Victor and Kristina Decide to Form VK Partnership

question 47

Essay

Victor and Kristina decide to form VK Partnership. They will be equal partners. Victor contributes a building with a $150,000 FMV and a $105,000 adjusted basis to the partnership. The building has a $60,000 mortgage, which the partnership assumes. Kristina contributes land with a $70,000 FMV and a $95,000 adjusted basis. Kristina will manage the day-to-day activities of the partnership. She will begin to receive a guaranteed payment for her work, starting in the second year of operations, and continuing on as long as she manages the operations of the partnership. Victor and Kristina have agreed that the guaranteed payment will be $10,000 per year. What tax issues should Victor, Kristina, and the partnership consider with respect to the formation and operation of the partnership?

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Definitions:

Tax-Deductible Expense

An expense that can be subtracted from gross income to reduce taxable income.

Corporation

A legal entity that is separate and distinct from its owners, who are known as shareholders.

Bonds

Long-term debt securities issued by corporations or governments to finance operations, projects, or other capital needs, paying periodic interest and the principal amount at maturity.

Stock

Stock represents ownership shares in a corporation, giving holders a claim on part of the company's assets and earnings.