1) Determine the partners capital accounts and basis at formation;

2) Set up the initial partnership balance sheet;

3) Determine partnership book and taxable income and allocate those amounts to the partners including making the required special allocations due to contributed property with built-in gain;

4) Determine the changes to capital accounts and outside basis due to the transactions during the year;

5) Set up the ending partnership balance sheet.

If you do those things correctly, you will arrive at all of the answers to the questions below.

George and Elaine contribute the following properties to the EG Products Partnership:

Partner Tax BasisFair Value at ContributionGeorge Cash25,00025,000 Inventory25,00040,000Elaine Equipment21,00030,000 Cash45,00045,000

The equipment contributed by Elaine is subject to a recourse liability of $10,000 that is assumed by the partnership.

Each partner is an equal 50% partner for all purposes.

During the first year, the partnership does the following:

1. Sells the inventory contributed by George for $42,000;
2. Depreciates the equipment contributed by Elaine as follows: $10,000 for partnership book purposes and $7,000 for tax purposes.
3. Spends $60,000 to buy additional inventory and sells $40,000 of that inventory for $60,000 (both for book and tax).
4. Incurs book and tax other operating expenses of $10,000.
5. Pays $4,000 of the liability contributed by Elaine.
6. There are no distributions from the partnership to the partners.

Questions

1. What is Georges outside basis in the partnership interest at formation?
2. What is Elaines outside basis in the partnership interest at formation?
3. What is Georges capital (book) account at formation?
4. What is Georges outside basis at the end of the first year?
5. What is Elaines outside basis at the end of the first year?
6. What is Georges capital (book) account at the end of one year?