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Tax Consequence on Partnership Formation

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a) Darryl, Darrell, and David form a 1/3d-1/3d-1/3d partnership. Darryl contributes land worth $100,000 with a basis of $100,000. Darrell contributes supplies worth $100,000 with a basis $90,000. David receives his 1/3d interest for his services in putting the deal together and for the future services. Thus if the partnership were to liquidate, David would get 1/3d of the partnership's assets. Does the deal make sense? How is the partnership formation taxed? (Note that Section 709 requires 60-month amortization for costs incurred in organizing a partnership, analogously to Section 248's rule for corporations, and disallows any deduction - ever - for costs of selling interest in a partnership).
b) What if David gets only 1/3d of future profits, which are speculative but gets no interest in the partnership's existing assets?
c) What if David gets only 1/3d of future profits, but Darryl and Darrell also contributed high quality corporate bonds to the partnership?

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a) The deal makes sense. Darryl and Darrell both contributed property with a FMV of $100,000 and David contributed $100,000 worth of service. after the contribution, they became equal partners of the partnership.
Neither Darryl or Darrell will recognize gain because the deal is subject to Section 721. No gain or loss is ...

Solution Summary

This solution shows the tax consequences under different scenarios when service is contributed in exchange for partnership interests.

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Business Formation and Choice of Entity

1. Two brothers would like to form a small retail business. They would like your advice in structuring the business. They have heard that there are various options such as a corporation, a partnership or a sub-chapter S Corporation and would like to know the advantages and disadvantages of each form. Include both tax and non-tax consequences. They plan on contributing the following:

Joe: $100,000 in cash
Jim: Equipment with a fair market value of $100,000 and a basis to him of $80,000.

They anticipate losses of $5000-$10000 in the first two years, but then hope that they will generate a profit.

Include in your answer the tax consequences in forming each type of business, the basis they would have in their stock or partnership interest, and the basis the business would have in the assets.

2. These same brothers would also like to know how they can take out distributions while minimizing taxes once the business is up and running.

3. Finally they would like to know what the consequences would be should they wish to dissolve the business or terminate their interest in it. Discuss each form.

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