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

Alicia's basis in the partnership equals the cash she contributed plus her share of the recourse debt contributed by Barry, because she is liable for her share of the partnership's debt, including the recourse debt. Choice A is incorrect because Alicia's basis also includes her share of the partnership's debt. Choice C is incorrect because the constructive liquidation scenario is always applicable for determining the allocation of debt to the partners. Choice D is incorrect because AB's basis in the land equals Barry's basis in the land immediately before the contribution date, regardless of the amount of the recourse debt assumed by the partnership.

Alicia and Barry Form the AB Partnership at the Start