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Requirement A: Recognized Gain/Loss
Requirement A: Recognized Gain/Loss
The "Tax-Free" Rule (IRC §721): Partners generally do not recognize gains upon formation unless their debt relief is greater than their total basis in the partnership.
1. Total Partnership Debt Pool: * Mortgage Contributed: $60,000
New Recourse Loan: $1,539,000
Total Liabilities: $1,599,000
2. 1/3 Debt Allocation (Per Partner): $1,599,000 \div 3 = \mathbf{\$533,000}$
3. The Gain Check (D’Lake): * $525,000 \text{ (Property Basis)} + 533,000 \text{ (Debt Share)} = \$1,058,000$
Since her basis is much higher than her $60,000 debt relief, her gain is $0.
Final Result: Recognized Gain = $0
Requirement B: Initial Tax Basis
Requirement B: Initial Tax Basis
The Concept: A partner's initial tax basis is the sum of the cash they contributed, the tax basis of the property they contributed, and their share of partnership debt, minus any personal debt the partnership takes over.
Each partner is allocated $1/3$ of the total partnership debt ($60,000 \text{ mortgage} + \$1,539,000 \text{ loan}$):
Individual Share: $533,000
2. Partner Breakdown:
D’Lake:
$525,000 \text{ (Land Basis)} + \$533,000 \text{ (Debt Share)} - \$60,000 \text{ (Debt Relief)} = \mathbf{\$998,000}$Green & Divot:
$465,000 \text{ (Cash)} + \$533,000 \text{ (Debt Share)} = \mathbf{\$998,000}$
Final Result: Everyone starts on equal footing with an initial basis of $998,000
Contributed Cash: $\$930,000$ (Green & Divot)
New Partnership Loan: $+\$1,539,000$
Carryover Land Basis: $+\$525,000$
Total Partnership Assets: $\mathbf{\$2,994,000}$
2. Identifying Total Liabilities
The partnership is responsible for both the pre-existing mortgage and the new financing:
Mortgage on Contributed Land: $\$60,000$
Recourse Note Payable: $+\$1,539,000$
Total Partnership Liabilities: $\mathbf{\$1,599,000}$
3. Calculating Total Tax Capital
Tax capital reflects the partners' equity without the inclusion of debt. Each partner is credited with their net contribution:
Calculation: $\$2,994,000 \text{ (Assets)} - \$1,599,000 \text{ (Liabilities)} $
Total Tax Capital: $\mathbf{\$1,395,000}$ (or $\$465,000$ per partner)
1quired:
d. Using the operating results, what are Slicenhook's ordinary income and separately stated items for 2025 and 2026? What amount of Slicenhook's income for each period would each of the partners receive?
. Calculating Ordinary Income (2025) We take gross profit and subtract standard operating costs:
Sales: $\$1,230,000$
Less COGS: $(\$428,000)$
Less Expenses & Depr.: $(\$270,000)$
Less Interest Expense: $(\$133,000)$
Total Partnership Ordinary Income: $\mathbf{\$401,000}$
2. Identifying Separately Stated Items These pass through to the partners' individual tax returns:
Qualified Dividends: $\$1,890$
Tax-Exempt Interest: $\$1,030$
Section 179 Expense: $\$39,000$ (Massive for 2025!)
3. The Partner's Share (1/3 Split) Each partner reports their exact percentage of every line item. For example, in 2025:
Ordinary Income: $\$401,000 \div 3 = \mathbf{\$133,667}$
Distributions: $\$300,000 \div 3 = \mathbf{\$100,000}$ (Cash received)
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