Liz and John formed the equal LJ Partnership on January 1 of the current year. L
ID: 2464412 • Letter: L
Question
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.
1. How much gain or loss will Liz, John, and the partnership realize?
2. How much gain or loss will Liz, John, and the partnership recognize?
3. What bases will Liz and John take in their partnership interests?
4. What bases will LJ take in the assets it receives?
5. Are there any differences between inside and outside basis? Explain.
6. How will the partnership depreciate any assets it receives from the partners?
Explanation / Answer
Answer:1 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 (it has a $0 basis in the partnership interests it issues).
Answer:2 Under § 721, neither the partnership nor either of the partners recognizes any gain on formation of the entity.
Answer:3 Liz will take a substituted basis of $155,000 in her partnership interest ($80,000 cash plus $75,000 basis in land). John will take a substituted basis of $20,000 in his partnership interest ($20,000 basis in the equipment).
Answer:4 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).
Answer:5 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).
Answer:6 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.
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