Payton and Eli form the EP Partnership to provide marketing services. They will be equal partners. Payton is contributing property with a fair market value of $350,000 and a basis of $300,000. Eli is contributing property with a fair market value of $200,000 and a $175,000 basis. He will also provide services to the partnership valued at $150,000. Discuss the issues raised by this arrangement and

Question

the likely tax treatment of these issues.

What will be an ideal response?

Answer 1

The formation of the partnership and transfers of appreciated property raise the following issues:
-Will either partner recognize income due to the exchange?
-Does Eli recognize any income due to providing services?
-What basis will each partner have in his partnership interest?
-What basis will the partnership have in the contributed property?
-When does the partnership's holding periods in the transferred assets start?

Payton will not recognize any gain or loss on the contribution of property to the partnership. He will have a basis of $300,000 in his partnership interest. Eli will recognize ordinary income due to the contribution of services of $150,000, but he does not recognize any gain on the property exchange. His beginning basis in his partnership interest is $325,000 ($175,000 + $150,000).

The partnership takes a carryover basis in the contributed assets. It will have a basis of $300,000 in the property contributed by Payton and $175,000 basis in the property which Eli contributed. The holding periods for the property carryover to the partnership.