Question

Mary and Todd form the MT Corporation, with a transfer of the following properties: Mary $500,000 cash Todd $500,000 FMV property $300,000 tax basis Both Mary and Todd receive a 50% interest in the corporate stock. VARIATION 2: return to original facts (no Karla). Todd’s property is valued at $700,000 but is contributed subject to a $200,000 liability. Complete the following Mary Todd Realized gain ________ ________ Recognized gain ________ _________ Basis of stock _________ _________ MT basis in contributed asset __________ _________

Answer 1

As per the tax rules, when a person contributes a property in a partnership and gets a share in the partnership, he/she is not required to realize any gains, since he has not sold the property. So, Mary Todd wiil not realize any gain here.

When you are releived from a liability because of contributing a property to a partnership firm against receiving an interest in the partnership, you must recognize gain, if total releive from liability exceeds your basis in the firm, since the liability releiving is a cash-flow for you. However, you don't get releived from entire liability as you hold a portion of the partnership. So, your liability decreases for the proportion, you don't have in the partnership.

So, Mary Todd's decrease in liability = $200,000 x 50% = $100,000
His basis in the partnership = $500,000

Hence, Mary would not recognize any gain.

Mary Todd's basis in the partnership = $500,000 - $100,000 = $400,000