524 MODULE 35 TAXES: PARTNERSHIPS

B. Partnership Formation
1. As a general rule, no gain or loss is recognized by a partner when there is a contribution of
property to
the partnership in exchange for an interest in the partnership. There are three situations where gain
must be recognized.

a. A partner must recognize gain when property is contributed which is subject to a liability, and the
resulting decrease in the partner's individual liability exceeds the partner's partnership basis.

(1) The excess of liability over adjusted basis is generally treated as a capital gain from the sale or
exchange of a partnership interest

(2) The gain will be treated as ordinary income to the extent the property transferred was subject
to depreciation recapture under Sec. 1245 or- 1250. .
EXAMPLE: A partner acquires a 20% interest in a partnership by contributing property worth $10,000 but
with an adjusted basis of $4,000. There is a mortgage of $6,000 that is assumed by the partnership. The
partner must recognize a gain of $800, and has a zero basis for the partnership interest, calculated as follows:

Adjusted basis of contributed property $ 4,000

 for an interest
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therein if the partnership would be an investment company if incorporated.
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po c. Partner must recognize compensation income when an interest in partnership capital is received in
rti exchange for services rendered.
on
EXAMPLE: X received a 10% capital interest if!. the ABC Partnership in exchange for services rendered. On the
of
date X was admitted to the partnership, ABC's net assets had a basis of $30,000 and a FMV of $50,000. X must
m
recognize compensation income of $5,000.
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ag 2. Property contributed to the partnership has the same basis as it had in the contributing partner's
e hands
al (a transferred basis).
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ca
te
a. The basis for the partner's partnership interest is increased by the adjusted basis of property con-
d tributed.
to
ot b. No gain or loss is generally recognized by the partnership upon the contribution.
he
r 3. The partnership's holding period for contributed property includes the period of time the
pa property
rt
ne was held by the partner. r

rs 4. A partner's holding period for a partnership interest includes the holding period of property
(8 contrib-
0 uted, if the contributed property was a capital asset or Sec. 1231 asset in the contributing partner's
%
x
$6 hands. .
,0 5. Although not a separate taxpaying entity, the partnership must make most elections as to the tax
00 treat-
) ment of partnership items. For example, the partnership must select a taxable year and various ac-
(4
.8 counting methods which can differ 'from the methods used by its partners. Partnership elections in-
00 clude an overall method of accounting, inventory method, the method used to compute depreciation,
) and the election to expense depreciable assets under Sec. 179.
P 6. Effective for amounts paid after October 22, 2004, a partnership may elect to deduct up to $5,000
ar
tn of
er organizational expenditures for the tax year in which the partnership begins business. The $5,000
's amount must be reduced (but not below zero) by the amount by which organizational expenditures
ba
si
exceed $50,000. Remaining expenditures can be deducted ratably over the I80-month period begin-
s ning with the month in which the partnership begins business.
(n a. For amounts paid or incurred after September 8, 2008, the partnership is deemed to have made the
ot
re election to amortize costs and does not have to attach a statement to its return. Alternatively, the
du partnership may elect to capitalize its costs on a timely filed return (including extensions) for the
ce taxable year in which the partnership begins business.
d
be b. Similar rules apply to partnership.start-up expenditures.
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w c .. For amounts paid on or before October 22, 2004, a partnership may elect to amortize organiza-
0) tional expenditures and start-up expenditures over not less than 60 months beginning with
the
$ month that business begins.
-
1
2 d. Partnership syndication fees (expenses of selling partnership interests) are neither deductible nor
amortizable.
b. Gai
n will be
recognized
on a
contributio
n of
property to
a
partnership
in
exchange