AmCo and BamCo form the AB General Partnership at the start of the current year with a land contribution by BamCo and a cash contribution by AmCo. BamCo's contributed property is subject to a recourse mortgage assumed by the partnership. BamCo has an 80% interest in AB's profits and losses. The land has been held by BamCo for the past 6 years as an investment. It will be used by AB as an operating asset in its parking lot business. Which of the following statements is correct?
A) Immediately after formation, AmCo's basis in the partnership equals the cash contributed by AmCo .
B) Immediately after formation, AmCo 's basis in the partnership equals the cash AmCo contributed plus AmCo's share of the recourse debt contributed by BamCo.
C) Because the debt is recourse, it can only be allocated to the general partners if one of them personally guarantees the debt.
D) AB's basis in the land contributed by BamCo equals BamCo's basis in the land immediately before the contribution date, less the amount of the recourse debt assumed by the partnership.
E) None of the above.

Question

Quizplus · Accepted Answer

According to the tax law, the partnership's initial basis in the contributed property is the same as the contributing partner's basis immediately before the contribution date. Therefore, AB's basis in the land contributed by BamCo equals BamCo's basis in the land immediately before the contribution date, which is reduced by the amount of the recourse debt assumed by the partnership. Additionally, AmCo's basis in the partnership equals the cash contributed by AmCo plus AmCo's share of the recourse debt contributed by BamCo. As the partnership has assumed the mortgage, it is a shared liability, and both general partners are responsible for the full amount if the other defaults. Therefore, the recourse debt can be allocated to AmCo as well.

AmCo and BamCo Form the AB General Partnership at the Start