ABC Partnership was formed on March 1 of the current year by three individuals.
ID: 2512453 • Letter: A
Question
ABC Partnership was formed on March 1 of the current year by three individuals. A
contributed $20,000 cash for a 25% interest. B contributed property with an adjusted
basis of $28,000 and fair market value of $32,000, subject to a $12,000 mortgage. C
contributed property with an adjusted basis of $20,000 and fair market value of $64,000,
subject to a $24,000 liability. B and C received 25% and 50% partnership interests,
respectively. The partnership assumed both partners' liabilities. The partnership has no
other liabilities. On March 1 of the current year, B's gain recognized on contribution and
basis in partnership interest are
A. $9,000 gain, $19,000 basis.
B. $9,000 gain, $25,000 basis.
C. $0 gain, $25,000 basis.
D. $0 gain, $19,000 basis.
Explanation / Answer
The basis of B's contribution will be calculated as follows:
Under partnership rules, gain will be recognized where the debt relief exceeds the contributing partner’s total basis in his interest. Here debt relief of $9,000 does not exceed B's total basis in his interest i.e. 28,000, hence no gain will be recognised.
Therefore the correct answer is option D. i.e. $0 gain, $19,000 basis.
Adjusted basis of contributed property 28,000 Part of mortgage assumed by other partners (12,000 x 75%) (9,000) Basis of B's interest in partnership 19,000