Question

Ashley contributes property to the TCA Partnership which was formed 7 years ago by Clark and Tara. Ashley’s basis for the property is $70,000 and the fair market value is $150,000. Ashley receives a 25% interest for his contribution. Because the TCA Partnership is unsuccessful in having the property rezoned from agricultural to commercial, it sells the property 12 months later for $210,000.

a. Determine the tax consequences to Ashley and to the partnership on the contribution of the property to the partnership.

b. Determine the tax consequences to Ashley and the other partners on the sale of the property.

c. Would the tax consequences in b. differ if the entity were an S corporation?

Answer 1

Answer - Part - (a) -

Ashley has no recognized gain under § 721 and a carryover basis for his partnership interest of $70000. The partnership has a carryover basis for Ashley’s property of $70000.

.

Answer - Part - (b) -

Recognized gain = Amount realized - Basis for property = $210000 - $70000 = $140000.

The precontribution appreciation of $80000 ($150000 - $70000) is allocated to Ashley. Of the $60000 balance, $15000 ($60000 * 25%) is allocated to Ashley and $45000 ($60000 * 75%) is allocated to the other partners.

.

Answer - Part - (c) -

If the entity were an S corporation, the recognized gain would be allocated based on stock ownership. Thus, $35000 ($140,000 * 25%) would be allocated to Ashley and $105000 ($140000 * 75%) would be allocated to the other partners.