To: Tax Manager [ LISA AND MATHEW]
From: Client Name [TAX MANAGER]
Date: April 27, 2018.
Subject: Tax Treatment for Partnership Formation Transactions under IRC Sec.721 & ASC 845
REMEMBER THE CASE INDICATES THAT YOU ARE DRAFTING A MEMORANDUM FOR THE MANAGER’S SIGNATURE. SO YOU SHOULD DO THE FOLLOWING:
BRIEFLY DESCRIBE THE FACTS FIRST BECAUSE YOUR MANAGER MAYNOT BE AS FAMILIAR WITH THE FACTS AS YOU ARE
THEN INDICATE WHAT THE ISSUE YOU RESOLVING FOR THE TWO PARTNERS.
YOU SHOULD ALSO ADDRESS THE HOLDING PERIODS FOR BOTH PARTERNS AS WELL AS THE PARTNERSHIP
YOU SHOULD ALSO ADDRESS THE BASIS OF THE ASSETS CONTRIBUTED TO BOTH THE PARTNERS AND THE PARTNERSHIP
FINALLY, HOW WOULD THE HANDLING OF THIS TRANSACTION DIFFER FOR FINANCIAL STATEMENT PURPOSES VERSUS TAX REPROTING PURPOSES. HERE YOU SHOULD SIMPLY INDICATE HOW THE TRANSACTION WOULD AFFECT THE PARTNERSHIP AND PARTNERS FOR BOOK PURPOSES. DON’T SPEND TOO MUCH TIME ON THIS THOUGH.
Under IRC Sec. 721, cash is treated as a property and no gain or loss is recognized to either business or partner in case of any partnership title transfer. In case of LGP, the $50,000 contributed by Lisa or the land of adjusted basis amounted $35,000 (fair market value of $50,000) shared by Matthew will raise no taxable gain for any party (i.e. the partnership or the partners themselves) (IRS, 2017).
In case of liability, against the loan taken from bank Lisa is thinking of selling the land, so the taxable gain of $15,000 will be recognized as the asset.
Under ASC 845, the recognition of assets in a partnership is always at the fair value. In case of our client, the cash will be recoded at its FV of $50,000 contributed by Lisa; the contribution of land by Matthew will also be recorded at fair value of $50,000 here. The reason that ASC 845 want you to have your assets at FV is because this standard think that any assets with active market that can determine the fair value of an asset, so be recorded at its FV. It allows you to deviate from this practice under following circumstances as if there is not fair value determinable market for the asset, if the exchange transaction does not have a commercial substance or if the item is held to sale in an ordinary course of business instead of being invested in the business. In all above-mentioned scenarios, none is applicable to LGP (IAS, 2014). So, in the end LGP will have a taxable gain of $15,000 under IRC Sec.
IAS, 2014. Nonmonetary transactions. [Online]
Available at: https://www.google.com.pk/search?dcr=0&ei=C_XeWuLrGcubgAbBubGADw&q=ASC+845&oq=ASC+845&gs_l=psy-ab.3..0i71k1l8.10287.10287.0.105220.127.116.11.0.0.0.0.0..0.0….0…1.1.64.psy-ab..1.0.0….0.B1gU2qAptmY
[Accessed 23 April 2018].
IRS, 2017. Nonrecognition of Gain or Loss on Contribution. [Online]
Available at: https://www.irs.gov/pub/irs-drop/rr-99-5.pdf
[Accessed 24 April 2018].