Question

On January 1, Ryan and James decided to open a Peruvian chicken restaurant (yum!). Ryan contributed the building and land for the restaurant that had a fair market value of $160,000 and adjusted tax basis of $140,000 for a 50 percent profits interest and capital interest. The building had a $50,000 mortgage on it. James contributed $40,000 of cash for a 50 percent profits interest and capital interest. Should the company fail to pay the mortgage, the creditor is only able to claim the building and land and potential profits of the company, not go after the personal assets of either partner. The company uses a calendar year tax period.

In the above scenario, what are Ryan and James’s initial outside tax bases in the partnership?

	I.	Ryan: $90,000. James: $40,000.
	II.	Ryan: $140,000. James: $40,000.
	III.	Ryan: $130,000. James: $0.
	IV.	Ryan: $165,000. James: $65,000.
	V.	None of the above.

Answer 1

1. Whenever any partner contributed asset for a partnership interest, No Gainis recognised on the transfer in the hands of partners to the partnership.
2. The Partners Initial Bais will the Bais of Asset transfer to the partnership. In Case of Cash Contribution, the basis will be amount contributed and in case of property, the adjusted basis of the property will be the basis for partner less liabilities assumed by other partners of any mortgage on property contributed.

Therefore based on the above explanation,

Ryan Tax Basis = Adjusted tax basis of property contributed - Liabilities assumed by the other partners on mortgaged property

=$1,40,000 - $50,0000

= $90,000

James Tax Basis = Cash Contributed to a partnership firm

= $40,000

Therefore Correct Option is an option (I) i.e Ryan: $90,000, James : $40,000

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