Individual A, Individual B, and Individual C would like to start the new A, B, C partnership. Each of the potential partners would like to contribute the following assets to the business with the following tax basis and estimated fair market value:

Individual A: Tax Basis FMV

Cash $100,000 $100,00

Individual B:

Land $20,000 $30,000

Building $40,000 $70,000

Individual C does not plan on contributing assets to the business. Individual C has offered to provide know-how and time to the business. In return, C would like a 20 percent profit interest in the partnership and a $10,000 per year guaranteed payment.

• The building is a warehouse. It was originally purchased for $50,000 (not including the land).
• The expected operating revenue is $120,000 and the expected operating expenses are $80,000 (not taking into account the depreciation expense and guaranteed payment).

Questions:

1. What would be each partners beginning basis in the partnership?
2. What would be the partnerships beginning basis in the partnership assets?
3. What would be each partners beginning profit, loss, and capital percentages? Note Individual C would not have an initial capital or loss sharing percentage; however, this would change over time.
4. Given the above numbers (including depreciation and guaranteed payment), what would be the results for each of the first three years. Discuss the tax consequences to each partner for each year. Assume that any profits are converted to cash each year.
5. What is the basis in the assets to the partnership at the end of each year? What is each partners basis in their partnership interest each year?