In this video, 4.02 – Partnership Taxation: Basis – Lesson 3, Roger Philipp, CPA, CGMA, walks through a complex example which analyzes the effects of various transactions on the basis of three different partners in a partnership.
In the example, we assume that the ABC Partnership is formed with three equal partners: Andy, Billie, and Cindy. Andy and Billie each contribute $100 of cash. Cindy contributes land with a tax basis of $80 and a fair market value of $130, subject to an unpaid mortgage of $30 that is being assumed by the partnership.
Remember that calculating ending outside basis in a partnership, you start with beginning outside basis, adjust for the partner’s percentage of the partnership income or loss, adjust downward for distributions received from the partnership, adjust upward for partner’s share of partnership liabilities, and adjust downward for partner’s liabilities contributed to the partnership.
Connect with us:
Are you accounting faculty looking for FREE CPA Exam resources in the classroom? Visit our Professor Resource Center: https://www.rogercpareview.com/professor-resource-center/
Video Transcript Sneak Peek:
Now let's do the same kind of question again. But let's look at all three partners to see how it affects their basis. So let's go back to that for example. For example assume that ABC partnership is formed with three equal partners, A, B, and C. A and B contribute $100 cash. C contributes land with a tax basis of 80, fair value of 130, subject to and unpaid mortgage of 30 that is being assumed by the partnership.
Okay so what we need to do is figure out what their basis is. So let's come over here. Let's set this up again. We've got partner A, partner B, partner C. He's got $100 cash, $100 cash. This guy puts in property. They told us that the property has a fair market value of 130. Now remember fair market value 130. Carry over basis or adjusted basis or tax basis of 80.
Now why do they give you the fair market value number? To ruin your career, so you pick it. Forget about it, forget about it. We're each one third partners and this is subject to a mortgage of $6. Okay, so initially boom. Carry over basis, 80. Contributed mortgage. I'm contributing a mortgage of how much? The mortgage on this is... Where'd I get $6?
Let's try that again. Unpaid mortgage of 30 is being assumed. Okay I'm mixing questions. 30 bucks. So I'm really putting in an asset here of 80, but I still owe 30 on it. I should probably get credit for 50, but I'm at risk for a third of this. So coming over here.
Contributed liability. I'm putting in this mortgage of 30, but we're each at risk for a third which is plus ten, plus ten, plus ten. Do you see how it affects everybody? So everybody's basis goes up because we're all at risk for a third of that new debt. So he ends up with what? 110. He ends up with 110. I end up with 80 minus 30 is 50 plus ten is 60. So 110, 110, and 60. That would be your ending numbers which you'll see there in that box. Mmm, okay.
What about services? Now remember when I contribute cash. Cash not subject to a mortgage. But property, they love that. So you can see how there's two things. And what are the two things? We'll come back over again. The two things being plus my percent of the liability. Minus the contributed liability. So contributed liability, my third of it, boom. That increases my basis. That didn't exist in an S Corp. It does exist with the partnership.
And then looking over services. When a partner renders services in exchange for an interest, the partner reports ordinary income equal to the fair value of the partnership interest that is being granted, and the partner's basis increased by that amount. So whether it's, again, services or whether it is the asset.
So next item. Under no circumstances can a partner's basis ever be reduced below zero. So it doesn't go zero. It cannot go negative. It says if a loss would've reduced the partner's base below zero, that portion of the loss is not deductible. If a distribution would've reduced it below zero, the partner will either adjust the basis of the distributed asset, or in the case of cash, report a gain. Because if you get money, but you have a zero basis, you must've had a gain.
So basis never-- These are the bullet points, the key points. Basis never declines below zero. Loss reducing basis below zero is not deductible. If you get cash distribution exceeding it, it's a gain. Contributed assets subject to higher liability results in a gain. I'm going to show you this example now. And they like to test this one too.