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 2 and show the associated tax consequences.
