Partner A and Partner B

[Harvey Lucas]

A and B formed a Partnership. (actually an LLC taxed as a partnership).

A, negotiated a great deal on the purchase of a Marina.

Purchase Price was originally 3,000,000, but because of A's negotiation skills, the seller agreed to sell for 2,500,000.

Seller had offers for 3,000,000, but agreed to sell to A for the $2,500,000.

Deal was $500,000 down payment and the balance on a 30 year note at 8% interest.

B came up with the $500,000 down payment.

However, the agreement is that A and B are 50% each partners in all aspects of the property and the partnership.

How do I show this on the partnership tax return?

Have they both contributed $250,000 of capital?

Or, has A earned income for brokering the deal that he has to count as income?

Thank You,
Harvey Lucas

[erchess]

It looks like to me

that B has made a capital contribution in cash of 50K. (500K not 50 of course.) They need to negotiate a value for A's negotiating skills and he can contribute that in addition to any money he pays toward the periodic payments or any other money he may contribute. I don't think the contribution by an owner of work to an LLC or Partnership is a taxable event unless the business is making a profit and actually gives money to the owner.

The way I read your post it seems as though B gave his own funds to the seller. That was unprofessional and I would explain to them both that in the future what they do is create a checking account in the name of the LLC and check against its balance to pay the expenses of the LLC. I have clients who couldn't follow that advice if their lives depended on it, perhaps because they are unable to get a bank to take the account at all or the bank wants to charge more than they see any reason for. I do for my own protection document that I have warned them of possible dire consequences of this sort of behavior.

[JCH]

B has 500K as a contribution to his capital account, and A has nothing.

[AJsTax]

A

B has 500K as a contribution to his capital account, and A has nothing.

IF A receives value in the partnership for work he performed FOR the partnership, then he has taxable income. That is the only way he could have basis in the share he received. IF he receives Value with his partnership share...

[JCH]

IF A receives value in the partnership for work he performed FOR the partnership, then he has taxable income. That is the only way he could have basis in the share he received. IF he receives Value with his partnership share...

They're 50/50 partners per the partnership agreement. If the partnership has taxable income, A will receive 50%.

[Harvey Lucas]

More Info

I oversimplified in the original post.

A was a tenant in the Marina for about 3 years before he was able to put the whole purchase deal together.

While he was a tenant, he made many improvements to the property including securing tenants.

A's cost in doing this was approx 100,000.

My thought now is that all of this activity could be considered "development" expense to A.

ie, A developed the property, and then at the end, he brought B in as a 50/50 partner.

A contributed property with a fmv of 500,000 and a basis of 100,000.

B contributed 500,000 cash which they used as the down payment on the purchase.

Book value of partnership property is 3,000,000, ie, 2,500,000 purchase price plus fmv of pre purchase development of 500,000.

A's capital account is 500,000
B's capital account is 500,000

A's "outside basis" is 100,000
B's "outside basis" is 500,000

There is no taxable income to A because he contributed "property" to the partnership, ie, development improvements, cost 100,000, fmv 500,000

Does this look right?

Harvey Lucas