Mrs. Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700) to M&W Inc. in exchange for a 36% interest in M&W Partnership. Determine Mrs. Brinkley's realized and recognized gain on the exchange and the tax basis in her partnership interest.

Question

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Mrs. Brinkley has realized a gain of $228,500 ($340,200 FMV - $111,700 adjusted basis). However, since she received a partnership interest in exchange for the property, she does not recognize the gain at this time (due to the nonrecognition provision for exchanges of property for partnership interests under Section 721). Her tax basis in the partnership interest is equal to the adjusted basis of the property transferred, which is $111,700.

Mrs Brinkley Transferred Business Property (FMV $340,200; Adjusted Tax Basis