[jdj017400]

On January 4, Year 1, Smith and White contributed $4,000 and $6,000 in cash, respectively, and formed the Macro General Partnership. The partnership agreement allocated profits and losses 40% to Smith and 60% to White. In Year 1, Macro purchased property from an unrelated seller for $10,000 cash and a $40,000 mortgage note that was the general liability of the partnership. Macro’s liability:

a. Increases Smith’s partnership basis by $16,000.

b. Increases Smith’s partnership basis by $20,000.

c. Increases Smith’s partnership basis by $24,000.

d. Has no effect on Smith’s partnership basis.

Choice “a” is correct: A partner’s basis in the partnership is increased by the partner’s share of partnership liabilities (Smith is a 40% partner). Macro is obligated on the $40,000 mortgage; 40% x $40,000 = $16,000. Even though the partnership is obligated to repay the mortgage, as a partner Smith is jointly and severally liable on the debt.

I completely understand why the answer is a, but I have a question in regards to a “what if” scenario on this question. What if the question stated that they formed an LLC or LLP, as opposed to a GP. Would this make the answer choice different…perhaps answer choice “d”?

I bring this up because Becker shows Basis as Ending Capital Account + “% RECOURSE liabilities”…just a little confused on how the actual exam could throw in curve balls.

Thanks in advance.

BEC - 80 (11/30/2010), Lost Credit - Retake 11/30/2012, 80 (FINISHED!)
AUD - 71 (05/31/2011), 79 (08/28/2011)
REG - 70 (11/30/2011), 87 (02/09/2012)
FAR - 61 (5/31/2012), 80 (08/31/2012)

[Anonymous]

I haven't seen that kind of question, meaning I've only seen Basis questions in the setting of a general partnership setting. Nothing crazy like LLP, LP's, or LLC's. So, just pay attention to P&L sharing percentages (I've seen those sharing percentages being different, one partner gets all the losses, and shares in income with other partners at X%), that will be your big flag to the question.

But you are correct, if the question was set in one of those situations, partners are only liable to the amount of their basis in the company and do not share liability personally.

[jdj017400]

Great, thanks!

BEC - 80 (11/30/2010), Lost Credit - Retake 11/30/2012, 80 (FINISHED!)
AUD - 71 (05/31/2011), 79 (08/28/2011)
REG - 70 (11/30/2011), 87 (02/09/2012)
FAR - 61 (5/31/2012), 80 (08/31/2012)

[Anonymous]

In the spirit of Jeff's warnings about exam disclosure, I am talking about review materials. I haven't seen basis questions in LLC, LLP, and LP business structures, and I used Becker FWIW.

Not a problem big guy, you got half in the bag, one pending and the beast to close it out.

[Anonymous]

Out of the thousands of questions I've encountered in the Gleim test prep, I've only seen them ask Basis questions on GPs and Corporations.

[Author]

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