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 the taxpayer for a full calendar year, while corporation C is closing it,s books by June 30.

now as B invested with 30% share

as corporation C realizes loss of $10,000 per month,therefore B made losses of 0.30x10,000x6(till June),and gainof 0.30x15,000x6 in next half of calender year 1

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

b)

in year 1,B reported gain of $9000 for filing return

in year 2 B will report=6x0.30x15000+0=$27000 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's income from year 1 would be :

operational loss=$10000x 12=120,000

in year 2 C will show =15000x12=180,000

in year 3 it will show no profit as it shut down it,s operations/