Schedule F asset rolled into Partnership

[equinecpa]

I have a client who raises horses. Their situation is as follows:

They breed racehorses and raise them at their farm until the fall of their yearling year. At this point the horses go into training or are conditioned to show. This activity is done by their son with the couple funding most of the expenses. The expenses related to raising the horses to the fall of the yearling year are reported on a Schedule F, and then once they enter training/conditioning they are reported on the 1065.

My question concerns the transfer of the horses to the partnership:

I'm revising some of the prior returns (not prepared by myself), and was wondering what would be the best way of recording the horses in the partnership. I see my options as:

a) Capital contribution - record at taxpayer's ACB -which is zero since these are raised horses and the expenses have already been deducted.

b) Sale to partnership -but at what price? FMV is very difficult to determine.

Some horses are sold immediately and others are raced and then sold. My concern with going with option A which is simplest is that the Schedule F will always be reporting losses since the income would be reported in the partnership. This is an 80/20 partnership with the 80% going back to the couple, so most of the income will revert back to them upon the eventual sale or entering racing but it will be on the K-1

Problem with B is determining a sales price - I was thinking with going with amount invested in each horse but realistically this may not be FMV.

What would you do with this situation? I don't believe there is anything technically wrong with option A but it does disturb me that the Schedule F will always be reporting losses. The partnership and the Schedule F are really different arms of the same business, do you think the IRS would see it that way under audit scrutiny?

Thanks

Carolyn

[Bird Legs]

Race Horses

Probably minsunderstood the question. What activity is the partnership in?
If it is raising and training race horses, why aren't all the expenses from date of birth
of the colt included in the partnership?
Also, if these expenses are being deducted on Sched. F, there is no basis in these
horses. If the horses are bred and born there, you have zero cost in the horses.
Only cost you could have is if they were purchased.

Just reread your post. My answer above is almost the same as your question. Please accept my
apologies for not being more particular.
Do have a question though. You refer to the partnership. How many partners? The son and who else?
The parents?

[equinecpa]

The partnership is in the business of racing horses. It is comprised of son and parents. The son is a full time trainer.

The parents are in the business of raising horses.