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Subject:BusinessPrice: Bought3
6.2 Jon contributes property with a basis in his hands of $75,000 to the JPS Limited Partnership in exchange for a one-third interest in the partnership. Jon is the sole general partner. The contributed property is worth $200,000 and it is subject to nonrecourse debt of $180,000, incurred five years ago. Jon's lender has the right to approve his transfer of the property and, as a condition of the transfer to the partnership, the lender requires that Paula, one of the limited partners, guarantee the repayment of $30,000 of the debt, which she does. Her guarantee is recognized as a payment obligation under Treas. Reg. § 1. 752-2(b)(3). The partnership has no other liabilities. The partnership agreement provides that the partnership uses the traditional method under section 704(c) and that excess nonrecourse debt is allocated in equal thirds to the three partners of JPS. How much gain does Jon recognize on this property contribution?
a) $0
b) $5,000
c) $55,000
d) $75,000
6.9 Individuals A, B and C are real estate investors. Following a slowdown in the housing market, they contact D, a homebuilder who is holding numerous single-family homes for sale to customers in the ordinary course of her business. The four individuals form a partnership, in which each partner holds an equal 25% interest. Each of A, B and C contributes cash to the partnership and D contributes the unsold homes. During the year, the partnership uses its cash to purchase an adjacent shopping center to hold for investment. It plans to convert the homes to rental properties, which it will hold for the foreseeable future. Three of the homes, however, are located outside the area of the partnership's interest. In the aggregate, these homes have a book value of $900,000 and a tax basis of $720,000, unchanged in both cases from the corresponding values at the time that D contributed these properties to the partnership. What are the book and tax consequences to B if the partnership sells the three houses prior to the end of the year for $1 million in the aggregate?
a) $25,000 book gain; $25,000 ordinary income
b) $25,000 book gain; $25,000 capital gain
c) $25,000 book gain; $205,000 ordinary income
d) $25,000 book gain; $45,000 ordinary income; $25,000 capital gain
7.7 The Main Street Investment Club is a general partnership with ten equal partners. This year, each of its partners is entitled to a 10% distributive share of interest income and qualified dividends. The Club proposes to allocate to Kim, a partner who pays tax at 24% on ordinary income and 15% on capital gains, $3,000 of interest income that would otherwise go to Li, a partner who pays tax at the maximum rate of 37% on ordinary income and 20% on capital gains. The Club proposes further to allocate to Li $3,000 of qualified dividends that would otherwise go to Kim. If the Club asks your advice on these special allocations, what will you say?
a) The special allocations are shifting allocations and therefore their economic effect is not substantial.
b) The special allocations violate the overall-tax-effect test, and therefore their economic effect is not substantial.
c) The special allocations are shifting allocations, but do not violate the over all-tax-effect test, and therefore their economic effect is substantial.
d) The special allocations are not shifting allocations and do not violate the overall-tax-effect test, and therefore their economic effect is substantial.
