Reference no: EM133320567

Case: A, B and C form the ABC partnership. A contributes land worth $2500 in which A has a basis of $1000. B and C each contributes $1000 cash.. A is to have a 50% interest in profits, losses, and capital; B and C are each to have 25% interests. As part of the basic business transaction, shortly after formation, the partnership distributes $500 to A. What are the tax consequences to A and the partnership as a result of this transaction?

Question 1. How would your analysis change if the distribution to equalize capital accounts occurred one year after formation? Three years after formation? Numbers are not necessary.

Question 2. Suppose, instead of distributing $500 cash, the partnership purchased a bond for $500. According to the partnership agreement, A is allocated 99% of all income, gain and loss from the bond. All other partnership items are allocated 50-25-25. Three years after formation, the bond is distributed to A.

Part B:

Assume the same facts in #1, except that the property is worth $4000 and is subject to a $2000 recourse mortgage, and there is no distribution planned. Assume, in the alternative,

1. The mortgage was incurred five years ago to finance another investment;
2. The mortgage was incurred last year to acquire the property;
3. The mortgage was incurred last year to make capital improvements on the property;
4. The mortgage was incurred three days before the partnership was formed; the proceeds were used to acquire stock.

Question 5. How would your answer change to 2(iv) change if the mortgage were nonrecourse?

Question 6. How would your answer change to 2 (i) if the property were worth $4500 and A received $500 cash distribution from the partnership at the time of contribution?