Question for CPAs

2 Replies

Hi--I'm a little rusty on these rules so please help me out--let's say that you and I form a partnership.  Let's assume the partnership agreement works out such that I will be allocated 90% of the partnership income, loss, deductions, credits, etc., and you will be allocated 10%.  I contribute property in which my basis is $45,000 and the mortgage is $10,000, and you contribute $5,000 cash.

Is my beginning tax capital account (not tax basis) as follows?
+ $45,000 basis in property contributed
-   $1,000 liabilities assumed by you
= $44,000 beginning tax capital account

And is your beginning tax capital account (not tax basis) as follows?
+ $5,000 cash contributed
+ $1,000 liabilities assumed by you
= $6,000 beginning tax capital account

I know that the liability assumption affects tax basis, but I am a bit hazy on tax capital.  Please enlighten me.  Citations would be helpful.  Thank you!

Yes your calculations are correct. If liabilites assumed exceed adjusted basis of property contributed, the contributing partner would recognize a gain to the extent his/her basis is negative.  

"No gain or loss is recognized by a partnership or a contributing partner who transfers property to a partnership solely in exchange for a partnership interest (capital and/or profits). There is no 80% ownership test (as is true with corporations under Sec. 351, discussed later), and there are no limits on the type of property contributed.

The partner’s basis in the partnership interest will equal the basis of the property contributed, and the property will have the same tax basis to the partnership. 

If the contributing partner receives any boot (other than assumed liabilities--see below), the transaction is fully taxable."

See Section 721 and Pub 541

Thanks, Brandon.  I know my calculations are correct for tax basis--can you find citations for tax capital?  It's tough because the code doesn't really entertain the notion of tax capital, only 704(b) capital.