In 2021, Emily and Erick form the EE Partnership by transferring assets from their sole proprietorships. Emily contributes the furniture and fixtures with a fair market value of $500,000 and a basis of $200,000. Erick contributes land with a fair market value of $600,000 and a basis of $400,000. The land (contributed by Erick) had a mortgage of $100,000 which EE partnership assumes. Emily and Erick will share income, gains m, and losses 50/50.

• Determine Emily’s outside basis in EE Partnership after she and Erick have formed EE Partnership.

• Determine Erick’s outside basis in EE Partnership after he and Emily have formed EE Partnership.

• During 2023, the partnership has the following results:

o Sales $1,000,000

o Cost of sales 600,000

o Utilities, rent, etc. 50,000

o Salary to sales staff 100,000

o LTCG (sale of stock) 5,000

o Charitable contributions 2,000

o Tax exempt income 1,000

o Distribution of cash to Erick 15,000

At the beginning of 2023, the partnership had a total debt (all of which is either recourse or qualified nonrecourse debt) of $400,000. At the end of 2023, the partnership had a total of recourse and qualified nonrecourse debt of $425,000.

Also, at the beginning of 2023, Erick’s the outside basis in EE Partnership of $525,000

Determine:

a). Erick’s the outside basis in EE Partnership at the end of 2023.

b). How Erick will be taxed on his transactions with the partnership. Identify the amount and character of the income/loss/deductions. You do NOT need to determine the amount of the tax liability.

c). In 2024, EE Partnership sells the land originally contributed by Erick. The sales price is $750,000. Determine the amount of gain that must be allocated to Emily and to Erick as a result of the sale of this property.

Answer rating: 100% (QA)

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