Question

On September 30, 2022, Amber was admitted as a partner in the firm of Dietrich and Dewar. Her contribution to capital consisted of 1,000 shares of stock in Biotech Corporation, which she bought in 2008 for $15,000 and which had a fair market value of $45,000 on September 30, 2022. Amber's interest in the partnership's capital and profits is 40 percent. On September 30, 2022, the fair market value of the partnership's net assets (after Amber was admitted) was $112,500, and profit for the 3 months ended December 31, 2022, was $6,000. What is Amber's taxable gain in 2022 on the exchange of stock for her partnership interest?

a.$30,000 ordinary income

b.$0 gain or loss

c.$30,000 long-term capital gain

d.$12,000

Answer 1

Amber's exchange of stock for a partnership interest typically would result in a capital gain of $30,000; however, under US tax code Section 721, such an exchange is a non-recognition event, meaning Amber would not recognize a gain or loss unless specific exceptions apply.

Step-by-step explanation:

When Amber was admitted as a partner and contributed her Biotech Corporation stock to the firm Dietrich and Dewar, the determination of her taxable gain upon this exchange of stock for her partnership interest must be considered. Amber's cost basis in the stock was $15,000 and the fair market value at the time of the transfer was $45,000.

The capital gain would be the difference between these amounts, which is $30,000. In general, the transfer of property to a partnership in exchange for a partnership interest is a non-recognition event under US tax code Section 721. This means that no gain or loss is recognized.

However, if the partnership assumes liabilities or if the contribution is made with a pre-arranged agreement for the partnership to sell the property and distribute proceeds, the contributor of the property could have taxable gain. Assuming none of these exceptions apply, Amber's contribution of stock is a classic example of a non-recognition event.