Question

A contributes $300,000 cash in exchange for a 30% ownership interest (profits and capital), B contributes property with a fair market value ("FMV") of $400,000 and adjusted basis of $110,000, but subject to a non-recourse mortgage of $100,000 (which is not qualified non-recourse financing) in exchange for a 30% ownership interest (profits and capital) and C contributed a property FMV $400,000 adjusted basis $500,000 in exchange for a 40% ownership interest. From January 1, Year 1 through December 31, Year 1 (12 months) P lost $10,000 a month from operations. From January 1 Year 2 through December 31 Year 2 P earned $15,000 per month from operations at which point it shuttered operations and earned $0 thereafter.

a. What income, gain or loss, of any does B recognize upon formation of P? b. What income does B report on B's income tax return for

    Year 1

Year 2

Year 3

c. What income does C report on C's income tax return for

Year 1

Year 2

Year 3

Answer 1

Given

A contributed $3,00,000 in Cash in Exchange for a 30% Ownership Interest.

Therefore A's Share of Income/ Loss = 30%

B Bontributed property with a Fair Market Value of $4,00,000 and Adjusted basis of $1,10,000 in exchange for 30% ownership interest.

B's Share of Income / Loss = 30%

C Contributed a property of FMV $4,00,000 with an adjusted basis of $5,00,000 in exchange for an ownership interest of 40%

C's Share of Income / Loss = 40%

(a) Income, Gain/ Loss does B should Recognise upon the formation of P :

As partnership P lost $10,000 a month From January 1 to December 31 in Year 1

Since B's Share of Income/ Loss is 30%,

B's Share of Loss upon the formation of P = $,10,000 * 12 * 30%

= $36,000

(b) Income that B should report on B's income tax return for Year 1, Year 2 and Year 3 :

In Year 1, B should report Loss of $36,000

In Year 2, B should report a Gain of = $15,000 * 12 *30%

= $54,000

In Year 3, B should report Gain /Loss as $0 (Since P haven't earned any income )

(c) Income that C should report on C's Income tax Return :

In Year 1, Loss of = $10,000 *12 * 40%

= $48,000

In year 2, Gain of = $15,000 *12 *40%

= $72,000

In Year 3, No gain or No Loss since P didn't earned any income or loss.

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