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Federal Tax Laws

Question 1

Jonathan owns property (basis of $200,000, value of $300,000). He plans to contribute the property to the JJG Partnership in exchange for a 25% interest.

  1. What issues arise if the partnership distributes $150,000 of cash to Jonathan three months after the property contribution?
  2. How can the risk of adverse tax consequences be minimized?

Question 2

At the beginning of the tax year, Melody’s basis in the MIP LLC was $60,000, including her $40,000 share of the LLC’s liabilities. At the end of the year, MIP distributed to Melody a cash amount of $10,000 and inventory (basis of $6,000, fair market value of $10,000). In addition, MIP repaid all of its liabilities by the end of the year.

  1. If this is a proportionate non-liquidating distribution, what is the tax effect of the distribution to Melody and MIP? 
  2. After the distribution, what is Melody’s basis in the inventory and in her MIP interest?
  3. Would your answers to (a) change if this had been a proportionate liquidating distribution? Explain.
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