QUESTION 3

The XYZ partnership has been operating for several years. All of its assets were purchased by the partnership, and at the end of the current year its balance sheet, which has been expanded to show the current fair market value of assets and capital, is as follows:

	Assets		Liabilities & Capital
	AB/Book	FMV	Liabilities
Cash	$600	$600	None
Accts. Rec.	0	200
Equipment	100	200
Stock	500	1000
Land	300	1000
Total	$1500	$3000
			Capital Accounts
			Tax/Book	FMV
		X	$500	$1000
		Y	500	1000
		Z	500	1000
			$1500	$3000

On the last day of the current year, W joins the partnership. In exchange for a contribution of $1000 cash, she receives a 25% interest in partnership profits, losses, and capital.

Reconstruct the balance sheet of the partnership following Ws admission to the partnership, assuming, in the alternative:

The partnership does not elect to revalue its assets under 1.704- 1(b)(2)(iv)(f), or

The partnership does elect to revalue its assets under the regulations.

If W had purchased Xs interest in the partnership instead of acquiring an interest through a contribution to the partnership, would the partnership be permitted to revalue its assets under the regulations? Why or why not?