[john b]

December 31, 2017, Alan and Baker were equal partners in a partnership with net assets having a tax basis and fair market value of $100,000. On January 2, 2018, Carr contributed securities with a fair market value of $50,000 (purchased in 2016 at a cost of $35,000) to become an equal partner in the new firm of Alan, Baker, and Carr. The securities were sold on December 15, 2018, for $47,000. How much of the partnership’s capital gain from the sale of these securities should be allocated to Carr?

The answer is 12,000. My question is, why wouldn’t these profit be split among the partners? I would have thought the answer was 4,000, but that isnt even an option. Thanks for the help!

[Ariel]

I believe that, since the securities had a built-in gain when Carr contributed them, any gain on the sale of the securities up to the $15,000 built-in gain on the date of contribution would be allocated to Carr. Anything above that $15,000 would be split among the 3 partners. So, because the securities were sold for a gain of only $12,000, the entire amount gets allocated to Carr.
If, for example, they were sold for $60,000, the first $15,000 would be allocated to Carr, with the remaining $10,000 gain allocated between the 3 partners, Carr included.
It has been a minute since I studied for REG, so others please correct me if I'm remembering incorrectly.

REG - 89 (June 2019)

FAR - 91 (July 2019)

AUD - 91 (August 2019)

BEC - 90 (October 2019)

[chandler]

@Ariel, is exactly right. 704(c) pre-contribution gains are allocated to the contributing partner before any remaining gain.

Chandler Priest

Licensed TX CPA

REG 01/27/18 - 98

BEC 03/03/18 - 96

AUD 04/07/18 - 91

FAR 06/02/18 -96

[Author]

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