Forming and Operating Partnerships Ch 20 20

Forming and Operating Partnerships
Solutions to Problems
a. What is Josephs tax basis in his partnership interest?
b. What is Berry Hills basis in the equipment?.
a. What is Lances tax basis in his LLC interest?
b. What is Lances holding period in his interest?
c. What is Cloud Peaks basis in the contributed property?
d. What is Cloud Peaks holding period in the contributed property?
a. What is Laurels initial tax basis in her LLC interest?
b. What is Laurels holding period in her interest?
c. What is Sand Creeks initial basis in the contributed property?
d. What is Sand Creeks holding period in the contributed property?
Harry: BasisFair Market Value
Cash $ 30000 $ 30000
Land 100000 120000
Totals $ 130000 $ 150000
Sally:
Equipment used in a business 200000 150000
Totals $ 200000 $ 150000
a. How much gain or loss will Harry recognize on the contribution?
b. How much gain or loss will Sally recognize on the contribution?
c. How could the transaction be structured a different way to get a better result for Sally?
d. What is Harrys tax basis in his partnership interest?
e. What is Sallys tax basis in her partnership interest?
f. What is Evergreens tax basis in its assets?
g. Following the format in Exhibit 20-2 prepare a tax basis balance sheet for the Evergreen partnership showing the tax capital accounts for the partners.
a. How much gain will Cosmo recognize from the contribution?
b. What is Cosmos tax basis in his partnership interest?
Maude: BasisFair Market Value
Cash $ 20000 $ 20000
Land* 100000 360000
Totals $ 120000 $ 380000
*Nonrecourse debt secured by the land equals $160000
James Harold and Jenny each contributed $220000 in cash for a 25% profits and capital interest.
a. How much gain or loss will Maude and the other members recognize?
b. What is Maudes tax basis in her LLC interest?
c. What tax basis do James Harold and Jenny have in their LLC interests?
d. What is High Horizons tax basis in its assets?
e. Following the format in Exhibit 20-2 prepare a tax basis balance sheet for the High Horizon LLC showing the tax capital accounts for the members
Kevan: BasisFair Market Value
Cash $ 15000 $ 15000
Land* 120000 440000
Totals $ 135000 $ 455000
*Nonrecourse debt secured by the land equals $210000
Each member received a one-third capital and profits interest in the LLC.
a. How much gain or loss will Jerry Dave and Kevan recognize on the contributions?
b. What is Kevans tax basis in his LLC interest?
c. What tax basis do Jerry and Dave have in their LLC interests?
d. What is Albee LLCs tax basis in its assets?
e. Following the format in Exhibit 20-2 prepare a tax basis balance sheet for the Albee LLC showing the tax capital accounts for the members. What is Kevans share of the LLCs inside basis?
f. If the lender holding the nonrecourse debt secured by Kevans land required Kevan to guarantee 33.33 percent of the debt and Jerry to guarantee the remaining 66.67 percent of the debt when Albee LLC was formed how much gain or loss will Kevan recognize?
a. Must Jim recognize any of the potential 1245 recapture when he contributes the machinery to Fast Choppers? {Hint:See 1245(b)(3).}
b. What cost recovery method will Fast Choppers use to depreciate the machinery? {Hint: See 168(i)(7).}
c. If Fast Choppers were to immediately sell the equipment Jim contributed for $150000 how much gain would Jim recognize and what is its character? {Hint: See 1245 and 704(c).}
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a. If Mountainside sells the property for $150000 after holding it for one year how much gain or loss does it recognize and what is the character of its gain or loss? {Hint: See 724.}
b. If Mountainside sells the property for $125000 after holding it for two years how much gain or loss does it recognize and what is the character of the gain or loss?
a. If South Peak sells the property for $3000000 four years after Claudes contribution how much gain or loss is recognized and what is its character? {Hint:See 724.}
b. If South Peak sells the property for $3000000 five and one-half years after Claudes contribution how much gain or loss is recognized and what is its character?
a. If Reggie sells his LLC interest thirteen months later for $30000 when the tax basis in his partnership interest is still $20000 how much gain does he report and what is its character?
b. If Reggie sells his LLC interest two months later for $30000 when the tax basis in his partnership interest is still $20000 how much gain does he report and what is its character? {Hint: See Reg. 1.1223-3}
a. If Connie receives a 5 percent capital interest only how much income must she report and what is her tax basis in the LLC interest?
b. If Connie receives a 5 percent profits interest only how much income must she report and what is her tax basis in the LLC interest?
c. If Connie receives a 5 percent capital and profits interest how much income must she report and what is her tax basis in the LLC interest?
Basis Fair Market Value
Cash $ 60 $ 60
Land 60 180
Inventory 72 60
$192 $300
Mary $ 96 $150
Scott 96 150
$192 $300
At the end of the current year Kari will receive aone-third capital interest only in exchange for services rendered. Karis interest will not be subject to a substantial risk of forfeiture and the costs for the type of services she provided are typically not capitalized by the partnership. For the current year the income and expenses from operations are equal. Consequently the only tax consequences for the year are those relating to the admission of Kari to the partnership.
a. Compute and characterize any gain or loss Kari may have to recognize as a result of her admission to the partnership.
b. Compute Karis basis in her partnership interest.
c. Prepare a balance sheet of the partnership immediately after Karis admission showing the partners tax capital accounts and capital accounts stated at fair market value.
d. Calculate how much gain or loss Kari would have to recognize if instead of a capital interest she only received a profits interest.
[LO2] Dave LaCroix recently received a 10 percent capital and profits interest in Cirque Capital LLC in exchange for consulting services he provided. If Cirque Capital had paid an outsider to provide the advice it would have deducted the payment as compensation expense. Cirque Capitals balance sheet on the day Dave received his capital interest appears below:
Assets: BasisFair Market Value
Cash $ 150000 $ 150000
Investments 200000 700000
Land 150000 250000
Totals $ 500000 $1100000
Liabilities and capital:
Nonrecourse Debt 100000 100000
Lance* 200000 500000
Robert* 200000 500000
Totals $ 500000 $ 1100000
*Assume that Lances basis and Roberts basis in their LLC interests equal their tax basis capital accounts plus their respective shares of nonrecourse debt.
a. Compute and characterize any gain or loss Dave may have to recognize as a result of his admission to Cirque Capital.
b. Compute each members tax basis in his LLC interest immediately after Daves receipt of his interest.
c. Prepare a balance sheet for Cirque Capital immediately after Daves admission showing the members tax capital accounts and their capital accounts stated at fair market value.
d. Compute and characterize any gain or loss Dave may have to recognize as a result of his admission to Cirque Capital if he receives only a profits interest.
e. Compute each members tax basis in his LLC interest immediately after Daves receipt of his interest if Dave only receives a profits interest.
a. What is Garretts tax basis in his partnership interest?
b. If Garrett sells his partnership interests three months after receiving it and recognizes a gain what is the character of his gain?
Name
Tax Year End
Capital/Profits %
George Allen
December 31
33.33%
Elanax Corp.
June 30
33.33%
Ray Kirk
December 31
33.34%
What is the required taxable year-end for Broken Rock LLC?
Name
Tax Year End
Capital/Profits %
Nelson Black
December 31
22.0%
Brittany Jones
December 31
24.0%
Lone Pine LLC
June 30
4.5%
Red Spot Inc.
October 31
4.5%
Pale Rock Inc.
September 30
4.5%
Thunder Ridge LLC
July 31
4.5%
Alpensee LLC
March 31
4.5%
Lakewood Inc.
June 30
4.5%
Streamside LLC
October 31
4.5%
Burnt Fork Inc.
October 31
4.5%
Snowy Ridge LP
June 30
4.5%
Whitewater LP
October 31
4.5%
Straw Hat LLC
January 31
4.5%
Wildfire Inc.
September 30
4.5%
What is the required taxable year-end for Granite Slab LLC?
Name
Tax Year End
Capital/Profits %
Eddie Robinson
December 31
40%
Pitcher Lenders LLC
June 30
25%
Perry Homes Inc.
October 31
35%
What is the required taxable year-end for Tall Tree LLC?
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Name
Tax Year End
Capital/Profits %
Mark Banks
December 31
35%
Highball PropertiesLLC
March 31
25%
Chavez BuildersInc.
November 30
40%
What is the required taxable year-end for Rock Creek LLC?
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a. Can they change to an August 31 year-end and if so how do they make the change? {Hint: See Rev. Proc. 2002-38 2002-1 CB 1037.}
b. Can they change to a September 30 year-end and if so how do they make the change?{Hint: See 444.}
Sales revenue $40000
Long-term capital gains $2000
Cost of goods sold ($13000)
Depreciation – MACRS ($3000)
Amortization of organization costs ($1000)
Guaranteed payments to partners for general management ($10000)
Cash distributions to partners ($2000)
Given these items what is Turtle Creeks ordinary business income (loss) for the year?
Sales revenue $70000
Gain on sale of land (1231) $11000
Cost of goods sold ($26000)
Depreciation – MACRS ($3000)
179 deduction* ($10000)
Employee wages ($11000)
Fines and penalties ($3000)
Municipal bond interest $6000
Short-term capital gains $4000
Guaranteed payment to Sandra ($3000)
*Assume the 179 property placed in service limitation does not apply.
a. How much ordinary business income (loss) is allocated to Georgio for the year?
b. What are Georgios separately stated items for the year?
[LO4] {Research} Richard Meyer and two friends from law school recently formed Meyer and Associates as a limited liability partnership (LLP). Income from the partnership will be split equally among the partners. The partnership will generate fee income primarily from representing clients in bankruptcy and foreclosure matters. While some attorney friends have suggested that the partners earnings will be self-employment income other attorneys they know from their local bar association meetings claim just the opposite. After examining relevant authority explain how you would advise Meyer and Associates on this matter. {Hint: See 1402(a)(13) and Renkemeyer Campbell & Weaver LLP v.Commissioner 136 T.C. 137 (2011)}
Sales revenue $70000
Gain on sale of land ( 1231) $8000
Cost of goods sold ($38000)
Depreciation – MACRS ($9000)
Employee wages ($14000)
Cash charitable contributions ($3000)
Municipal bond interest $2000
Other expenses ($2000)
a. Compute Garys share of ordinary income (loss) and separately stated items to be reported on his year 1 Schedule K-1 including his self-employment income (loss).
b. Compute Garys share of self-employment income (loss) to be reported on his year 1 Schedule K-1 assuming G&P is a limited partnership and Gary is a limited partner.
c. What do you believe Garys share of self-employment income (loss) to be reported on his year 1 Schedule K-1 should be assuming G&P is an LLC and Gary spends 2000 hours per year working there full time?
Rental real estate income $2000
Sales revenue $70000
1245 recapture income $8000
Interest income $2000
Cost of goods sold ($38000)
Depreciation – MACRS ($9000)
Supplies expense ($1000)
Employee wages ($14000)
Investment interest expense ($1000)
Partners medical insurance premiums paid by Hoki Poki ($3000)
As part of preparing Hoki Pokis current year return identify the items that should be included in computing its ordinary business income (loss) and those that should be separately stated. {Hint: See Schedule K-1 and related preparers instructions at www.irs.gov.}
[LO 4] Jhumpa Stewart and Kelly are all one-third partners in the capital and profits of Firewalker general partnership. In addition to their normal share of the partnerships annual income Jhumpa and Stewart receive an annual guaranteed payment of $10000 to compensate them for additional services they provide. Firewalkers income statement for the current year reflects the following revenues and expenses:
Sales revenue $340000
Interest income 3300
Long-term capital gains 1200
Cost of goods sold (120000)
Employee wages (75000)
Depreciation expense (28000)
Guaranteed payments (20000)
Miscellaneous expenses (4500)
Overall net income $97000
a. Given Firewalkers operating results how much ordinary business income (loss) and what separately stated items [including the partners self-employment earnings (loss)] will it report on its return for the year?
b. How will it allocate these amounts to its partners?
c. How much self-employment tax will each partner pay assuming none have any other source of income or loss?
a. Is HighYields proposed special allocation acceptable under current tax rules? Why or why not? {Hint: See Reg. 1.704-1(b)(2)(iii)(b) and 1.704-1(b)(5) Example (5).}
b. If the IRS ultimately disagrees with HighYields special allocation how will it likely reallocate the taxable and tax-exempt interest among the members? {Hint: See Reg. 1.704-1(b)(5) Example (5)(ii).}
Ordinary business loss
Nondeductible penalties
Tax-exempt interest income
Short-term capital gain
Cash distributions
Rank these items in terms of the order they should be applied to adjust Carmines tax basis in Piccolo for the year (some items may be of equal rank).
Sales revenue $ 420000
Dividend income 5700
Short-term capital gains 2800
Cost of goods sold (210000)