Question

ABC Partnership was formed on March 1 of the current year by three individuals. A

contributed $20,000 cash for a 25% interest. B contributed property with an adjusted

basis of $28,000 and fair market value of $32,000, subject to a $12,000 mortgage. C

contributed property with an adjusted basis of $20,000 and fair market value of $64,000,

subject to a $24,000 liability. B and C received 25% and 50% partnership interests,

respectively. The partnership assumed both partners' liabilities. The partnership has no

other liabilities. On March 1 of the current year, B's gain recognized on contribution and

basis in partnership interest are

A. $9,000 gain, $19,000 basis.

B. $9,000 gain, $25,000 basis.

C. $0 gain, $25,000 basis.

D. $0 gain, $19,000 basis.

Answer 1

The basis of B's contribution will be calculated as follows:

Adjusted basis of contributed property	28,000
Part of mortgage assumed by other partners (12,000 x 75%)	(9,000)
Basis of B's interest in partnership	19,000

Under partnership rules, gain will be recognized where the debt relief exceeds the contributing partner’s total basis in his interest. Here debt relief of $9,000 does not exceed B's total basis in his interest i.e. 28,000, hence no gain will be recognised.

Therefore the correct answer is option D. i.e. $0 gain, $19,000 basis.