At partnership inception, Black acquires a 50% interest in
Decorators Partnership by contributing property with an adjusted
basis of $250,000. Black recognizes a gain if

I. The fair market value of the contributed property exceeds
its adjusted basis.

II. The property is encumbered by a mortgage with a balance
of $100,000.

(d) The requirement is to determine which statements
are correct regarding Black’s recognition of gain on transferring
property with an adjusted basis of $250,000 in exchange for a
50% partnership interest. Generally, no gain is recognized when
appreciated property is transferred to a partnership in exchange
for a partnership interest. However, gain will be recognized if the
transferred property is encumbered by a mortgage, and the partnership’s
assumption of the mortgage results in a decrease in the
transferor’s individual liabilities that exceeds the basis of the
property transferred. Here, the basis of the property transferred
is $250,000, and the net decrease in Black’s individual liabilities is
$50,000 (i.e., $100,000 × 50%), so no gain is recognized.