Stacey, Bill, and Olivia close friends decided to form a general partnership to operate a coffee shop. They discussed what they each could contribute. After have discussed the issue, they developed a plan. Stacey would contribute an inventory of gourmet coffee beans that she had purchased for $1,000 and was currently valued at $500. Bill would contribute an industrial strength espresso machine that he had purchased for $5,000 and was currently valued at $7,000. He had used the machine in a similar business and had held it for 2 years. Olivia would contribute $5,000. They intended to be equal partners. After the partnership was formed, they would look for an appropriate location from which to operate the coffee shop. The partnership would either purchase the building or lease space, depending on what option they could find. They have ask you to advise them regarding them regarding the formation of the partnership.

1. Contribution to the partnership: a.What documentation would you prepare for the three friends to establish that the inventory, espresso machine, and cash had been transferred to the partnership and had become partnership property? b.Why is it important to establish that the property has (or has not) become partnership property? c. From a tax perspective, what other documentation do you believe would be important to obtain at the time of contribution? d.What problems would you anticipate if one of the friends wanted to contribute his or her services to the partnership, rather than cash or asset?

2.Ownership issues: a.What problem do you see with the three wanting to be equal partners? b. What solutions would you offer to this problem? c.How would you explain this issue to the friends?

3.If the three intended to go forward and not be equal partners: a.Will each partner receive a capital interest or profits interest? How do you know that? b.What percentage interest in the partnership would each partner own? c. What would each partner's basis in the partnership be? d.What would each partner's holding period in the partnership interest be? e.What would the partnership's basis in each asset be? f.What would the partnership's holding period in each asset be?

4.Operation issue: a.Have the partners contributed the assets necessary for the partnership to operate a coffee shop? b.If the partnership does not have the assets needed to operate a coffee shop, how will the partnership acquire such assets?

5. Construct a balance sheet for the partnership at the time of formation.