Alicia and Barry Form the AB Partnership at the Start

question 73

Multiple Choice

Alicia and Barry form the AB Partnership at the start of the current year with a land contribution by Barry and a cash contribution by Alicia. Barry's contributed property is subject to a recourse mortgage assumed by the partnership. Barry has an 80% interest in AB's profits and losses. The land has been held by Barry for the past 6 years as an investment. It will be used by AB as an operating asset in its parking lot business. Which of the following statements is correct?

• A) Immediately after formation, Alicia's basis in the partnership equals the cash contributed by Alicia.
• B) Immediately after formation, Alicia's basis in the partnership equals the cash she contributed plus her share
• Of the recourse debt contributed by Barry.
• C) Because the debt is recourse, the constructive liquidation scenario is not applicable for determining the allocation of debt to the partners.
• D) AB's basis in the land contributed by Barry equals Barry's basis in the land immediately before the
• Contribution date, less the amount of the recourse debt assumed by the partnership.
• E) None of the above.

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Definitions:

Bargain Purchase Option

An option in a lease that allows the lessee to purchase the leased asset at the end of the lease term at a price significantly lower than its estimated fair market value.

Capital Lease

A lease agreement that transfers substantially all the risks and benefits of ownership to the lessee, effectively treated as a purchase by the lessee.

Unguaranteed Residual Value

The estimated future value of an asset at the end of its lease term that is not guaranteed by the lessee or a third party.

Lease Obligation

A financial commitment to make future payments under a lease agreement.