Mike and Melissa form the equal MM Partnership. Melissa contributes the assets o
ID: 2576993 • Letter: M
Question
Mike and Melissa form the equal MM Partnership. Melissa contributes the assets of her sole proprietorship (value of $140,000, adjusted basis of $115,000). Mike sells his land (fair market value of $100,000, adjusted basis of $120,000) to a third party for $100,000 and then contributes that cash as well as an additional $40,000 to the partnership. The partnership locates equivalent land that it purchases for $110,000.
How do these changes affect the tax and economic result for Mike and the partnership?
Mike has a realized loss of $______ on the sale of the land of which $_____ is recognized. Mike recognizes no gain or loss on his contribution to the partnership and has a basis of $_____ in his partnership interest. The partnership incurs a $_____ economic cost when it purchases equivalent land instead of receiving the land as a contribution from Mike.
Explanation / Answer
Explanation
- Mike has a taxable transaction when he sells the assets to a 3rd party. He receives cash of $100,000 in exchange for assets with a basis of $120,000 and recognizes a $20,000 loss
- When Mike contributes the $140,000 cash to the P/S, he recognizes no gain or loss and has a basis of $140,000 in his P/S interest.
- The P/S would need to use $110,000 of Mike's cash contribution to acquire new equivalent land. In this situation, the tax result to Mike is improved ( he can recognize a $20,000 realized loss), but there is a $10,000 economic cost to the P/S when it acquires assets for $110,000 instead of $100,000
Filled blanks
Mike has a realized loss of $20000 on the sale of the land of which $0 is recognized. Mike recognizes no gain or loss on his contribution to the partnership and has a basis of $140000 in his partnership interest. The partnership incurs a $110000 economic cost when it purchases equivalent land instead of receiving the land as a contribution from Mike.