Question

9 Liz and John formed the equal LJ Partnership on January 1 of the current year. Liz contributed $80,000 of cash and land with a fair market value of $90,000 and an adjusted basis of $75,000. John contributed equipment with a fair market value of $170,000 and an adjusted basis of $20,000. John had used the equipment in his sole proprietorship. a. How much gain or loss will Liz, John, and the partnership realize? b. How much gain or loss will Liz, John, and the partnership recognize? c. What bases will Liz and John take in their partnership interests? d. What bases will LJ take in the assets it receives? e. Are there any differences between inside basis and outside basis? Explain. f. How will the partnership depreciate any assets it receives from the partners? g. Do additional considerations arise because of the difference between the basis and fair market values of the property John contributed? Explain.

Answer 1

Answer:

a. Jhon gain $150.000.

b. There is no gain or loss needed to be recognized.

c. Substituted basis = $20,000.

d. Partnership LZ $175.000

e. There is no difference.

Explanation:

a. Liz: Gain = $90,000 - $75,000 = $15,000

John: Gain = $170,000 - $20,000 = $150,000

Partnership: The total value of property received

b. As per section 721, There is no gain or loss is recognized by partnrhsip or other partners on formation of the entity.

c. Liz: Substituted basis = $80,000 + $75,000 = $155,000

John: Substituted basis = $20,000 i.e. in equipment

d. Partnership LZ : Carry over basis = $80,000 + $75,000 + $20,000 = $175,000

e. No, there is no diffrence.

Inside basis : $80,000 + $75,000 + $20,000 = $175,000

Answer 2

a) The gain realized by Liz, John, and the LJ Partnership are as follows:

                                                          Liz               John          LJ Partnership

Realized gain                                $15,000      $150,000        $175,000

b) The gain recognized by Liz, John, and the LJ Partnership are as follows:

                                                            Liz             John          LJ Partnership

Recognized gain                                 $0                $0                $0

c) The bases that Liz and John will take in their partnership interests are the substituted basis of $155,000 ($80,000 + $75,000) and $20,000 respectively.

d) The LJ Partnership's basis in the assets it receives from the partners is $175,000 ($155,000 + $20,000).

e) There are no differences between the outside and inside bases since they all total $175,000, respectively.

What are the inside and outside bases of a partnership interest?

In partnership tax laws, inside and outside bases refer to a partnership's basis in its assets and partners' interests in a partnership.

The inside and outside bases are usually the fair market values of the assets contributed by partners.

Data and Calculations:

                                                                     Liz          John     LJ Partnership

Capital contribution to LJ Partnership

Cash                                                      $80,000                            $80,000

Land:

Fair market value                                 $90,000

Adjusted basis                                     $75,000                            $75,000

Equipment:

Fair market value                                                      $170,000    

Adjusted basis                                                           $20,000     $20,000

a) Realized gain                                   $15,000      $150,000     $175,000

b) Recognized gain                                 $0                $0                $0

c) Substituted bases

d) Assets' bases                                                                           $175,000

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