Mary contributed assets valued at $360,000 (basis of $200,000) in exchange for h
ID: 2474708 • Letter: M
Question
Mary contributed assets valued at $360,000 (basis of $200,000) in exchange for her 40% interest in ABC GP (a general partnership). Steve contributed land and a building valued at $640,000 (basis of $380,000) in exchange for the remaining 60% interest. Steve's property was encumbered by a qualified nonrecourse debt of $100,000, which was assumed by the partnership. The partnership reports the following income and expenses for the current tax year:
Utilities, salaries, operating expenses 260,000
Short-term capital gain 10,000
Tax-exempt interest income 2,000
Charitable contributions 6,000
Distribution to Mary 12,000
Distribution to Steve 18,000
During the current tax year, ABC refinanced the land and building. At the end of the year, ABC had recourse debt of $110,000 for partnership accounts payable and qualified nonrecourse debt of $180,000.
1. What is Mary's basis after formation of the partnership? Steve's basis?
2. What income and separately stated items does the partnership report on Mary's Schedules K-1?
3. What items does Mary report on her tax return?
4. Assume that all partnership debts are shared proportionately. At the end of the tax year, what are Mary's basis and amount at risk in her partnership interest?
5. What is Mary's capital account balance at the beginning of the tax year?
6. What is Mary's capital account balance at the end of the tax year?
7. What accounts for the difference between Mary's ending capital account and her ending tax basis in the partnership interest?
Explanation / Answer
Solution:
1. Share of partner basis in partnership is equal to adjusted basis of property contributed or any cash paid or any income recognised by the partner on the formation of the partnership. This share is reduced by the liabilties held by the partner in the partnership firm.
Since the assets is transferred oon market value. It will be the cost to the partnership and hence the same shall be taken to calculate the basis.
Mary's Basis would be = $360000/$1000000 = 36%
Steve's Basis = $640000/$100000 = 64%
2. Schedule K-1 is a tax document issued for an investment in partnerships interest.
Mary's Schedule K-1 shall report share of the partnership's income, deductions and credits.
3. Mary's shall report the following in the tax return:
4. Marys basis at the end of the year = $12000/$30000 = 40%
5. Mary's capital account at the beginning of the tax year will be $360000.
6.Mary's Capital account balance at the end of the tax year will be as follows:
Opening Capital (1) = $360000
Add: Distributed income (2) = $12000
Closing Capital = $372000
7. The difference between Mary's ending capital account and her tax ending basis in the partnership interest is due the reason the property which she has contributed to the partnership will not be under the tax net in her personal return . Only the income received would be liable to tax in her trax return.