A colleague comes to you with the following investment proposal that he would like to market for

Question:

A colleague comes to you with the following investment proposal that he would like to market for Client:
• Client obtains cash of $60,000 from Bank.
• Bank loan agreement specifies that $40,000 of this amount represents principal; the remaining $20,000 represents interest.
• Client contributes the $60,000 cash to which agrees to assume Client’s $40,000 debt.
• Under Sec. 752, Partnership’s debt assumption is treated as a of money that reduces Client’s basis in interest from $60,000 to $20,000.
• invests the $60,000 in a resort hotel project.
• Before the project comes onstream, Client sells interest for $15,000.
Net result: Partnership, not Client, is responsible for repayment of Bank loan. Client realizes a $5,000 capital loss without having spent any of its own funds.
Prepare a memorandum that sets forth the tax and reporting implications of this investment proposal. At a minimum, consult the following authorities:
• IRC Secs. 6707A and 6111
• Reg. Secs. 1.6111-4 and 301.6112-1
• Notice 2000-44, 2000-2 C.B. 255
Distribution
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