Formation of a Partnership. On January 1, Julie, Kay and Susan form a partnership. The contributions of the three individuals are listed below. Julie received a 30% partnership interest, Kay received a 60% partnership interest, and Susan received a 10% partnership interest. They share the economic risk of loss from recourse liabilities according to their partnership interests. Individual Asset Basis to Partner FMV (Fair Market Value)
Julie Accounts Receivable $0 $60,000
Kay Land $30,000 $58,000
Building $45,000 $116,000
Susan Services ? $20,000
Kay has claimed $15,000 of straight-line MACRS depreciation on the building. The land and building are subject to a $45,000 mortgage, of which $18,000 is allocable to the land and $36,000 is allocable to the building. The partnership assumes the mortgage. Susan is an attorney, and the services she contributes are the drawing-up of all partnership agreements.
* Provide detail and label each item.
A) What amount and character of gain, loss, or income must each partner recognize on the formation of the partnership?
B) What is each partner’s basis in her partnership interest?
C) What is the partnership’s basis in each of its assets?
D) What is the partnership’s initial book value of each asset?
E) To raise some immediate cash after the formation, the partnership decides to sell the land and building to a third party and lease it back. The buyer pays $40,000 cash for the land and $80,000 cash for the building in addition to assuming the $54,000 mortgage. Assume the partnership claim no additional depreciation on the building before the sale. What is each partner’s distributive share of the gains, and what is the character of the gains?