Chapter 21 Partnerships

Click here go to purchase the Solutions Manual

---

51. LO.7 Assume the same facts as in Problem 50. Assume that Burgundy, Inc.’s annual guaranteed payment is increased to $120,000 starting on January 1, 2017, and the LLC’s taxable income for 2016 and 2017 (after deducting Burgundy’s guaranteed payment) is the same (i.e., $80,000 and $90,000, respectively). What is the amount of income from the LLC that Burgundy, Inc., must report for its tax year ending April
30, 2017?
52. LO.3, 7, 9, 12 Bryan and Cody each contributed $120,000 to the newly formed BC
Partnership in exchange for a 50% interest. The partnership used the available funds to acquire equipment costing $200,000 and to fund current operating expenses. The partnership agreement provides that depreciation will be allocated
80% to Bryan and 20% to Cody. All other items of income and loss will be allocated equally between the partners. Upon liquidation of the partnership, property will be distributed to the partners in accordance with their capital account balances. Any partner with a negative capital account must contribute cash in the amount of the negative balance to restore the capital account to $0.
In its first year, the partnership reported an ordinary loss (before depreciation) of $80,000 and depreciation expense of $36,000. In its second year, the partnership reported $40,000 of income from operations (before depreciation), and it reported depreciation expense of $57,600.
a. Calculate the partners’ bases in their partnership interests at the end of the first and second tax years. Are any losses suspended? Explain.
b. Does the allocation provided in the partnership agreement have economic effect? Explain.
53. LO.7, 9, 12 Assume the same facts as in Problem 52. On the first day of the third tax year, the partnership sold the equipment for $150,000. The gain on the sale is allocated equally to the partners. The partnership distributes all cash in accordance with the partners’ capital account balances, and the partnership liquidates.
a. Calculate the partners’ bases in their partnership interests after reflecting any gain or loss on disposal of the equipment. Disregard any depreciation in year 3.
b. How will partnership cash balances be distributed to the partners upon liquidation?
c. What observations can you make regarding the value of a deduction to each partner?
54. LO.10 The MGP General Partnership was created on January 1 of the current year by having Melinda, Gabe, and Pat each contribute $10,000 cash to the partnership in exchange for a one-third interest in partnership income, gains, losses, deductions, and credits. On December 31 of the current year, the partnership balance sheet reads as follows:
Basis FMV Basis FMV
Assets $60,000 $75,000 Recourse debt $30,000 $30,000
Melinda, capital 14,000 19,000
Gabe, capital 14,000 19,000
Pat, capital 2,000 7,000 $60,000 $75,000
Pat’s capital account is less than Melinda’s and Gabe’s capital accounts because Pat has withdrawn more cash than the other partners have.
How do the partners share the recourse debt as of December 31 of the current year?
55. LO.3, 9, 10 Paul and Anna plan to form the PA LLC by the end of the current year.
The members will each contribute $80,000 of cash, and in addition, the
LLC will borrow $240,000 from First State Bank. The $400,000 will be used to buy an investment property. The property will serve as collateral, and both members will be required to personally guarantee the debt.
The tentative agreement provides that 65% of operating income, gains, losses, deductions, and credits will be allocated to Paul for the first five years the LLC is in existence. The remaining 35% is allocated to Anna. Thereafter, all LLC items will be allocated equally. Assume that the agreement also provides that capital accounts will be properly maintained and that each member must restore any deficit in the capital account upon the LLC’s liquidation.
The LLC members would like to know, before the end of the tax year, how the $240,000 liability will be allocated for basis purposes. Using the format (1) facts,
(2) issues, (3) conclusion, and (4) law and analysis, draft a memo for the tax planning file for PA LLC that describes how the debt will be shared between Paul and Anna for purposes of computing the adjusted basis of each LLC interest.
56. LO.9, 10, 12, 17 The BCD Partnership plans to distribute cash of $20,000 to partner
Brad at the end of the tax year. The partnership reported a loss for the year, and Brad’s share of the loss is $10,000. At the beginning of the tax year,
Brad’s basis in his partnership interest, including his share of partnership liabilities, was $15,000. The partnership expects to report substantial income in future years.
a. What ordering rules are used to calculate Brad’s ending basis in his partnership interest?
b. How much gain or loss will Brad report for the tax year?
c. Will the deduction for the $10,000 loss be suspended? Why or why not?
d. Could any planning opportunities be used to minimize any negative tax ramifications of the distribution? Explain.
57. LO.10, 12 Jasmine Gregory is a 20% member in Sparrow Properties LLC, which is a lessor of residential rental property. Her share of the LLC’s losses for the current year is $100,000. Immediately before considering the deductibility of this loss,
Jasmine’s capital account (which, in this case, corresponds to her basis excluding liabilities) reflected a balance of $50,000. Jasmine has personally guaranteed a $10,000 debt of the LLC that is allocated to her as a recourse debt. Her share of the LLC’s nonrecourse debt is $30,000. This debt cannot be treated as qualified nonrecourse debt.
Jasmine spends several hundred hours a year working for Sparrow Properties.
Jasmine is also a managing member of Starling Rentals LLC, which is engaged in long-term (more than 30 days) equipment rental activities. (This is considered a passive activity.) Jasmine’s share of Starling’s income is $36,000.
Jasmine’s modified adjusted gross income before considering the LLCs’ activities is $300,000. The “active participation” rental real estate deduction is not available to Jasmine.
Determine how much of Sparrow’s $100,000 loss Jasmine can deduct on her current calendar year return. Using the format (1) facts, (2) issues, (3) conclusion, and
(4) law and analysis, draft an internal office memo for the client’s tax file describing the loss limitations. Identify the Code sections under which losses are suspended.
58. LO.13 Four GRRLs Partnership is owned by four girlfriends. Lacy holds a 40% interest; each of the others owns 20%. Lacy sells investment property to the partnership for its fair market value of $200,000 (Lacy’s basis is $250,000).
a. How much loss, if any, may Lacy recognize?
b. If the partnership later sells the property for $260,000, how much gain must it recognize?
c. How would your answers in parts (a) and (b) change if Lacy owned a 60% interest in the partnership?
d. If Lacy owned a 60% interest and her basis in the investment property was $120,000 (instead of $250,000), how much, if any, gain would she recognize on the sale? How would the gain be characterized?
59. LO.14 Gil’s outside basis in his interest in the GO Partnership is $100,000. In a proportionate nonliquidating distribution, the partnership distributes to him cash of $30,000, inventory (fair market value of $40,000, basis to the partnership of $20,000), and land (fair market value of $90,000, basis to the partnership of $40,000). The partnership continues in existence.
a. Does the partnership recognize any gain or loss as a result of this distribution?
Explain.
b. Does Gil recognize any gain or loss as a result of this distribution? Explain.
c. Calculate Gil’s basis in the land, in the inventory, and in his partnership interest immediately following the distribution.
60. LO.14 When Teri’s outside basis in the TMF Partnership is $80,000, the partnership distributes to her $30,000 of cash, an account receivable (fair market value of $60,000, inside basis to the partnership of $0), and a parcel of land (fair market value of $60,000, inside basis to the partnership of $80,000). Teri remains a partner in the partnership, and the distribution is proportionate to the partners.
a. Determine the recognized gain or loss to the partnership as a result of this distribution.
b. Determine the recognized gain or loss to Teri as a result of the distribution.
c. Determine Teri’s basis in the land, account receivable, and TMF Partnership after the distribution.
61. LO.14 In each of the following independent cases in which the partnership owns no hot assets, indicate:
• Whether the partner recognizes gain or loss.
• Whether the partnership recognizes gain or loss.
• The partner’s adjusted basis for the property distributed.
• The partner’s outside basis in the partnership after the distribution.
All partners receive proportionate distributions.
a. Kim receives $20,000 of cash in partial liquidation of her interest in the partnership.
Kim’s outside basis for her partnership interest immediately before the distribution is $3,000.
b. Kourtni receives $40,000 of cash and land with an inside basis to the partnership of $30,000 (value of $50,000) in partial liquidation of her interest. Kourtni’s outside basis for her partnership interest immediately before the distribution is $80,000.
c. Assume the same facts as in part (b), except that Kourtni’s outside basis for her partnership interest immediately before the distribution is $60,000.
d. Klois receives $50,000 of cash and inventory with a basis of $30,000 and a fair market value of $50,000 in partial liquidation of her partnership interest. Her basis was $90,000 before the distribution.
62. LO.14 At the beginning of the tax year, Melodie’s basis in the MIP LLC was $60,000, including her $40,000 share of the LLC’s liabilities. At the end of the year, MIP distributed to Melodie cash of $10,000 and inventory (basis of $6,000, fair market value of $10,000). In addition, MIP repaid all of its liabilities by the end of the year.
a. If this is a proportionate nonliquidating distribution, what is the tax effect of the distribution to Melodie and MIP? After the distribution, what is Melodie’s basis in the inventory and in her MIP interest?
b. Would your answers to part (a) change if this had been a proportionate liquidating distribution? Explain.
63. LO.14 In each of the following independent liquidating distributions in which the partnership also liquidates, determine the amount and character of any gain or loss to be recognized by each partner and the basis of each asset (other than cash) received.
In each case, assume that distributions of hot assets are proportionate to the partners.
a. Landon has a partnership basis of $40,000 and receives a distribution of $50,000 in cash.
b. Mark has a partnership basis of $50,000 and receives $20,000 of cash and a capital asset with a basis to the partnership of $25,000 and a fair market value of $40,000.
c. Neil has a partnership basis of $100,000 and receives $40,000 of cash, inventory with a basis to the partnership of $30,000, and a capital asset with a partnership basis of $20,000. The inventory and capital asset have fair market values of $20,000 and $30,000, respectively.
d. Oscar has a partnership basis of $40,000 and receives a distribution of $10,000 of cash and an account receivable with a basis of $0 to the partnership (value is $15,000).
64. LO.15 BDD Partnership is a service-oriented partnership that has three equal general partners. One of them, Barry, sells his interest to another partner, Dale, for $90,000 of cash and the assumption of Barry’s share of partnership liabilities. (Liabilities are shared equally by the partners.) Immediately before the sale, the partnership’s cash basis balance sheet is as shown below. Assume that the capital accounts before the sale reflect the partners’ bases in their partnership interests, excluding liabilities. The payment exceeds the stated fair market value of the assets because of goodwill that is not recorded on the books.
Basis FMV Basis FMV
Cash $120,000 $120,000 Note payable $ 30,000 $ 30,000
Accounts receivable –0– 90,000 Capital accounts
Capital assets 30,000 75,000 Barry 40,000 85,000
David 40,000 85,000
Dale 40,000 85,000
Total $150,000 $285,000 Total $150,000 $285,000
a. What is the total amount realized by Barry on the sale?
b. How much, if any, ordinary income must Barry recognize on the sale?
c. How much capital gain must Barry report?
d. What is Dale’s basis in the partnership interest acquired?