Homework SourseAbby and Bob form a partnership where each has a 50 interest
Abby and Bob form a partnership where each has a 50% interest in capital and profits. Abby contributes cash of $25,000 and land valued at $25,000. Abby has a basis in the land of $20,000 and has held it for two years. Partner Bob contributes equipment (basis to Bob of $15,000, FMV of $30,000) and inventory (basis to Bob of $10,000 FMV $20,000). Partner Bob would recognize Section 1245 gain of $15,000 on the hypothetical sale of the equipment to a third party at the time of contribution after having depreciated it for several years. What is each partner’s basis in their partnership interest?
Abby receives a basis of $45,000 and Bob receives a basis of $50,000.
Abby receives a basis of $45,000 and Bob receives a basis of $25,000.
Both receive a basis of $50,000.
Abby receives a basis of $50,000. Bob receives a basis of only $25,000 because Bob will have to recognize a total of $25,000 in Section 1245 gain and ordinary income on the partnership’s disposition of the equipment and inventory, respectively.
Please give reasoning for the answer.
| A. | Abby receives a basis of $45,000 and Bob receives a basis of $50,000. | |
| B. | Abby receives a basis of $45,000 and Bob receives a basis of $25,000. | |
| C. | Both receive a basis of $50,000. | |
| D. | Abby receives a basis of $50,000. Bob receives a basis of only $25,000 because Bob will have to recognize a total of $25,000 in Section 1245 gain and ordinary income on the partnership’s disposition of the equipment and inventory, respectively. |
Solution
Ans is B Abby receives a basis of $45,000 and Bob receives a basis of $25,000.
Explanation: As a general rule us 721, no gain or loss is recognized on formation of partnership upon contribution of cash or assets in exchange for partnership share. So Abby basis would be (25000+20000) and Bob basis would be (15000+10000)
