Bruce, John, and Laura form a general partnership to conduct a plumbing
business and agree to share all profits and losses equally. All three partners are skilled plumbers and will perform services as co-proprietors in the new partnership. Bruce, the partner with the most liquid assets, will contribute $10,000 in cash. John, who previously conducted his plumbing business as a sole proprietor, contributes $5,000 of zero-basis accounts receivable and $5,000 of installment notes with a $1,000 basis. Laura, who previously worked for her father before his retirement last year, contributes a truck and items of inventory (bathtubs, sinks, etc.). The truck has an aggregate adjusted basis of $2,000 and a fair market value of $9,000. Because they are leftovers from a previous job and will be difficult to sell, the inventory has a basis of $4,000, but is worth only $1,000. Assume the partnership will compute its income on the cash-method of accounting.
a.      What are the basic tax consequences to Bruce, Bob, Laura, and the partnership from these contributions?
b.      Suppose Bruce and Laura initially form the partnership (as 50% partners) and, two years later, Bob contributes the accounts receivable and installment notes for a one-third interest. What are the basic tax consequences to the parties?
c.      What are the holding periods of the partners' partnership interests?
d.      Can the partnership allocate the taxable income equally when it collects the $5,000 of accounts receivable? How would the taxable income be allocated if the partnership sells the equipment and trucks the following year for $9,000? How would the taxable loss be allocated if the partnership sells the inventory for $1,000?

Answer rating: 100% (QA)

Answer a Tax consequencesBasic for Bruce Bob and Laura as well as the Pship is NIL for the contribut... View the full answer