Andrea, Robert, and Agatha form the ARA Partnership as equal general partners. Andrea contributes land with a $20,000 basis and a $40,000 FMV along with cash of $60,000. Andrea has held the land for two years as an investment. Robert contributes equipment with a $50,000 adjusted basis and a $100,000 FMV. Robert has used the equipment in his sole proprietorship for three years and has claimed $40,000 of accelerated depreciation. Agatha contributes accounts receivable from her sole proprietorship with a zero basis and a $45,000 FMV along with cash of $35,000. In addition, Agatha set up the accounting system for the business. She normally would charge $20,000 to do the same job for a client. On the first day of business, the partnership borrows $90,000 (recourse debt) from their bank to begin the business. The partners have equal risk of loss for these liabilities.
a. How much gain, loss, or income must each partner recognize on the formation of the partnership? What is the character of any gain, loss, or income recognized?
b. How much gain, loss, income, or deduction will the ARA Partnership recognize on the formation?
c. What is the partnership’s basis in its property on the day the business begins?
d. What is each partner’s basis in his or her partnership interest?