Chapter 10 Answers to Homework Spring 2013 - Copy

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SPRING 2013

CHAPTER 10: ANSWERS TO HOMEWORK

Lecture. The “inside basis” is the partnership’s tax basis for the assets it owns. The “outside basis” is a given partner’s tax basis in the partnership interest. On formation of a partnership, the total of all partners’ outside bases will equal the partnership’s inside bases of all of its assets.

Lecture. A partner’s capital account is a mechanical determination of the partner’s financial interest in the partnership, as determined using one of several possible accounting methods, including tax basis, GAAP, § 704(b) book basis, or some other method defined by the partnership.

The capital account reflects contributions and distributions of cash or other property to or from the partner. In addition, it accumulates the partner’s share of increases and decreases from operations, including amounts that are otherwise tax-exempt or nondeductible. Even if capital accounts are determined on a tax basis, a partner’s capital account usually will differ from the partner’s basis in the partnership interest because (among other reasons) the capital account does not include the partner’s share of partnership liabilities.

9. As a general rule, both §§ 721 and 351 provide that no gain or loss is recognized when property is transferred on the formation of a partnership or corporation. However, § 351 applies only if those persons transferring property to a corporation are in control of the corporation immediately after the exchange, whereas § 721 does not include a control requirement. Section 721 not only applies to initial transfers in forming the partnership but to all subsequent contributions from any partner.

Similarities exist between §§ 721 and 351 in that these nonrecognition provisions do not apply to all transfers made by the owners. Under § 721, the contributor must receive an interest in the partnership, while under § 351, the transferor must receive stock in the corporation. Under both...