Choice "A" is correct. A partner's initial basis in their partnership interest is determined by, among other items, the adjusted basis of appreciated property contributed. Such basis is reduced by liabilities assumed by the other partners.When property that is subject to a liability is contributed to a partnership and the subsequent decrease in the partner's individual liability exceeds partnership basis, the excess amount is treated like taxable boot, which means there is a taxable gain to the partner.
Initial Basis: | $40,000 | (basis in asset contributed to the partnership) |
Less: liabilities assumed by others: | (54,000) | ($60,000 in total liabilities less 10% retained) |
Net Basis: | ($14,000) | Excess liability, taxable to Campbell |
Campbell's basis in partnership: | $0 | |
Choice "b" is incorrect. Basis determination begins with the contributed asset's basis, not fair market value.Choice "c" is incorrect. The incoming partner is considered as being relieved of 90% of the liability because the partner is purchasing a 10% interest. Therefore, 90% of the liability is the responsibility of the other partners.Choice "d" is incorrect. Basis determination begins with the contributed asset's basis, not fair market value.
