Hi,

I had a question on the recognition of gain regarding both partnerships and corporations:

1)      I know one instance where a partner recognizes gain is where the partner contributes property that is subject to an excess liability (determined by the % of the liability given up by the partner). My question on this statement is the following - does this only apply to the contribution of property, or if cash is contributed also, we would use that in the determination of the gain?

For example, partner contributes property of $100k subject to a $225k mortgage and CASH of $20k for a 1/3 interest in the partnership.

Would I be correct to calculate as follows?

Cash –        $20k

Property - $100k

Mtg -       <$150k>  : $225k x (2/3)

Gain of $30k OR don’t use cash in calculation and just gain of $50k?

2)      Same thing for corps – except subtract the full liability.

Cash –        $20k

Property - $100k

Mtg -       <$225k>  : NO percentage taken.

Gain of $105k OR don’t use cash in calculation and just gain of $125k?

Thanks in advance for your help!

i know for sure #1 is correct, you would have a recognize gain of $30k

not sure about #2

Not to completely contradict or bring confusion to what's being said here, but I believe that in both of the situations discussed above, contributing cash does not trigger gain recognition.

For partnerships, the contribution of property (not servicess) in exchange for partnership interest is a nontaxable event. If property contributed it encumbered by a liability--and the liability exceeds the adjusted basis of the property, then boot is said to be received which triggers gain recognition. I do believe that if cash is RECEIVED in this exchange, there is gain--but not when cash is contributed.

For Corporations, if sec. 351 applies wherein 80% control exists immediately after the formation transaction, no gain or loss is recognized by contributing property (not services). If cash is received by the shareholder, then gain would exist--but I don't believe gain exists when the shareholder CONTRIBUTES cash.

Okay, am I off my rocker? Let's get this straightened out so that we all can pass this exam!!