Chapter 21 Partnerships

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Problems
27. LO.3 Emma and Laine form the equal EL Partnership. Emma contributes cash of $100,000. Laine contributes property with an adjusted basis of $40,000 and a fair market value of $100,000.
a. How much gain, if any, must Emma recognize on the transfer? Must Laine recognize any gain? If so, how much?
b. What is Emma’s basis in her partnership interest?
c. What is Laine’s basis in her partnership interest?
d. What basis does the partnership take in the property transferred by Laine?
28. LO.3, 17 Kenisha and Shawna form the equal KS LLC with a cash contribution of $360,000 from Kenisha and a property contribution (adjusted basis of $380,000, fair market value of $360,000) from Shawna.
a. How much gain or loss, if any, does Shawna realize on the transfer? Does
Shawna recognize any gain or loss? If so, how much?
b. What is Kenisha’s basis in her LLC interest?
c. What is Shawna’s basis in her LLC interest?
d. What basis does the LLC take in the property transferred by Shawna?
e. Are there more effective ways to structure the formation? Explain.
29. LO.3 Liz and John formed the equal LJ Partnership on January 1 of the current year.
Liz contributed $80,000 of cash and land with a fair market value of $90,000 and an adjusted basis of $75,000. John contributed equipment with a fair market value of $170,000 and an adjusted basis of $20,000. John had previously used the equipment in his sole proprietorship.
a. How much gain or loss will Liz, John, and the partnership realize?
b. How much gain or loss will Liz, John, and the partnership recognize?
c. What bases will Liz and John take in their partnership interests?
d. What bases will LJ take in the assets it receives?
e. Are there any differences between inside and outside basis? Explain.
f. How will the partnership depreciate any assets it receives from the partners?
30. LO.3 Mike and Melissa form the equal MM Partnership. Mike contributes cash of $40,000 and land (fair market value of $100,000, adjusted basis of $120,000), and Melissa contributes the assets of her sole proprietorship (value of $140,000, adjusted basis of $115,000). What are the tax consequences of the partnership formation to Mike, Melissa, and MM Partnership?
31. LO.3 Assume the same facts as in Problem 30, except that Mike sells his land to a third party for $100,000 and then contributes that cash to the partnership in addition to the original $40,000 contribution. The partnership locates equivalent land that it purchases for $110,000. How do these changes affect the tax and economic result for Mike and the partnership?
32. LO.3, 9, 17 Sam and Drew are equal partners in SD LLC formed on June 1 of the current year. Sam contributed land that he inherited from his uncle in
2008. Sam’s uncle purchased the land in 1983 for $30,000. The land was worth $100,000 when Sam’s uncle died. The fair market value of the land was $200,000 at the date it was contributed to the LLC.
Drew has significant experience developing real estate. After the LLC is formed, he will prepare a plan for developing the property and secure zoning approvals for the LLC. Drew would normally bill a third party $50,000 for these efforts. Drew will also contribute $150,000 of cash in exchange for his 50% interest in the LLC. The value of his 50% interest is $200,000.
a. How much gain or income will Sam recognize on his contribution of the land to the LLC? What is the character of any gain or income recognized?
b. What basis will Sam take in his LLC interest?
c. How much gain or income will Drew recognize on the formation of the LLC?
What is the character of any gain or income recognized?
d. What basis will Drew take in his LLC interest?
33. LO.3,17 Continue with the facts presented in Problem 32.
a. Construct a balance sheet for SD LLC assuming that Drew’s services are completed immediately after forming SD. The balance sheet should reflect the LLC’s basis in the assets and the fair market value of these assets.
b. Outline any planning opportunities that may minimize current taxation to any of the parties.
34. LO.3, 17 Continue with the facts presented in Problem 32. At the end of the first year, the LLC distributes $100,000 of cash to Sam. No distribution is made to Drew.
a. Under general tax rules, how would the payment to Sam be treated?
b. Under general tax rules, how much income or gain would Sam recognize as a result of the contribution and distribution?
c. Under general tax rules, what basis would the LLC take in the land Sam contributed?
d. What alternative treatment might the IRS try to impose?
e. Under the alternative treatment, how much income or gain would Sam recognize?
f. Under the alternative treatment, what basis would the LLC take in the land contributed by Sam?
35. LO.3 The JM Partnership was formed to acquire land and subdivide it as residential housing lots. On March 1, 2016, Jessica contributed land valued at $600,000 to the partnership, in exchange for a 50% interest in JM. She had purchased the land in 2008 for $420,000 and held it for investment purposes (capital asset). The partnership holds the land as inventory.
On the same date, Matt contributed land valued at $600,000 that he had purchased in 2006 for $720,000. He also became a 50% owner. Matt is a real estate developer, but this land was held personally for investment purposes. The partnership holds this land as inventory.
In 2017, the partnership sells the land contributed by Jessica for $620,000. In
2018, the partnership sells the real estate contributed by Matt for $580,000.
a. What is each partner’s initial basis in his or her partnership interest?
b. What is the amount of gain or loss recognized on the sale of the land contributed by Jessica? What is the character of this gain or loss?
c. What is the amount of gain or loss recognized on the sale of the land contributed by Matt? What is the character of this gain or loss?
d. How would your answer in part (c) change if the property was sold in 2023?
36. LO.4 In 2016, Tom and Missy form TM Partnership, Ltd. (an LLLP), to own and operate certain real estate. Tom contributed land, and Missy contributed cash to be used for setting up the entity and creating a plan for developing the property.
Once a development plan was in place, the partnership sold interests in the partnership to investors to raise funds for constructing a shopping center. The partnership incurred expenses of $30,000 for forming the entity and $60,000 for starting the business (e.g., setting up the accounting systems, locating tenants, and negotiating leases). It also paid $5,000 in transfer taxes for changing the ownership of the property to the partnership’s name. The brokerage firm that sold the interests to the limited partners charged a 6% commission, which totaled $600,000. The calendar year partnership started business in November 2016. Describe how all of these initial expenses are treated by the partnership.
37. LO.4 On July 1 of the current year, the R & R Partnership (an LLLP using a calendar tax year) was formed to operate a bed-and-breakfast. The partnership paid $3,000 in legal fees for drafting the partnership agreement and $5,000 for accounting fees related to organizing the entity. It also paid $10,000 in syndication costs to locate and secure investments from limited partners. In addition, before opening the inn for business, the entity paid $15,500 for advertising and $36,000 in costs related to an open house just before the grand opening of the property. The partnership opened the inn for business on October 1.
a. How are these expenses classified?
b. How much may the partnership deduct in its initial year of operations?
c. How are costs treated that are not deducted currently?
38. LO.5 Browne and Red, both C corporations, formed the BR Partnership on January
1, 2014. Neither Browne nor Red is a personal service corporation, and BR is not a tax shelter. BR’s gross receipts were $4.6 million, $5 million, $6 million, and $7 million, respectively, for the four tax years ending in 2014, 2015, 2016, and 2017.
Describe the methods of accounting available to BR in each tax year.
39. LO.6 Cerulean, Inc., Coral, Inc., and Crimson, Inc. form the Three Cs Partnership on January 1 of the current year. Cerulean is a 50% partner, and Crimson and
Coral are 25% partners. For reporting purposes, Crimson uses a fiscal year with an
October 31 year-end, Coral uses the calendar year, and Cerulean uses a fiscal year with a February 28/29 year-end. What is the required tax year for Three Cs under the least aggregate deferral method?
40. LO.3, 7, 8 Phoebe and Parker are equal members in Phoenix Investors LLC. They are real estate investors who formed the LLC several years ago with equal cash contributions. Phoenix then purchased a parcel of land.
On January 1 of the current year, to acquire a one-third interest in the entity,
Reece contributed to the LLC some land she had held for investment. Reece purchased the land five years ago for $75,000; its fair market value at the contribution date was $90,000. No special allocation agreements were in effect before or after
Reece was admitted to the LLC. Phoenix holds all land for investment.
Immediately before Reece’s property contribution, the balance sheet of Phoenix
Investors LLC was as follows:
Basis FMV Basis FMV
Land $30,000 $180,000 Phoebe, capital $15,000 $ 90,000
Parker, capital 15,000 90,000 $30,000 $180,000 $30,000 $180,000
a. At the contribution date, what is Reece’s basis in her interest in the LLC?
b. When does the LLC’s holding period begin for the contributed land?
c. On June 30 of the current year, the LLC sold the land contributed by Reece for $90,000. How much is the recognized gain or loss? How is it allocated among the LLC members?
d. Prepare a balance sheet reflecting basis and fair market value for the LLC immediately after the land sale described in part (c). Assume that no other transactions occurred during the year.
41. LO.7, 8 Assume the same facts as in Problem 40, with the following exceptions:
• Reece purchased the land five years ago for $120,000. Its fair market value was $90,000 when it was contributed to the LLC.
• A few years later, Phoenix sold the land contributed by Reece for $84,000.
a. How much is the recognized gain or loss? How is it allocated among the LLC members?
b. Prepare a balance sheet reflecting basis and fair market value for the LLC immediately after the land sale. Also prepare schedules that support the basis and fair market value of each LLC member’s capital account.
42. LO.7, 9, 10 Amy and Mitchell are equal partners in the accrual basis AM Partnership.
At the beginning of the current year, Amy’s capital account has a balance of $300,000, and the partnership has recourse debts of $200,000 payable to unrelated parties. Assume that all partnership recourse debt is shared equally between the partners. The following information about AM’s operations for the current year is obtained from the partnership’s records.
Ordinary income $400,000
Interest income 4,000
Long-term capital loss 6,000
Short-term capital gain 12,000
Charitable contribution 4,000
Cash distribution to Amy 20,000
Assume that year-end partnership debt payable to unrelated parties is $140,000. If all transactions are reflected in her beginning capital and basis in the same manner, what is Amy’s basis in the partnership interest:
a. At the beginning of the year?
b. At the end of the year?
43. LO.7, 8 Assume the same facts as in Problem 42. What income, gains, losses, and deductions does Amy report on her income tax return? Based on the information provided, what other calculations is she required to make?
44. LO.11 Assume the same facts as in Problem 42. Prepare Amy’s tax-basis capital account rollforward from the beginning to the end of the tax year. How does her capital account differ from her basis as calculated in Problem 42?
45. LO.7, 8, 9 The KL Partnership is owned equally by Kayla and Lisa. Kayla’s basis is $20,000 at the beginning of the tax year. Lisa’s basis is $16,000 at the beginning of the year. Assume that partnership debt did not change from the beginning to the end of the tax year. KL reported the following income and expenses for the current tax year:
Sales revenue $150,000
Cost of sales 80,000
Distribution to Lisa 15,000
Depreciation expense 20,000
Utilities 14,000
Rent expense 18,000
Long-term capital gain 6,000
Payment to Mercy Hospital for Kayla’s medical expenses 12,000
a. Determine the ordinary partnership income and separately stated items for the partnership.
b. Calculate Kayla’s basis in her partnership interest at the end of the tax year.
What items should Kayla report on her Federal income tax return?
c. Calculate Lisa’s basis in her partnership interest at the end of the tax year. What items should Lisa report on her Federal income tax return?
46. LO.7, 8, 9, 12 How would your answers in Problem 45 change if partnership revenues were $100,000 instead of $150,000?
47. LO.3, 7, 9, 10 Suzy contributed assets valued at $360,000 (basis of $200,000) in exchange for her 40% interest in Suz-Anna GP (a general partnership).
Anna contributed land and a building valued at $640,000 (basis of $380,000) in exchange for the remaining 60% interest. Anna’s property was encumbered by a qualified nonrecourse debt of $100,000, which was assumed by the partnership.
The partnership reports the following income and expenses for the current tax year:
Sales $560,000
Utilities, salaries, and other operating expenses 360,000
Short-term capital gain 10,000
Tax-exempt interest income 4,000
Charitable contributions 8,000
Distribution to Suzy 10,000
Distribution to Anna 20,000
During the current tax year, Suz-Anna refinanced the land and building (i.e., the original $100,000 debt was repaid and replaced with new debt). At the end of the year, Suz-Anna had recourse debt of $100,000 for partnership accounts payable and qualified nonrecourse debt of $200,000.
a. What is Suzy’s basis after formation of the partnership? Anna’s basis?
b. What income and separately stated items does the partnership report on Suzy’s
Schedule K–1? What items does Suzy report on her tax return?
c. Assume that all partnership debts are shared proportionately. At the end of the tax year, what are Suzy’s basis and amount at risk in her partnership interest?
48. LO.11 Assume the same facts as in Problem 47, and assume that Suz-Anna prepares the capital account rollforward on the partners’ Schedules K–1 on a tax basis.
a. What is Suzy’s capital account balance at the beginning of the tax year?
b. What is Suzy’s capital account balance at the end of the tax year?
c. What accounts for the difference between Suzy’s ending capital account and her ending tax basis in the partnership interest?
49. LO.3, 7, 9, 10 Assume the same facts as in Problem 47, except that Suz-Anna was formed as an LLC instead of a general partnership.
a. How would Suz-Anna’s ending liabilities be treated?
b. How would Suzy’s basis and amount at risk be different?
50. LO.7 Burgundy, Inc., and Violet are equal partners in the calendar year BV LLC.
Burgundy uses a fiscal year ending April 30, and Violet uses a calendar year.
Burgundy receives an annual guaranteed payment of $100,000 for use of capital contributed by Burgundy. BV’s taxable income (after deducting the payment to Burgundy,
Inc.) is $80,000 for 2016 and $90,000 for 2017.
a. What is the amount of income from the LLC that Burgundy must report for its tax year ending April 30, 2017?
b. What is the amount of income from the LLC that Violet must report for her tax year ending December 31, 2017?