Let's now apply the basis and holding period rules to Sunchaser Shakery. Nicholas contributed $63,000 of cash and restaurant equipment worth $45,000 with a basis of $28,000 to Sunchaser Shakery partnership in exchange for a 50% capital and profits interest. Sunchaser has no liabilities and in part A the question asks, "What is Nicolas's basis and holding period in his Sunchaser's interest?" To solve this problem, we'll use the initial basis formula that you learned about recently, and so we will begin with the amount of cash contributed by Nicholas, which we're told was $63,000. We'll also factor in the adjusted basis of any property that he contributed which we were told was $28,000. And just to kind of use the rest of the formula even though we haven't quite talked about all the elements at this point, we would also factor in any gain recognized by the partner Nicholas in this case, his share of partnership liabilities of which there are none, and then last the partners liabilities that are assumed by the partnership of which there are none. So adding these elements together we see that his basis is $91,000. In terms of holding period, we can see that he contributed both cash and presumably Section 1231 assets because it was restaurant equipment. So the holding period here of his $91,000 as a basis would be allocated between the cash and the 1231 assets contributed. So in other words, of the $91,000, $63,000 the cash portion of it would have a non-tacked holding period, and the remaining $28,000 that attributable to the property that was transferred, the restaurant equipment would have a tacked holding period again because it's presumably Section 1231 assets. Right so that's our answer for our first part, part A and part B the question asks, "What is Sunchaser's basis in holding period in the equipment?" On the partnership side of things, they always receive carryover or exchange basis. So in this case their basis in the equipment transferred would be the $28,000 basis that Nicholas had at the time of the transfer. And in all cases despite the type of property that it might be, the holding period is always tacked and that's all there is to it. In exchange for a 20% interest in Sunchaser's Shakery partnership, Nicholas contributed land worth $70,000 with the basis of $40,000. Sunchaser assumed the $15,000 mortgage on the land and its liabilities arising from its initial business operations is $5,000 immediately prior to the contribution, and we want to know what is Nicolas's basis in his Sunchaser interest. If you recall under Section 752 (b) the assumption AB partners liability by the partnership is treated as a distribution of money to the partner which will alternatively reduce the basis of the partner's interest. In addition, the basis of a partner's interest in a partnership is increased by their percentage of ownership of the partnerships liabilities. So in other words we can use our initial basis formula to solve this problem. So, let's begin with the cash contributed by Nicholas of which there was none, and then we'll factor in the adjusted basis of property contributed which in this case is the land, and $40,000. We would also add in any gain recognized by the partner in this situation which we do not have any, we factor in the partner share of partnership liabilities. And here we're told there's a $5,000 of liabilities from initial business operations and as a 20% partner, his share of these liabilities would then be $1,000. Finally, we would subtract the partners liabilities that are assumed by the partnership, and here we have to be careful because this is sort of the tricky part. So there's $15,000 of liabilities that were assumed by the partnership so these liabilities initially belonged to Nicholas. However, when they take these liabilities away from him ultimately, he's still responsible for his ownership percentage of those liabilities which is exactly what we did in the previous line item. So even though he's a 20% owner when they take 100% of his liabilities away at the end of the day he's still responsible for 20% of those liabilities as a partner in the partnership. So in this case we have to be very careful and think about the amount that's actually being taken away from him net which in this case is 80%, one minus his 20% interest in the partnership. So $15,000 times 80% is $12,000. So adding all this up we see that his initial basis in his Sunchaser interest is $29,000. And so again here just to be clear, the liability assumed by the partnership this $15,000 is multiplied by 80% because he has a 20% interest. So the 80% reflects the portion that he is not responsible for. In other words, as a 20% owner he still has the responsibility for 20% of the debts so only 80% of the liability was really assumed by the partnership in this case. Nicholas acquired a 25% interest in Sunchaser Shakery partnership by contributing property with an adjusted basis of $80,000 that was encumbered by a $120,000 mortgage. And we first want to know what amount of gain if any does Nicholas recognize and then, what is Nicolas's basis in his Sunchaser interest. So the issue with this problem is that we have the liability at stake so, if you recall if the amount of the liability assumed by the partnership exceeds the contributing partners basis in the partnership, the access is a gain that must be recognized by the partner. So we can start by looking at that, plus that was the first question that was asked. So we look at the overall basis of $80,000 and we see that the liability that's being taken away here is $120,000 but ultimately, as in the last problem he's still responsible for his portion of that even as a partner. So in other words what's really being taken away is the 75% of this because he's still responsible for 20. So the liability that's being taken away then, then shows us that we have this net negative difference. So this would be the gain that he will then have to recognize. So now we can use this information and plug it into the basis formula that we've been discussing to find out what his basis in Sunchaser partnership is once this transaction is complete. So let's start with the same formula that we've been using all along, so we begin with cash contributed, which in this case is zero, the adjusted basis of any property contributed which we were told is $80,000. Here, we would factor in any gain recognized by the contributing partner and we just determined that would be $10,000 plus his share of any liabilities of the partnership which was zero, and then we would factor in any liabilities assumed by the partnership which again is what we just noted above. So, we would take the $120,000 times the portion that's actually taken away from him, which is the 75% or the $90,000. And so when we factor all this together we see that he actually has a zero basis. And this kind of illustrates how the basis formula isn't random, it's actually quite clever in that it automatically adjust for the fact that basis cannot be negative by forcing the partner to recognize a gain in the situation where the liability exceeded the basis.
