Tom and Rick plan to form T & S Enterprises, a general partnership to remodel and operate a small shopping mall in a building that is owned by Rick. Tom will contribute $50,000 cash for a 50% interest. Rick intends to contribute the building and land, which has a FMV of $180,000 (building $150,000 and land $30,000) and is subject to a fully recourse mortgage liability of $130,000 incurred to purchase the building, for the other 50% interest. Rick's depreciated basis in the building is $46,400 and accumulated depreciation prior to the building's contribution is $63,600. The building and land were purchased on June 5, 2005 for $123,600 (building $110,000 and land $13,600).

 

Issues:

 

What is the tax impact of Rick's contribution of property subject to a liability exceeding the basis of the property qualify for nonrecognition treatment?

 

What is the partnership's basis in the property?

 

What is Rick's basis in his partnership interest?

 

What is Tom's basis in his partnership interest?

 

Apply Sec 721, Sec 752, IRC Sec(s). 722 to your answer

Under Code Sec. 721, a partner doesn't usually recognize gain or loss when it makes a contribution  of property  to a partnership, but there are exceptions.

Recognizing gain or loss on partnership contributions. A partner recognizes gain or loss when:

• . . . encumbered property is contributed to a partnership subject to a liability. Since the transaction is treated as if the contributing partner received a cash distribution equal to the amount of the liability minus the partner's share of the partnership's liability, see ¶  B-1600 et seq., if the deemed distribution exceeds the partner's basis in the partnership, gain will be recognized on the contribution, 

Under Code Sec. 752 , an increase in a partner's share of partnership liabilities is treated as a contribution of cash by the partner to the partnership. A decrease in a partner's share of partnership liabilities is treated as a distribution of cash from the partnership to the partner. The treatment is similar when a partner assumes partnership liabilities (a cash contribution) or the partnership assumes a partner's liabilities (a cash distribution).

Answer rating: 100% (QA)

1 Tax Impact of Ricks Contribution of Property with Excessive Liability Since Ricks contribution of the building is subject to a fully recourse mortgage liability exceeding the basis of the property n... View the full answer