Federal Tax Laws
Question 1
Jonathan owns property (basis of $200,000, value of $300,000). He plans to contribute the property to the JJG Partnership in exchange for a 25% interest.
- What issues arise if the partnership distributes $150,000 of cash to Jonathan three months after the property contribution?
- How can the risk of adverse tax consequences be minimized?
Question 2
At the beginning of the tax year, Melody’s basis in the MIP LLC was $60,000, including her $40,000 share of the LLC’s liabilities. At the end of the year, MIP distributed to Melody a cash amount of $10,000 and inventory (basis of $6,000, fair market value of $10,000). In addition, MIP repaid all of its liabilities by the end of the year.
- If this is a proportionate non-liquidating distribution, what is the tax effect of the distribution to Melody and MIP?
- After the distribution, what is Melody’s basis in the inventory and in her MIP interest?
- Would your answers to (a) change if this had been a proportionate liquidating distribution? Explain.
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