1. On January 1, Year 1, A, B, and C join together to form an equal partnership. A and B contribute $30,000 each to the partnership. C does not make a capital contribution, but instead agrees to act as the manager of the partnership’s business. Each of A, B, and C receives a one-third interest in the capital, profits, and losses of the partnership. What are the tax consequences to C on the transfer of the partnership capital interest, including (a) the amount of income, gain, or loss and its character for tax purposes and (b) the adjusted basis and holding period of the interest received? What are the tax consequences to the partnership on the transfer, including (c) the income, gain, or loss realized and (d) deductions? Assume, in each case, that the value of the partnership interest transferred to C is $20,000.
2. What if, in 1. above, C previously negotiated a contract to purchase a new office building in which to locate the business of the partnership and contributes the contract to the partnership?
3. In 1. above, what result if A and B each contributes property with a basis of $10,000 and a fair market value of $30,000 instead of cash?
4. In 3. above, what result if C receives his capital interest for services he has provided in the past to A and B?
5. Since October, Year 1, A and B have operated an equal law partnership. Each partner contributed $30,000 cash at the partnership’s formation with which it purchased the small office building where the partners practice in a suburban community. The building is now worth $120,000 and has an adjusted basis of $55,000. In December, Year 3, the partners seek to persuade C, a highly respected tax attorney, to join them as a partner. C has no money or property to contribute. Nevertheless, A and B are willing to give him a one-third interest in the capital, profits, and losses of the partnership. C agrees to join the firm and to establish and conduct a tax department. What are the tax consequences of the transaction to all parties? Assume that the building is the partnership’s only asset and that the value of the partnership interest transferred to C is $40,000.
6. In 5. above, what are the tax effects to C and the partnership if the partnership agreement provides that C cannot sell his partnership interest unless he has performed services for the partnership until the earlier of his death or five years from the date he entered the partnership?
7. In 6. above, compare the current and future tax consequences to C if he:
a. Reports the partnership interest as income by electing Section 83(b).
b. Does not elect to report income under section 83(b).