Which of the following statements is always correct regarding assets acquired by a newly formed partnership? If a partner contributes:

Question

a. Depreciable property: the partnership treats the property as newly acquired depreciable property, and may claim a § 179 deduction.
b. Unrealized (cash-basis) receivables: the partnership will report a capital gain when the receivable is collected.
c. Inventory (in the partner's hands): the partnership reports ordinary income if the property is held as a capital asset and sold within five years of the contribution date.
d. Land valued at less than its basis: the partnership reports a § 1231 loss if the property is sold at a loss.

Answer 1

c
RATIONALE: If the partnership holds (as a capital asset) inventory contributed by the partner, it reports ordinary income if the inventory is sold within five years of the contribution date. If depreciable property is contributed to the partnership (choice a.), the partnership steps into the partner's shoes in calculating depreciation and it may not claim a § 179 deduction. If a partner contributes cash basis accounts receivable (choice b.), the partnership reports ordinary income when the receivable is collected. If the partner contributes depreciated land held by the partner as a capital asset (choice d.), the partnership must report a capital loss if the land is sold within five years of the contribution.