Alicia and Barry form the AB Partnership at the start of the current year with a land contribution by Barry and a cash contribution by Alicia. Barry's contributed property is subject to a recourse mortgage assumed by the partnership. Barry has an 80% interest in AB's profits and losses. The land has been held by Barry for the past 6 years as an investment. It will be used by AB as an operating asset in its parking lot business. Which of the following statements is correct?
A) Immediately after formation, Alicia's basis in the partnership equals the cash contributed by Alicia.
B) Immediately after formation, Alicia's basis in the partnership equals the cash she contributed plus her share
Of the recourse debt contributed by Barry.
C) Because the debt is recourse, the constructive liquidation scenario is not applicable for determining the allocation of debt to the partners.
D) AB's basis in the land contributed by Barry equals Barry's basis in the land immediately before the
Contribution date, less the amount of the recourse debt assumed by the partnership.
E) None of the above.

Question

Quizplus · Accepted Answer

In a partnership, a partner's basis can come from contributions of cash, property, or debt. In this case, Alicia contributed cash while Barry contributed property subject to a recourse debt. Alicia's basis will be equal to the cash she contributed plus her share of the partnership's recourse debt, which in this case would be 50% of the debt since she has a 20% interest in the profits and losses of AB. Option A is incorrect because it does not take the recourse debt into account. Option C is incorrect because constructive liquidation scenarios can still apply to partnerships with recourse debt. Option D is correct because the partnership's basis in the contributed land is equal to Barry's basis in the land immediately before the contribution date, reduced by the amount of the recourse debt assumed by the partnership.

Alicia and Barry Form the AB Partnership at the Start