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QUESTION

Williams and Mr. Lily have operated separate sole proprietorships for several years.

Mr. Williams and Mr. Lily have operated separate sole proprietorships for several years. Both of the proprietorships are service businesses, and they are on the cash basis of accounting for federal income tax purposes. On January 1, they contribute the net assets of their separate proprietorships to a new partnership in which they will conduct business. Each has an equal capital and profits interest in the new partnership. Mr. Williams contributes the following items: Cash, $6,000; Accounts Receivable, zero basis, fair market value of $15,000; Equipment, $5,000 basis, fair market value of $14,000; and Accounts Payable, zero basis, $30,000 face value. Mr. Lily contributes cash of $5,000 in exchange for his 50 percent interest. What amount of gain must Mr. Williams recognize? What is the basis of his partnership interest after the contribution?

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