Partnership Basis Liz and John formed the equal LJ Partnership on January 1 of t
ID: 2497131 • Letter: P
Question
Partnership Basis
Liz and John formed the equal LJ Partnership on January 1 of the current year.
Liz contributed $80,000 of cash and land with a fair market value of $90,000 and an adjusted basis of $75,000. John contributed equipment with a fair market value of $170,000 and an adjusted basis of $20,000. John had previously used the equipment in his sole proprietorship.
How much gain or loss will Liz, John, and the partnership realize?
How much gain or loss will Liz, John, and the partnership recognize?
What bases will Liz and John take in their partnership interests?
What bases will LJ take in the assets it receives?
Are there any differences between inside and outside basis? Explain.
How will the partnership depreciate any assets it receives from the partners?
Requirements:
Clearly identify the requirements being addressed. Show all calculations within the cells of an Excel spreadsheet. This means that you must use formulas and links so that your thought process can be examined. Make good use of comments to convey your thought process as well. No hard coding of solutions is permitted. Submit a single MS Excel file for grading.
Explanation / Answer
a. Liz realizes a gain of $15,000 on contribution of the land. John realizes a gain of $150,000 on contribution of the equipment. The partnership realizes a gain equal to the value of the property it receives
b. Under this, neither the partnership nor either of the partners recognizes any gain on formation of the entity.
c. Liz will take a substituted basis of $155,000 in her partnership interest (Because he made a contribution of $80,000 cash plus $75,000 basis in land). John will take a substituted basis of $20,000 in his partnership interest (He had only $20,000 as equipment).
d. The partnership will take a carryover basis in all the assets it receives ($80,000 basis in cash, $75,000 basis in land, and $20,000 basis in equipment).
e. The partners’ outside bases in their partnership interests total $175,000: Liz’s basis of $155,000 plus John’s basis of $20,000. This is the same as the partnership’s basis in assets of $175,000 ($80,000 cash plus $75,000 land plus $20,000 equipment).
f. The partnership will ‘‘step into John’s shoes” in determining its depreciation expense. It will use the remaining depreciable life and the same depreciation rates John would have used.