Question:
Bob Krause and his large family corporation have been longtime clients of your accounting firm. During the current year, Bob and his adult son, Tom, formed the BT Partnership to develop and sell vacation homes on the Suwanee River. Bob contributed a 1,000-acre tract of land in exchange for 50% interest in BT Partnership''s profits and looses. The land had a $300,000 FMV and a $30,000 adjusted basis. Tom contributed $150,000 in cash for the remaining 50% interest in the partnership. Two months after being formed, BT partnership used the land as security for a $200,000 loan from a local bank. of the $200,000 loan proceeds, the partnership then distributed the other $150,000 of the loan proceeds to Bob. Bob plans not to report these transactions because property contributions in exchange for a partnership interest and distributions of money by a a partnership that do not exceed the partners basis are nontaxable transaction. What would you advise your client to do in this situation.
What is wrong with the above situation? What does Bob have to report for tax and why?