On January 1, Bruce, Melissa, Eric, and Finn formed a partnership. The contributions of the individuals are listed below. Bruce receives a 20% partnership interest, Melissa receives a 50% partnership interest, Eric receives a 20% partnership interest, and Finn receives a 10% interest. They share the economic risk of loss from recourse liabilities according to their partnership interests. Partner Property Contributed Basis to Partner FMV
Bruce Accounts Receivable $0 $61,000
Melissa Land $28,000 $68,000
Building $47,000 $102,000
Eric Services ? $19,000
Finn Machinery $60,000 $40,000
Melissa has claimed $12,000 of straight-line MACRS depreciation on the building. The land and building are subject to a $58,000 mortgage, of which $23,200 is allocable to the land and $34,800 is allocable to the building. The partnership assumes the entire mortgage. Eric is a CPA, and the services that he provides assist the partnership in drafting the partnership agreements. Finn has claimed $15,000 of MACRS depreciation on the machinery.
a) What amount and character of gain, loss, or income must each partner recognize on the formation of the partnership?
b) What is each partner’s basis in his/her partnership interest?
c) What is the partnership’s basis in each of its assets?
d) What is the partnership’s initial book value of each asset?
e) To raise some immediate cash after the formation, the partnership decides to sell the land and building to a third party and lease it back. The buyer pays $44,800 cash for the land and $67,200 cash for the building in addition to assuming the $58,000 mortgage. Assume the partnership claimed no additional depreciation on the building before the sale.
i. What is each partner’s distributive share of the gains, and what is the character of the gains?
ii. What is each partner’s new basis in his/her partnership interest?