership has no liabilities. When valuing the estate, should the executor choose the date of death or the alternate valuation date? Why?
Solution:
Executor can choose alternate valuation date in the following circumstances:
In general, section 2032 provides for the valuation of a decedent's gross estate at a date other than the date of the decedent's death. More specifically, if an executor elects the alternate valuation method under section 2032, the property included in the decedent's gross estate on the date of his death is valued as of whichever of the following dates is applicable:
(1) Any property distributed, sold, exchanged, or otherwise disposed of within 6 months (1 year, if the decedent died on or before December 31, 1970) after the decedent's death is valued as of the date on which it is first distributed, sold, exchanged, or otherwise disposed of;
(2) Any property not distributed, sold, exchanged, or otherwise disposed of within 6 months (1 year, if the decedent died on or before December 31, 1970) after the decedent's death is valued as of the date 6 months (1 year, if the decedent died on or before December 31, 1970) after the date of the decedent's death;
(3) Any property, interest, or estate which is affected by mere lapse of time is valued as of the date of the decedent's death, but adjusted for any difference in its value not due to mere lapse of time as of the date 6 months (1 year, if the decedent died on or before December 31, 1970) after the decedent's death, or as of the date of its distribution, sale, exchange, or other disposition, whichever date first occurs.
Adjusted basis of contributed property
$14,000
Part of liability by other partners (10000*80%)
$8,000
Basis of Joanie partnership interest
$6,000