On January 1, Ryan and James decided to open a Peruvian chicken restaurant (yum!). Ryan contributed the building and land for the restaurant that had a fair market value of $160,000 and adjusted tax basis of $140,000 for a 50 percent profits interest and capital interest. The building had a $50,000 mortgage on it. James contributed $40,000 of cash for a 50 percent profits interest and capital interest. Should the company fail to pay the mortgage, the creditor is only able to claim the building and land and potential profits of the company, not go after the personal assets of either partner. The company uses a calendar year tax period.

In the above scenario, how much income (or loss) do Ryan and James have to immediately recognize for tax purposes on their initial contributions to the partnership?

	I.	Ryan recognizes $0 of income. James recognizes $0 of income.
	II.	Ryan recognizes $20,000 of income. James recognizes $0 of income.
	III.	Ryan recognizes $20,000 of income. James recognizes $40,000 income.
	IV.	Ryan recognizes $20,000 of loss. James recognizes $40,000 of loss.
	V.	Ryan recognizes $0 of income. James recognizes $40,000 of loss.
	VI.	None of the above.