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) Since 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 initial basis in the partnership is the sum of cash contributed plus the proportionate share of the recourse mortgage assumed by the partnership ($0, if no debt was assumed). Because the land is an operating asset, the partnership takes a basis in it equal to fair market value. Barry's adjusted basis in the land carries over to the partnership, subject to reduction by the amount of the recourse mortgage allocated to him. As a general rule, a partnership's debt is allocated to its partners under the rules of Sec. 752, unless an exception applies. However, since this is a recourse obligation, unless AB elects a minimum gain chargeback under Sec. 704(c), the debt allocation will be based on residual profit and loss sharing percentages.

Alicia and Barry Form the AB Partnership at the Start