Question

The XYZ partnership has the following balance sheet:

Assets		Tax Basis	FMV
Real estate		$120,000	$180,000
Liabilities		$0	$0
Capital
X		$40,000	$60,000
Y		$40,000	$60,000
Z		$40,000	$60,000
		$120,000	$180,000

If Q provides $45,000 of services in exchange for a $25% interest in the partnership, what is the tax effect to Q, X, Y, Z, and XYZ? Assume all of the partners are individuals. How much income does Q recognize? How much gain do X, Y, and Z recognize? How much of a deduction do they get? What basis will XYZ have in the real estate? What is the balance sheet afterward?

Answer 1

When two or more person starts any business for profit motive is known as the partnership business and the profits and losses will be shared by an equal basis.

Assets	Tax Basis	FMV
Real Estate	$120,000	$180,000
Liabilities	$0	$0
Capital
X	$40000	$60,000
Y	$40000	$60,000
Z	$40000	$60,000
Total	$120,000	$180,000

Q will recognize income of service worth $45000

XYZ partnership will have capital gain of $15000{i.e. 180000-(40000*3)-45000 which will be allocated in equal proportion of $5000 to X,Y,Z

XYZ will have tax basis of $135000(i.e. $120000+$15000)after the admission of Q

Gain for each partner will be:
Asset	Tax Basis	FMV
Real Estate	$135,000	$180,000
Liabilities	$0	$0
Capital
X	$30000	$45000
Y	$30000	$45000
Z	$30000	$45000
Q	$45000	$45000
	$135,000	$180,000
X capital = $40000-$15000)+$5000	$30000
for the other it will be calculated in the same way
X,Y,Z will get a deduction of $15000 each