Lesson 8 Comprehensive Case Study

a. How much gain or loss do each of the partners and the partnership recognize on the
formation of the partnership?
Generally, at the time of formaation of partnership, no gain or loss is recognized as a partner
transfers assets to form a partnership and received interest in partnership. Until and unless
liabilities are not considered by partnership in excess of the basis, no gain or loss has been
recognized by partner.

b. What is each partner's basis in his/her partnership interest?

ALISA JOHN VICTORIA
Basis in the Beginning $500000 $300000 $0
Liabilities Released (Mortgaged land) (500000)
Share of Liabilities (40%, 50% and 10%) 200000 250000 50000
Basis at the end $700000 $50000 $50000

c. What is the partnership's basis in its assets immediately after the formation?
Calculation of Partnership basis in its assets immediately after formation:
Amount
Cash $200,000
Equipments $300,000
Land $300,000
Total basis $800,000

d. When does each of the partner's holding periods for their partnership interests begin?
A partner’s holding period for a partnership interest received in exchange for a contribution of
property depends on the character of the contributed property. If the contributed property is a
capital asset or property( ie. Alisa's Equipment and John's Land) used in a trade or business
immediately prior to the contribution, the partner’s holding period for the partnership interest
includes the holding period of the contributed property. If the partnership interest is received in
exchange for money or other property(ie. Alisa's Cash Contribution), the partner’s holding
period commences on the date the interest is acquired, i.e., the contribution date.
e. If Alisa had contributed inventory, instead of equipment, when would her holding period
inher partnership interest begin?
If Alisa had contributed inventory, instead of equipment, then her holding period in her
partnership interest begin on the date of Contribution.

f. When does the partnership's holding period begin for the equipment and the land?
When partners contribute capital assets (assets used in a trade or business and held for more than
one year), the holding period of the contributed property "tacks on" to the partnership interest.
Otherwise, it begins on the day the partnership interest is acquired.

g. How should such gain be allocated if the partnership sells the land for its fair market
value?
Pursuant to Treasury Regulation Section 1.752-2, the partners share all partnership
recourseliabilities (including the mortgage on the land) in accordance with their respective
interests in the partnership. The partnership is a general partnership and has assumed the
mortgage on the land; as such John has rights of contribution against his fellow partners under
state law.

i. What methods may the partnership adopt for allocating the depreciation expense on the
equipment?
When depreciable property is contributed to a partnership, the partnership is treated as if it
stepped into the shoes of the transferor partner. The partnership uses the depreciation method and
remaining depreciable life used by the transferor.

j. Suppose Alisa had contributed the inventory of her sole proprietorship instead of
equipment, and the partnership sold the inventory within five years. What is the character
of such gain or loss?
If Alisa had contributed the inventory of her sole proprietorship instead of equipment and the
partnership sold the inventory within 5 years, than such it is treated as ordinary income or loss.