Question

Exercise 10-23 (Algorithmic) (LO. 8)

When Padgett Properties LLC was formed, Nova contributed land (value of $282,000 and basis of $70,500) and $141,000 cash, and Oscar contributed cash of $423,000. Both partners received a 50% interest in partnership profits and capital.

a. How is the land recorded for § 704(b) book capital account purposes?

For § 704(b) book capital account purposes, Padgett records the land at $..................?

b. What is Padgett's tax basis in the land?
$............?

c. If Padgett sells the land several years later for $423,000, how much tax gain will Nova and Oscar report?
Nova reports a $.............? gain and Oscar's gain is $................?

Answer 1

a. Padgett records the land at its $282,000 value for §704(b) book capital account purposes.

b.         Padgett takes a carryover tax basis of $70,500.

c.         If the land is sold for $423,000, Nova reports a $282,000 gain and Oscar’s gain is $70,500. The precontribution gain of $211,500 ($282,000 value at the contribution date − $70,500 basis) is allocated to Nova. The $141,000 ( $423000 – $282000 ) post-contribution gain is allocated equally between the partners according to their 50/50% profit-sharing ratios.