Question

Lemon, Lime, and Orange, three cash method, calendar year individuals, form Starburst General Partnership to create fruit candies. Before forming this partnership, they each had their own sole proprietorship. The partners contribute the following property (in each case worth $3,200 net of liabilities) in exchange for equal 1/3 interests in the partnership's capital, profits and losses (see the table below of property contributed by each partner). The partnership assumes all liabilities encumbering the contributed assets. Assume that the partners are responsible for an equal share of the partnership's liabilities. What is the most that any specific partner recognizes on these transactions? - Lemon contributes land with a fair market value of $6,880, which is encumbered by a recourse mortgage of $4,320. Lemon has held the land for several years as an investment, and his basis in the land is $1,600. Lemon also contributes $640 in cash. - Lime contributes a building, a §1231 asset, with a value of $4,160 in which Lime has an adjusted basis of $2,080. The building was purchased several years ago by Lime and is subject to a recourse mortgage $960. - Orange contrifibutes zero basis accounts receivable from his business worth $5,600 and assigns his accounts payable of $2,400 to the partnership. $1,600

$960
​$0 $320

Answer 1

Lemon would recognize the most gain on the contribution to the partnership totalling $2,720, as the liabilities relieved by the partnership exceed his basis in the contributed land. Neither Lime nor Orange would recognize any taxable gain, because for them, the liabilities assumed are less than or equal to their bases in the contributed assets.

Step-by-step explanation:

In the context of forming a partnership by contributing various assets, a partner typically recognizes gain to the extent that the amount of liabilities relieved by the partnership exceeds the adjusted basis in the contributed property. In the situation with Lemon, Lime, and Orange forming the Starburst General Partnership, we consider the individual contributions:

• Lemon contributes land and cash, with the fair market value of the land and encumbrances noted.
• Lime contributes a building with details on its value, adjusted basis, and mortgage.
• Orange contributes accounts receivable and payable with specified values.

To determine the most any specific partner recognizes on these transactions, we calculate any gain recognized based on the difference between the mortgage liabilities assumed by the partnership and the partner's basis in the property contributed.

For Lemon, the recognition of gain would be as follows:

Mortgage liability relieved: $4,320

Adjusted basis in land: $1,600

Gain recognized: $4,320 - $1,600 = $2,720

Lime and Orange would not recognize any taxable gain on their contributions since the liabilities assumed do not exceed their respective basis in the property contributed.

Answer 2

Lemon, having contributed property (land) with a liability that exceeded the property's adjusted basis, would recognize a gain of $2,720, representing the most gain recognized by any partner in these transactions.

Step-by-step explanation:

The question pertains to the recognition of gains when contributing property to a partnership in a transaction structured under the Internal Revenue Code. When a partner contributes property to a partnership, the general rule under the IRS code is that no gain or loss is recognized. However, if the property is subject to a liability that exceeds the contributor's adjusted basis in the property, there may be a gain recognized by the contributing partner to the extent of the liability relief.

Calculating Recognizable Gain

1. Lemon contributes land with a basis of $1,600, a fair market value of $6,880, and a liability of $4,320. Lemon would recognize a gain of $2,720, the difference between the liability assumed by the partnership and Lemon's basis.
2. Lime contributes to a building with a liability lower than her basis, and thus would recognize no gain.
3. Orange contributes accounts receivable with a zero basis and assumes liabilities equal to the net value of the contributed property, so no gain is recognized.

In conclusion, Lemon recognizes the most gain at $2,720 on the contributed land encumbered by a recourse mortgage.