4-1 of gain or loss is the general rule for property...
TRANSCRIPT
Property Contributions to
Partnerships
Chapter 4
Nonrecognitionof gain or loss is the general rule
for property contributions to
partnership
4-1
Compare contributions of
services in which the
general rule is income (Ch 5)
4-1
A letter of intent may be
property
Stafford727 F.2d 1043 (CA11 1984)
4-3
“the absence of enforceability does not necessarily preclude a
finding that a document, substantially committing the parties to the major terms of a development
project, is property”:
4-3
Other Examples:
• Unpatented know-how
• Unpatented secret processes
4-3
Mark IV Pictures v. Comm’r, 969 F.2d 669
(8th Cir. 1992),
The facts showed that the payments were for
services, and not for film rights
7
4-3
Partnership Level Gain on Transfers of Equity Intersts
for Services 4-4
2005 Proposed Equity for Services
Regulations
The Treasury and IRS view is that
“partnerships should not be required to recognize gain on the transfer of a
compensatory partnership interest.”
McDougal required gain recognition to a race horse owner on the transfer of a
one-half interest in the appreciated race horse to a trainer who fixed the leg of the race horse, immediately prior to the contribution of the race horse to a newly
formed partnership.
Built-in Gain Property:
IRC sec. 704(c) Property
Example 4-1 4-5
• Dave and Donna form an equal partnership to operate an orchard
• Dave contributes $100,000.
12
Donna contributes:
FMV BasisLand $50,000 $10,000
Equip. $50,000 $25,000
13
• Donna does not recognize gain.
• The partnership’s tax basis in the land and equipment is $10,000 and $25,000 respectively.
• The partnership’s book basis in the land and equipment is $50,000 each (FMV)
14
If the land is sold for $50,000, then
the entire tax gain of $40,000 is
allocated to 50% partner Donna (Sec. 704(c))
15
Donna contributes:
FMV BasisLand $50,000 $10,000
Money $50,000 $50,000
16
ObservationWhat if:
As part of the deal she receives a distribution of $50,000 six months later
and the distribution reduces her partnership
interest from 50% to 33.33%
17
Book Capital Accts (In Thousands)
Donna(50%)
Dave(50%)
Beginning Bal. 100 100
Distribution -50
Book Capital Accts (In Thousands)
Donna(33%)
Dave(66.6%)
Beginning Bal. 100 100
Distribution -50
Ending Bal. 50 100
Tax free recovery of $60,000 of outside
basis?
• Likely disguised sale of land (Chap. 6) –Donna recognizes $40,000 of gain on the sale.
• Can use installment method if eligible. 20
Example 4-2A 4-7
Alice contributes land to a partnership in exchange for a 20% partnership interest:
$10,000 FMV$4,000 Adjusted Basis
Bill and Carol each contribute $20,000 for two 40% interests. 21
4-7
No gain recognition for Alice (Sec. 721)
Alice’s outside basis = $4,000 (Sec. 722)
Partnership’s inside basis = $4,000 (Sec. 723)
Alice’s beginning Sec. 704(b) “capital account” is $10,000.22
If the land were sold by the partnership for $10,000, how much of the $6,000 recognized tax gain would be allocated to Alice?23
4-7
$6,000 (Sec. 704(c))
24
If the land were sold by the partnership for $10,000, does the partnership have any Sec. 704(b) book gain?
25
No Book GainBook basis of contributed property is FMV (Sec. 704(b)).
26
If the land were sold by the
partnership for $20,000?
27
Book gain is now $10,000
($20,000 - $10,000) and
$2,000 (20%) of book gain is
allocated to Alice.28
The tax gain is $16,000
($20,000 - $4,000).
How much is allocated to Alice on her K-1?
29
$8,000 is Allocated to Alice:
$6,000 (first $6K)*
* Sec. 704(c) tax gain 6K
30
$8,000 is Allocated to Alice:
$6,000 (first $6K)*+ $2,000 (20% x $10K)**= $8,000
* Sec. 704(c) tax gain 6K** Sec. 704(b) tax & book
gain of 10K31
Alice’s beginning capital account:
Beg. EndBook $10,000
Tax $4,00032
Alice’s ending capital account:
Beg. EndBook $10,000 $12,000
Tax $4,000 $12,000 33
What if the partnership had total recourse debt of $10,000 of which $2,000 (20%) is allocated to Alice under sec. 752
34
Example 4-2B
Impact of Partnership Debt
A net increase in a partner’s share of debt is a deemed contribution of money by the partner.(Sec. 752)35
The impact of the net debt assumption $2,000 is that Alice’s outside basis is increased by the $2,000:
$4,000 basis of contrib. prop.+$2,000 deemed cash contrib.=$6,000 Alice’s outside basis.
36
The $2,000 debt share does not increase the
partnership’s $4,000 inside tax basis in
the contributed property
37
Subsequent Increases and Decreases in Outside Basis
Sec. 705
OrderingBeginning O.B.
+ Income (exempt also)
- Distributions- Losses= Ending O.B.
39
Example 4-2C
What if Alice in Example 4-2A received a liquidating distribution of $10,000 cash from the partnership when her pre-distribution outside basis is $4,000 (not a disguised sale)? 40
4-8
$6,000 of gain (Sec. 731(a)(1))
41
• Does not appear directly on the parter’s K-1
• Does not increase outside basis
• Does increase at-risk basis
If the partnership made a section 754 election, the section 734 adjustment of $6,000 eliminates the gain to the continuing partners—Bill and Carol 42
Without a Section 754
Election43
Absent a section 754 election, if the land were subsequently sold for $10,000, the tax gain of $6,000 would be allocated $3,000 to Bill and $3,000 to Carol (50-50 partners). 44
However, that gain would increase each continuing partner’s outside basis from $20,000 to $23,000.
45
If Bill and Carol were liquidated for $20,000,
then each would recognized a loss of
<$3,000> under section 731 (capital
loss). 46
Example 4-2D
What if Alice’s share of partnership debt is reduced by $10,000 when her pre-distribution outside basis is $4,000? 47
4-8
Impact of Partnership Debt
A net decrease in a partner’s share of partnership debt is a deemed distribution of money to the partner. (Sec. 752)48
$6,000 of gain (Sec. 731(a)(1)
Example 4-2E
What if Alice is properly allocated losses of <$10,000> when her post-distribution outside basis is $4,000? 50
4-9
<$4,000> deducted (IRC sec. 704(d))
<$6,000> suspended
51
Example 4-2F
$4,000 Beginning O.B.
Alice’s K-1:<$7,000> Losses
$3,000 Cash Distribution
52
4-9
OrderingBeginning O.B.
+ Income- Distributions- Losses= Ending O.B.
53
$3,000 distribution reduces her outside basis to $1,000 ($4,000 O.B. - $3,000 distribution).
<$1,000> loss is deductible
<$6,000> losses are suspended.
54
VisionMonitorSoftware, LLC, TC Memo 2014-182 (Sept. 3, 2014)
Partnership Had No Basis in Partner Notes
Contributed to Partnership Until Notes are Paid 55
4-9
Contributed Property with a Built-in Loss and
Prop. Regs.
REG-144468-05 (Feb. 3, 2014)
56
4-10
The prop. regs. require the tax
basis balance sheet to reflect the built-in loss contributed
property at FMV
What happens to the contributing partner’s built-in
loss?
The built-in loss becomes a special exclusive basis
adjustment of the contributing partner
(AKA: the “section 704(c)(1)(C) adjustment”)
Example 4-3AAdam contributes raw land (Blackacre):$50,000 FMV$90,000 Basis
Melvin contributes $50,000 cash.
4-11
ContributingPartner Adams
NoncontributingPartner Melvin
Tax Book Tax BookBeg. Bal. 50,000 50,000 50,000 50,000
The partnership would show a common balance sheet tax basis of $50,000 (FMV) in Blackacre
Adam has a section 704(c)(1)(C) basis
adjustment of $40,000
($90,000 - $50,000) in the Land
62
Similar to basis adjustments under section 743(b), a section 704(c)(1)(C) basis adjustment is unique to the contributing partner and does not affect the common balance sheet basis of partnership property
Blackacreappreciates and is subsequently sold for $70,000
65
Adam MelvinTax Book Tax Book
Beginning Capital 50,000 50,000 50,000 50,000Blackacre Sale for $70,000 10,000 10,000 10,000 10,000
Ending Capital 60,000 60,000 60,000 60,000
Book and Tax Gain is $20,000
(split 50/50)
Adam’s $40,000 IRC sec. 704(c)(1)(C)
adjustment would offset his $10,000 gain and produce a net loss of
($30,000) ($10,000 – 40,000)
Adam’s outside basis is reduced to $60,000
($90,000 (beg. O.B.) -$30,000 (net loss)
Matching Tax and Book capital accounts
If, prior to the Blackacre sale, Adam
gave his 50% partnership interest to his daughter, the section 704(c)(1)(C)
adjustment is eliminated68
If Blackacre is sold following the gift, then the daughter would report the $10,000 of gain
69
Example 4-3BWhat if Adam contributed:Blackacre:
$45,000 Adjusted Basis$5,000 FMV
andWhiteacre:
$5,000 Adjusted Basis$45,000 FMV
4-12
ContributingPartner Adams
NoncontributingPartner Melvin
Tax Book Tax BookBeg. Bal. 10,000 50,000 50,000 50,000
The partnership would show a common balance sheet tax basis of $5,000 (FMV) in Blackacre and $5,000 (A.B.) in Whiteacre
Adam has a section 704(c)(1)(C) basis
adjustment of $40,000
($45,000 (A.B.) -$5,000 (FMV)) in
Blackacre72
Blackacreappreciates and is subsequently sold for $25,000
74
Adam MelvinTax Book Tax Book
Beginning Capital 10,000 50,000 50,000 50,000Blackacre Sale for $25,000 10,000 10,000 10,000 10,000
Ending Capital 20,000 60,000 60,000 60,000
Book and Tax Gain is $20,000
(split 50/50)
Adam’s $40,000 IRC sec. 704(c)(1)(C)
adjustment would offset his $10,000 gain and produce a net loss of
($30,000) ($10,000 – 40,000)
Adam’s outside basis is reduced to $20,000
($50,000 (beg. O.B.) -$30,000 (net loss)
matching tax basis capital accounts
If Whiteacre were subsequently sold
for $45,000(tax gain of
$40,000)
Adam Capital Melvin Capital
Tax Book Tax Book
Beginning Balance 20,000 60,000 60,000 60,000
Whiteacre Sale for $45,000
40,000
Ending Capital 60,000 60,000 60,000 60,000
IRC sec. 704(c)(1)(C) is
Not Applicable to
Reverse Section 704(c) Allocations.
Prop. Reg. Example Involving
Depreciable Property
4-13
• A contributes depreciable Property on January 1:$12,000 adjusted basis
$5,000 fair market value
• B contributes $5,000 to PRS, a partnership.
• A’s property had a 10 Year MACRS life with 7.5 years remaining at the time of contribution.
4-13
• PRS's basis in Property is $5,000 (fair market value) and the depreciation is $667 per year ($5,000 divided by 7.5 years), which is shared equally between A and B.
A’s 704(c)(1)(C) basis adjustment is
$7,000 ($12,000 (A.B.) -
$5,000 (FMV) 83
A's $7,000 section 704(c)(1)(C) basis
adjustment is subject to depreciation of $933 per
year ($7,000 ÷ 7.5 years)
If a partner with a sec. 704(c)(1)(C) adjustment sells their partnership interst, then the
adjustment is eliminated.
The prop. regs. are effective when
finalized.“No inference is
intended … before the effective date of these
regulations”
Introduction To Partnership
Capital Accounts
87
4-21
88
Why maintain Sec. 704(b)book capital accounts?
89
Section 704(b) requires capital
account maintenance to use the safe harbors for
substantial economic effect
90
Helps establish capital and profit
percentage of contributing partner
+704(c) tracking and revaluations
91
Helps establish how much to distribute to a redeemed partner
+704(c) revaluations
92
Proposed section 751(b) regulations require
capital account revaluation if other
property is distributed and partnership has 751
property after the distribution
93
The recently proposed regulations governing the allocation of nonrecourse deductions rely upon book
capital accounts to allocate excess nonrecourse debt
under section 752.
94
Need not use book capital accounts
on Schedule L and K-1s
Ordering Matches O.B.
Beginning Cap.+ Income- Distributions- Losses= Ending Cap.
95
FMV of contributed property
FMV of distributed property
• a pre-distribution adjustment must be made to reflect unrealized appreciation or depreciation in the distributed property
Capital Accounts (“Book”)
96
1) Contribution of money or property in exchange for partnership interest.
2) Distribution of money or property in exchange for partnership interest.
Optional Adjustments to Book Capital Accounts
97
3) Grant of partnership interest for services
4) In connection with issuance of noncompensatory option
5) Under GAAP mark to market rules.
98
The Optional Adjustments Are Made for All Partnership
Property With Unrealized Appreciation or Depreciation
99
Example 4-4The ABC Partnership is a
dealer in real estate
Section 704(c) Basics
4-23
ABC Partnership
AliceBill
Blackacre FMV $1,000,000Adj. Basis: $100,000
30%50%
Carol$600,000
$400,000
20%
Assets:704(b)
Book BasisCash $1,000,000Blackacre $1,000,000
Total $2,000,000Capital:
Alice 50% $1,000,000Bill 30% $600,000Carol 20% $400,000
Debt + Capital $2,000,000
Balance Sheet After Formation
Assets: Tax Basis704(b)
Book BasisCash $1,000,000 $1,000,000Blackacre $100,000 $1,000,000
Total $1,100,000 $2,000,000Capital:
Alice 50% $100,000 $1,000,000Bill 30% $600,000 $600,000Carol 20% 400,000 400,000
Debt + Capital $1,100,000 $2,000,000
Balance Sheet After Formation
Blackacre (land)--held for sale --
is sold for $1,000,000 at the end of
Year 1
Ordinary Gain $900,000(1,000,000 – 100,000)
No other income or loss.
IRC sec. 704(c) forces all $900K of the tax gain
to Alice
Zero Book Gain
Assets: Tax Basis704(b)
Book BasisCash $2,000,000 $2,000,000Capital:
Alice 50% $1,000,000 $1,000,000Bill 30% $600,000 $600,000Carol 20% 400,000 400,000
Debt + Capital $2,000,000 $2,000,000
Balance Sheet After Sale
ABC Partnership
AliceBill
Blackacre FMV $1,000,000Adj. Basis: $100,000
30%50%
Carol$600,000
$400,000
20%
Assets: Tax Basis704(b)
Book BasisCash $1,000,000 $1,000,000Blackacre $100,000 $1,000,000
Total $1,100,000 $2,000,000Capital:
Alice 50% $100,000 $1,000,000Bill 30% $600,000 $600,000Carol 20% 400,000 400,000
Debt + Capital $1,100,000 $2,000,000
Balance Sheet After Formation
Later, Blackacre
appreciates by $1,000,000
Assets: Tax Book FMVCash 1,000 1,000 1,000Blackacre $100 1,000 2,000
Total $1,100 2,000 3,000Capital:
Alice 50% $100 1,000 1,500Bill 30% $600 600 900Carol 20% 400 400 600
Debt + Capital $1,100 2,000 3,000
Balance Sheet After Appreciation of Blackacre (in Thousands)
Donna contributes $3,000,000 for a 50% interest in
ABCD
Per the partnership agreement, book
capital accounts are adjusted to reflect current FMV at the
time Donna becomes a partner.
Reverse 704(c)
Assets: Tax Basis Book BasisCash $4,000,000Blackacre $2,000,000
Total $6,000,000Capital:
Donna 50% $3,000,000Alice 25% $1,500,000Bill 15% $900,000Carol 10% 600,000
Debt + Capital $6,000,000
Revalued ABCD Balance Sheet After Donna Contributes $3 Mil.
Assets: Tax Basis Book BasisCash $4,000,000 $4,000,000Blackacre $100,000 $2,000,000
Total $4,100,000 $6,000,000Capital:
Donna 50% $3,000,000 $3,000,000Alice 25% $100,000 $1,500,000Bill 15% $600,000 $900,000Carol 10% 400,000 600,000
Debt + Capital $4,100,000 $6,000,000
Revalued ABCD Balance Sheet
Blackacre (land)--held for sale --
is sold for $2,000,000.
Zero Book Gain
Book Capital Accts (In Thousands)
Alice Bill Carol
Beginning 1,000 600 400
Book Capital Accts (In Thousands)
Donna Alice Bill Carol
Beginning 1,000 600 400
Donna Admitted
3,000
Book Capital Accts (In Thousands)
Donna Alice Bill Carol
Beginning 1,000 600 400
Donna Admitted
3,000
Revaluation 500 300 200Blackacre Sale
0 0 0 0
Ending Cap. 3,000 1,500 900 600
Second $1,000,000(reverse 704(c)):
$500,000 to Alice$300,000 to Bill$200,000 to Carol
Tax Basis Capital Accts (In Thousands)Alice(25%)
Bill(15%)
Carol(10%)
Beginning 100 600 400
Tax Basis Capital Accts (In Thousands)
Donna(50%)
Alice(25%)
Bill(15%)
Carol(10%)
Beginning 100 600 400
Donna Admitted
3,000
Revaluation
Tax Basis Capital Accts (In Thousands)
Donna(50%)
Alice(25%)
Bill(15%)
Carol(10%)
Beginning 100 600 400
Donna Admitted
3,000
Revaluation
Blackacre Sale
0 1,400 300 200
Ending Cap. 3,000 1,500 900 600
Assets: Tax Basis Book BasisCash $6,000,000Capital:
Donna 50% $3,000,000Alice 25% $1,500,000Bill 15% $900,000Carol 10% 600,000
Debt + Capital $6,000,000
Balance Sheet After Sale
Assets: Tax Basis Book BasisCash $6,000,000 $6,000,000Capital:
Donna 50% $3,000,000 $3,000,000Alice 25% $1,500,000 $1,500,000Bill 15% $900,000 $900,000Carol 10% 600,000 600,000
Debt + Capital $6,000,000 $6,000,000
Balance Sheet After Sale
If the cash is distributed in
liquidation per book capital accounts,
then zero tax gain or loss to
all partners on liquidation.
Variation on 4-5A(not in Text)
Strategy with Debt. The Entity is an LLC
What if Donna does not want to pay
$3,000,000 for her 50% interest?
Any win-win solutions?
Assets: Tax Book FMVCash 1,000 1,000 1,000Blackacre $100 1,000 2,000
Total $1,100 2,000 3,000Capital:
Alice 50% $100 1,000 1,500Bill 30% $600 600 900Carol 20% 400 400 600
Debt + Capital $1,100 2,000 3,000
ABC Balance SheetBefore Donna Joins (in Thousands)
The partnership could first borrow
$1,000,000 and distribute it to Alice
($500,000), Bill ($300,000) and Carol
($200,000)
Alice, Bill, and Carol would
proportionately guarantee the LLC
debt(Donna does not guarantee
the LLC debt)
Assets: Tax Book FMVCash 1,000 1,000 1,000Blackacre $100 1,000 2,000
Total $1,100 2,000 3,000Debt 1,000 1,000 1,000Capital:
Alice 50% -400 500 1,000Bill 30% 300 300 600Carol 20% 200 200 400
Debt + Capital $1,100 2,000 3,000
ABC Balance Sheet (in Thousands)
Does the Distribution trigger tax
gain for Alice?
NO!
100,000 Beg.+ 500,000 Debt Share- 500,000 Distribution
= 100,000 End.(no change when Donna joins)
Alice’s Outside Basis
Assets: Tax Book FMVCash 3,000 3,000 3,000Blackacre $100 2,000 2,000
Total $3,100 5,000 5,000Debt 1,000 1,000 1,000Capital:Alice 25% -400 1,000 1,000Bill 15% 300 600 600Carol 10% 200 400 400Donna 50% 2,000 2,000 2,000Debt + Cap. $3,100 5,000 5,000
ABCD Balance Sheet (in Thousands)
A big problem for Alice if Donna were
subsequently allocated 50% of the
debt reducing Alice’s share by
$250,000
100,000 Beg.- 250,000 Distribution= 0
Sec. 731(a) gain of $150,000
Alice’s Outside Basis
Example 4-5BContribution at a
Discount
4-25
Same facts as Example 4-4A except Donna negotiates a 25%
discount ($750,000 discount)
and contributes $2,250,000 for her 50%
interest.
Assets: Tax Book FMVCash 1,000 1,000 1,000Blackacre $100 1,000 2,000
Total $1,100 2,000 3,000Capital:
Alice 50% $100 1,000 1,500Bill 30% $600 600 900Carol 20% 400 400 600
Debt + Capital $1,100 2,000 3,000
Balance Sheet Before Donna’s Contribution (in Thousands)
The negotiated $2,250,000
contribution must be used to imply the post-
contribution book value of partnership
assets
“[T]he fair market value assigned to property … revalued by a partnership, will be regarded as correct, provided that
1) such value is reasonably agreed to among the partners in arm's-length negotiations, and
2) the partners have sufficiently adverse interests.”
Reg. 1.704-1(b)(2)(iv)(h)
So the implied FMV of partnership assets, after Donna’s contribution, is
$4,500,000
.50 x X = 2,250,000
X = 4,500,000
The implied value of Blackacre is $1,250,000:
4,500,000 -- Total Asset Value- 3,250,000 -- Cash
= 1,250,000 -- Blackacre FMV
Assets: Tax Basis Book BasisCash $3,250,000Blackacre $1,250,000
Total $4,500,000Capital:
Donna 50% $2,250,000Alice 25% $1,125,000Bill 15% $675,000Carol 10% 450,000
Debt + Capital $4,500,000
Revalued ABCD Balance SheetAfter Donna Contributes $2.25 Mil.
Assets: Tax Basis Book BasisCash $3,250,000 $3,250,000Blackacre $100,000 $1,250,000
Total $3,350,000 $4,500,000Capital:
Donna 50% $2,250,000 $2,250,000Alice 25% $100,000 $1,125,000Bill 15% $600,000 $675,000Carol 10% 400,000 450,000
Debt + Capital $3,350,000 $4,500,000
Revalued ABCD Balance SheetAfter Donna Contributes $2.25 Mil.
Blackacre (land)--held for sale --
is sold for $2,000,000 for a
book gain of $750,000
($2,000,000 -$1,250,000)
Allocation of Book Gain of 750,000:
$375,000 to Donna (50%)$187,500 to Alice (25%)$112,500 to Bill (15%)
$75,000 to Carol (10%)
Book Capital Accts (In Thousands)
Donna(50%)
Alice(25%)
Bill(15%)
Carol(10%)
Beginning 1,000 600 400
Donna Admitted
2,250
Book Capital Accts (In Thousands)
Donna(50%)
Alice(25%)
Bill(15%)
Carol(10%)
Beginning 1,000 600 400
Donna Admitted
2,250
Revaluation 125 75 50
Book Capital Accts (In Thousands)
Donna(50%)
Alice(25%)
Bill(15%)
Carol(10%)
Beginning 1,000 600 400
Donna Admitted
2,250
Revaluation 125 75 50
Blackacre Sale
375 187.5 112.5 75
Ending Cap. 2,625 1,312.5 787.5 525
Tax gain of $1,900,000
($2,000,000 $100,000)
First $900,000(forward 704(c):
All to Alice
Second $250,000(reverse 704(c)):
$125,000 to Alice$75,000 to Bill$50,000 to Carol
Third $750,000(matches book gain (704(b)):
$375,000 to Donna (50%)
$187,500 to Alice (25%)
$112,500 to Bill (15%)
$75,000 to Carol (10%)
Tax Basis Capital Accts (In Thousands)
Donna(50%)
Alice(25%)
Bill(15%)
Carol(10%)
Beginning 100 600 400
Donna Admitted
2,250
Revaluation
Tax Basis Capital Accts (In Thousands)
Donna(50%)
Alice(25%)
Bill(15%)
Carol(10%)
Beginning 100 600 400
Donna Admitted
2,250
Revaluation
Blackacre Sale
375 1,212.5 187.5 125
Ending Cap. 2,625 1,312.5 787.5 525
Assets: Tax BookCash 5,250 5,250Capital:
Donna 50% 2,625 2,625 Alice 25% 1,312.5 1,312.5Bill 15% 787.5 787.5Carol 10% 525 525
Total Capital 5,250 5,250
Balance Sheet After Sale (in Thousands)
If the cash is distributed in
liquidation per book capital accounts,
then zero tax gain or loss to
all partners on liquidation.
704(c)Allocation Methods
(Examples moved to Chapter 8)
Contribution of Property Subject to Recourse Debt
Reg. 1.752-1
4-29
Alice contributes land to a corporation for 20% of the stock (assume Sec. 351 applies):
$10,000 FMV$4,000 Adjusted Basis$6,000 Recourse Debt
165
S (or C) Corporation Example
Although she is protected by Sec. 351, she must recognize $2,000 of gain under Sec. 357(c)—debt relief in excess of her total basis in total contributed property ($6,000 - $4,000).
166
Example 4-7
Alice contributes land to partnership for 20% interest:
$10,000 FMV$4,000 Adjusted Basis$6,000 Recourse Debt
167
4-27
Alice’s remaining outside basis (O.B.):
$4,000 A.B. of Land-$4,800 Debt (80%) Allocated to other Ps$ 0 Ending O.B.
Gain of $800 (Cash in excess of O.B.)
168
Contribution of Property Subject to Nonrecourse
Debt
Reg. 1.752-3
4-30
Example 4-8
Alice contributes land to partnership for 20% interest:
$10,000 FMV$4,000 Adjusted Basis$6,000 Non-Recourse Debt
170
4-29
Alice’s share of the $6,000 nonrecourse debt is $2,800:
Tier One: Zero (no minimum gain)
Tier Two: $2,000 ($6,000 (debt) -$4,000 (land adjusted basis))
Tier Three: $800 (($6,000 (debt) -$2,000 (tier two allocation)) x 20%)171
Alice’s remaining outside basis (O.B.):
$4,000 A.B. of Land-$3,200 Debt Allocated to other Ps$ 800 Alice’s O.B.
Zero Gain Recognized
172