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