Question

30 points Scott Smith invests $30,000 for a 20% interest in DJP Partners on September 1 of the current year. A month later, DJP Partners borrows $200,000 at 8% mortgage interest rate to buy a piece of land as future parking garage. DIP hires a general contractor to construct the garage in early November of the current year. After breaking the ground, the contractors find that the land is a gold ore and DJP stops developing the lot but does not pay off the mortgage. DJP breaks even in the current year. On January 1 of the next year, Scott sells his interest in DJP to Duncan Ambrose for $1,000,000 in cash. What is Scott's outside basis in his interest in DJP prior t of partnership debt.] (3 points) 1 o the sale? [Hint: outside basis includes basis in capital and share a What is Scott's gain from the sale? Also, what is the character of the gain (ordinary income or capital gain)? Assuming DJP has no hot assets. (3 points) b

Answer 1

1 a. Scott's outside basis interest in DJP prior to the sale is $70,000

Amount in $ Particulars Initial contribution Borrowing (200000*20%) ),KO Total 70,000

b. Scott's gain from the sale : Capital gain = $ 930,000 (1,000,000 + 40,000 - 70,000)