[Anonymous]

I’m using Wiley Book/Test bank and Ninja Notes studying for REG to take in April 2013.

When a partnership assumes a liability from a partner (ex. mortgage), sometimes the answer says the partner’s basis is reduced by the full liability assumed to get to the partner’s basis and sometimes it will reflect (for example) an 80% x liability reduction to get to the partners basis (for example when a partner has 20% interest, the 80% assumed by other partners reduces that partners basis).

Does anyone know or can you direct me where to find when the liability assumed by the partnership from a partner creates a 100% versus a lesser amount of reduction in the partner basis?

[MustPass1988]

Can you provide a specific MCQ? It might be easier to help you this way

AUD: PASSED [81]; Expired, retaking August 23rd
BEC: PASSED [83]; Expired, retaking July 11th
REG: PASSED [83]
FAR: FAILED [64]; Retaking May 23rd

[Zaq]

If a partner submits a liability, their basis is decreased by the amount assumed by the corporation.

If a partner assumes a liability (from an new incoming partner), their basis is increased by amount of the liabilities assumed (liability*partnership %).

Like MustPass1988 said, giving an example would be great, but my guess is that you may be mixing up the difference between an Inside Basis (Partnership's Basis of Contributed Property) and Outside Basis (Partner's Basis in Contributed Property).

FAR: 50, 76!
REG: 74... (ouch baby, very ouch), 76!
AUD: 65, 91!?
BEC: 80! Aaaand doneskies!

May 2012 to August 2013. Can't believe it's over.

[Anonymous]

I will see if I can find an example in the book and will look into the outside versus inside basis items to see if that helps with clarification. Thank you!!

AUD: 86

REG: 4/06/13

BEC: 4/25/13

FAR: 5/30/13

[Anonymous]

SAMPLE QUESTION:

Bailey contributed land with a FMV of 75K and an adjusted basis of 25K to A Partnership in exchange for 30% interest. The partnership assumed Bailey's 10K mortgage on the land. What is Bailey's basis in the partnership interest?

Answer: Basis = Adjusted Basis of contributed land of 25K less the portion of liability assumed by partnership. So..

$25,000 Basis

-7,000 (10,000 liability x 70%) – amount assumed by partnership

---

18,000 is Bailey's Basis

There are other questions where the answer says to reduce the adjusted basis by 100% (instead of the 70% noted above). I can't figure out the distinction. I'll see if I can find a sample of that.

AUD: 86

REG: 4/06/13

BEC: 4/25/13

FAR: 5/30/13

[Anonymous]

Okay, the other example I found where 100% of the liability assumption decreases the basis was a Corporation. The answer says “All liabilities assumed by the corporation are treated as boot when computing stock basis. The basis of a shareholder in the stock is the adjusted basis in contributed property less boot received (i.e., cash and liability assumed by the corporation) and increased by the gain recognized.

*** So, for partnerships and Corporations the treatment of the company assuming a liability of a shareholder/partner is different. If anyone has any other input or thoughts, I'd greatly appreciate it!

Thanks and good luck to you on your upcoming exams!

AUD: 86

REG: 4/06/13

BEC: 4/25/13

FAR: 5/30/13

[J]

For a partnership, the basis of an incoming partner is generally the adjusted basis of the property contributed, and generally no gain or loss is recognized on the transaction. The holding period for the asset(s) contributed usually includes the holding period of the partner for those assets.

EXAMPLE: In exchange for a 20% interest in a partnership, Person A contributes cash of $5,000 and property with an adjusted basis of $10,000 and a FMV of $15,000. Person A's basis in the partnership is $15,000 ($5,000 cash + $10,000 adjusted basis of the property).

If the partnership assumes liabilities of an incoming partner, the liabilities assumed by the other partners would reduce the incoming partner's basis by that amount.

EXAMPLE: In exchange for a 20% interest in a partnership, Person A contributes property with an adjusted basis of $10,000 and a FMV of $18,000. The property is also subject to an outstanding note payable of $8,000. In this case, given that the partner's liability of the outstanding note is being partially assumed (80%) by the other partners, this would reduce Person A's basis created by the property contribution. The property would be recorded at $10,000, and that is the starting point for Person A's basis. However, $6,400 of the liability would be assumed by other partners, so Person A's basis in the partnership would be $3,600.

If the incoming partner contributes property with a liability that is greater than the adjusted basis of the property, and the decrease in the partner's liability exceeds the partner's partnership basis, a capital gain would be recognized.

EXAMPLE: Person A contributes property with an adjusted basis of $10,000 and a FMV of $16,000 to the partnership in exchange for a 20% interest. The property also has an outstanding note of $15,000. In this case, the other partners would assume 80% of the liability ($15,000 * 0.8 = $12,000). Person A's basis in the partnership would be $0. In addition, Person A would recognize a capital gain of $2,000 ($10,000 basis of property less $12,000 liability assumed by others).

Hope that helps a little…

[sbarkerACPA]

@InterFC1 Thanks for the thorough explanations. For the examples given, can you explain how it would be different if it was a corporation….**peeking behind door** Thanks in advance

BEC: 74;81
AUD: 77
REG: 71; 80
FAR: 78
License for CPA----APPROVED
CPA Class of 2013

[J]

For a corporation, no gain or loss is recognized as long as the individuals contributing the property control at least 80% of the voting power of the corporation AND 80% of all classes of nonvoting stock. The adjusted basis of the property in the hands of the corporation would be the same as the adjusted basis in the hands of the contributing shareholder. If the above is not the case (80% rule), a taxable exchange has occurred and the taxpayer must report a gain (the basis to the corporation would then be FMV at the time of contribution).

The same rule with respect to liabilities assumed is true for corporations; if the liabilities assumed by the corporation are greater than the adjusted basis of the property contributed, the shareholder has a basis of zero and must realize a capital gain of the difference. For example, if the shareholder contributes property with an adjusted basis of $10,000 and there is an outstanding note on the property of $14,000, the shareholder's basis is zero and must realize a capital gain of $4,000. This is actually easier than partnerships, as there is no need to calculate the percentage of liabilities assumed by other partners.

[sbarkerACPA]

@interFC1 Thanks

BEC: 74;81
AUD: 77
REG: 71; 80
FAR: 78
License for CPA----APPROVED
CPA Class of 2013

[Anonymous]

Thank you for the great responses! I took REG on April 6 and felt good walking out. If only we didn't have to wait a month for scores!!!

AUD: 86

REG: 4/06/13

BEC: 4/25/13

FAR: 5/30/13

[Author]

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