[soynofoam]

Partnership Interest Question Wiley Q6

(Question written below) I understand why the answer is zero. My only question revolves around the last statement of Wiley’s answer, “Carr will have a $30,000 basis for the 25% partnership interest received.” If he has 25% interest in the capital and profits, and the net assets are $600,000, why does he only have a $30,000 basis?

Here’s the question:

The following information pertains to Carr’s admission to the Smith & Jones partnership on July 1, 2010:

Carr’s contribution of capital: 800 shares of Ed Corp. stock bought in 1997 for $30,000; Fair market value $150,000 on July 1, 2010. Carr’s interest in capital and profits of Smith & Jones: 25%. Fair market value of net assets of Smith & Jones on July 1, 2010 after Carr’s admission: $600,000.

Carr’s gain in 2010 on the exchange of the Ed Corp. stock for Carr’s partnership interest was (d) $0.

Here’s the answer:

Generally no gain or loss is recognized on the transfer of property to a partnership in exchange for a partnership interest. Since Carr’s gain is not recognized, there will be a carryover basis of $30,000 for the stock to the partnership, and Carr will have a $30,000 basis for the 25% partnership interest received.

Thanks for any explanation regarding his 25% interest vs. his basis.

[jalban1324]

The $600,000 is a just a distracter. It is the FMV of the assets of the partnership. It has no effect on the agreed upon 25% interest. The $150,000 is also not needed. This was probably intentional because the $150,000 just happens to be 25% of $600,000. I bet one of the wrong answers is $120,000? If the partnership later sells the stock, that built-in gain would have to be allocated to Carr.

A (05/23/12) 92
R (07/02/12) 77
F (08/29/12) 69 Retake 2/27/13 80
B (10/22/12) 79

[Author]

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