Tax Memorandum Harvard Case Solution & Analysis

Facts of the case

The partnership is formed between four partners namely Ashely, Bridget, Chris and Dan. All of the partners are engaged in equal partnership. Bridget hascontributed Rosewood Estate Building whose fair market value was $100,000 with the basis of $75,000, depicting that he has contributed property to the partnership. The basis of partnership in the contributed propertyis equivalent to the fair market value of the property.The straight line method was used for depreciating building for the tax purposes whose life was 39 years.Later on, it was distributed as non-liquidating distribution to one of the partner i.e. Chris. Another building Briarwood Estate was distributed to Bridget at the time whenhehas alreadycontributed to Rosewood.

Description of the Issue

The issue is the allocation of the depreciation for tax purpose and maintaining the balance of capital accountto partners with the first building contributed by Bridget. The issue of tax concerns is the amount of depreciation being charged by the business and the amount of depreciation allowable on tax agencies.Thenext issue is the distribution impact onChris’sinterest as well as his capital account balance.

Tax Memorandum Harvard Case Solution & Analysis

Tax Analysis

After the contribution of the building to the partner, some or all of the proportionate share of the deduction in depreciation tends to be allocated to other partners with respect to the Rosewood building. Under IRC section 722, the basis of the rosewood building is less than its fair market value, he may receive gain on the building. Under Code 26, Sub Section 167- Depreciation, is the next concern for the organization as the basis share recognized by the partners are at 75,000, while the fair value is at 100,000$. The organization is taking 1923 as annual depreciation, however the tax depreciation on the asset would be 2564 annually; total difference for the 5 year period would be 3205 dollars, this has to be recognized on the property which is increasing the Tax base of the organization.A recognition of the gain on property or built in gain wouldraise the basis of Bridget by $25000amount in the partnership. The property is distributed to Chrisas a non-liquidating, which means that there would no tax effect and no gain and loss would be recognized on non-liquidating distribution. Chris can recognize gain in case if the cash exceeds more than the outside tax basis of the Bridget interest in partnership. Maintaining capital account balance in order to reflect the economic interest of each partner is important in partnership. The capital account balance of Chris would include the effect of the distribution transaction. As the building was distributed by Bridget to Chris, the basis of Bridgetin the contribute property would be equal to the fair market value. Furthermore, the distribution of Briarwood to Bridgetshould be reported his return for tax year.



It is being concluded that the Bridget in result of distributing building to Chris would receive gain as the fair market value is higher than his basis in partnership. The capital account of Chris would not be greatly affected as the building Rosewood is distributed as a non-liquidating distribution..................

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