Question

Individual A ("A"), Individual B ("B"), both calendar year taxpayers, and Corporation C ("C") with a fiscal year end June 30, form Partnership P ("P") on January 1 of Year 1. P manufactured widgets and is not a passive activity. 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

a)

after formation corporation p:

B is a taxpayer for a full calendar year, while the corporation C is closing its book by June 30.

now as B is invested with a 30% share:

as ci+orporation C realizes a loss of $10,000 per month, therefore B made losses of 0.30 x 10,000(till June),and gain of 0.30 x 15,000 x 6 in next half of calendar year 1

therefore total loss/,gain = $9,000(on operating profit)

b)

in year 1, B reported a gain of $9,000(on operating profit)

in year 2 B will report=(6x0.30x15000+0=$27,000 for filing return

in year 3, B will earn $0 from the business and will be shown as it is for filing returns.

c)

C income from year 1 would be:

operational loss=$10,000x12=$120,000

in year 2 C will show =$15,000 x 12 =$180,000

in year 3 it will show no profit as it shut downs its operations.