Question: The PG Partnership was formed by Peter and George. Peter contributed $45,000 cash for a 50% partnership interest. George contributed property with a tax basis of $23,000 and a value of $45,000 for a 50% interest.
a. If PG Partnership sells the property contributed by George for $48,000, what is the taxable gain? What is the book gain?
b. How will the gain be allocated to the partners?
c. How would your answers change in a and b if the property was sold for $32,000?
d. Assume the PG Partnership holds the property contributed by George for two years before its sale. (Assume straight-line depreciation and five years left on the recovery period.) How much annual depreciation will each partner have per the books and per the tax allocation assuming the partnership uses the traditional method?
e. Explain the ceiling rule under Section 704(c) and how a partnership can eliminate the problem created by the ceiling rule.
f. Redo part d assuming the partnership uses the remedial method. What would the depreciation allocation be in Year 1? (Assume straight-line depreciation and with five years remaining on the asset. A new asset would have a 10 year useful life.) What would the depreciation allocation be in Year 6?