The equal AB partnerships only asset is Building 1 which has

The equal AB partnership’s only asset is Building #1, which has a fair market value of $800,000 and an adjusted basis of $300,000. C becomes a one-third partner by contributing Building #2 with a fair market value of $700,000 and an adjusted basis of $150,000 and which is subject to a $300,000 recourse liability which the partnership assumes. At the time of C’s contribution, the partnership revalues its assets under Regulation Section 1.704-1(b)(2)(iv)(f).

(a) How is the $300,000 liability allocated?

(b) What result in (a), above, if the liability is a nonrecourse debt secured by Building #2 and the partners agree to use the traditional method to allocate Internal Revenue Code Section 704(c) gain?

(c) If C, instead of contributing Building #2, contributes $400,000 cash and shortly thereafter the partnership incurs a $500,000 nonrecourse loan secured by Building #1, how is the $500,000 liability allocated?

Solution

Part a

Partner

Adjusted capital

Recourse liability

A

200000

75000

B

200000

75000

C

400000

150000

Part b

Partner

Traditional method

Non-recourse liability

A

Equal

100000

B

Equal

100000

C

Equal

100000

Part c

Partner

Traditional method

Non-recourse liability

A

Equal

166666.7

B

Equal

166666.7

C

Equal

166666.7