Question - Assume that on the creation of Shorttime Partnership, a general partnership (the "partnership") on January 2, 2012, your client, Jack, a United States citizen, and the majority partner, transferred appreciated undeveloped real property to the partnership in exchange for an 80% interest in the capital and profits of the partnership. Jack's adjusted basis in the property on the date of the transfer to the partnership was $30,000, and the fair market value of the property was $80,000. Jack still owns his 80% interest in the partnership. Your client's sister, Jane, a Canadian citizen who is a resident of the United States, received the remaining 20% interest in the capital and profits of the partnership in exchange for her contribution of accounting services to the partnership. Jane still owns her 20% interest in the partnership. The value of the real estate rapidly increased, and on February 15, 2012, Shorttime Partnership sold the undeveloped real property to an unrelated party for $150,000.
Jack wants to know the income tax consequences to each of the parties as a result of the initial contributions and the subsequent sale by the partnership. Thus, the questions are:
a. What are the income tax consequences to each of the parties as a result of the formation of the partnership?
b. What are the tax consequences to each of the parties of the sale of the sole asset of the partnership? Assume that the partnership has no other income or expenses for 2012.