Celeste contributed business-related assets valued at $250,000 (basis of CRITICAL THINKING $100,000) in exchange for her 50% interest in the Celestine Partnership. Ernestine contributed land and a building valued at $400,000 (basis of $200,000) in exchange for the remaining 50% interest. Ernestine’s property was encumbered by a qualified nonrecourse debt of $150,000, which was assumed by the partnership. The partnership reports the following income and expenses for the current tax year. At the end of the current tax year, Celestine held recourse debt of $100,000 for partnership accounts payable and qualified nonrecourse debt of $140,000.

a. What is Celeste’s basis after formation of the partnership? Ernestine’s basis?

b. What income and separately stated items does the partnership report on Celeste’s Schedule K–1? What items does she report on her tax return?

c. Assume all partnership debts are shared equally. At the end of the tax year, what are Celeste’s basis and amount at risk in her partnership interest?

Continue with the facts presented, except that Celestine was ISSUE ID formed as an LLC instead of a general partnership. a. What would be Celeste’s share of the LLC’s ending liabilities? b. How would Celeste’s basis and amount at risk be different?


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