Incorporation of Plummet Company
Plummet Company is created with the following asset contributions. John and Jill are equal owners in this new business venture.
|
Shareholder
|
Assets
|
Basis
|
Fair Market Value
|
|
John
|
Cash
Services
|
$100,000
50,000
|
$100,000
50,000
|
|
Jill
|
Land
|
40,000
|
200,000*
|
*The land is subject to a liability in the amount of $50,000 that the Company assumes.
Plummet Company
Assume that John and Jill choose to operate their business as a partnership for tax purposes. How will the change in entity for tax purposes affect your answers in Module 2?
Address the specific questions below for this module:
• Does the above transaction qualify for a tax-free exchange similar to Sec. 351 for corporations? If so, what code section contains the rule for tax-free exchanges for partnerships?
• Compute the partners' basis in the units received in the exchange.
• Prepare a tax balance sheet for Plummet Company (assuming it is a partnership).
• Comment on the tax issues facing John and Jill in connection with withdrawing money from the partnership? Discuss the same options as in Module and show the associated tax consequences.