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Chapter 21 Partnerships
Research Problems
Research Problem 1. Fredstone Consolidated, Inc., and Gradison Enterprises, Inc., are both real estate developers. Each entity owns a 50% general partner interest in
Realty Partners, GP, a general partnership. Fredstone and Gradison each contributed $15,000 to form the partnership. The partnership uses the $30,000 contributed by the partners and a recourse loan of $100,000 obtained from an unrelated third-party lender to acquire $130,000 of rental properties. (All amounts are in thousands.)
The partners believe they will have extensive losses in the first year due to depreciation expense and initial cash-flow requirements. Fredstone and Gradison agreed to share losses equally. To make sure the losses can be allocated as intended, they included a provision in the partnership agreement requiring each partner to restore any deficit balance in their partnership capital account upon liquidation of the partnership.
Fredstone was also willing to include a provision that requires it to make up any deficit balance within 90 days of liquidation of the partnership. This provision does not apply to Gradison; instead, Gradison is required to restore any deficit balance in its capital account within two years of liquidation of the partnership. No interest will be owed on the deferred restoration payment.
a. Can Realty allocate the $100,000 recourse debt equally to the two partners so that they can deduct their respective shares of partnership losses? Assume that the applicable Federal rate under § 1274(b) is 10%, compounded semiannually.
Explain.
b. Assume, instead, that Realty is an LLC, but that the lender has required that Fredstone must guarantee 100% (all $100,000) of the debt and that Gradison must guarantee 50% ($50,000) of the debt. Assume, also, that Fredstone and Gradison agree to waive their rights of contribution against each other. Under Proposed
Regulations, how is the debt now allocated between Fredstone and Gradison under § 752?
Research Problem 2. Barney, an individual, and Aldrin, Inc., a domestic C corporation, have decided to form BA LLC. The new LLC will produce a product that Barney recently developed and patented. Barney and Aldrin, Inc., will each own a 50% capital and profits interest in the LLC. Barney is a calendar year U.S. taxpayer, while
Aldrin, Inc., uses a July 1–June 30 fiscal year. The LLC does not have a “natural business year” and elects to be taxed as a partnership.
a. Determine the taxable year of the LLC under the Code and Regulations.
b. Two years after formation of the LLC, Barney sells half of his interest (25%) to
Aldrin, Inc. Can the LLC retain the taxable year determined in part (a)? Why or why not?
See Appendix E for Comprehensive Tax Return Problem—Form 1065
Research Problem 3. Andy has operated his moving company, MoveOn, as a sole proprietorship for several years. In 2016, MoveOn placed into service $480,000 of property qualifying for immediate expensing under § 179. In 2016, Andy also joined with another local mover to form and operate a storage company, The Attic
LLC. Andy holds a 90% capital and profits interest in The Attic. In 2016, The Attic purchased and placed into service $2.2 million of property qualifying for expensing under § 179. Andy has $600,000 of taxable income from MoveOn and a $750,000 share of ordinary income from his 90% ownership of The Attic, both before considering any § 179 expense. Assuming that Andy wants to maximize his current deductions (without sacrificing future deductions), how much can he elect to deduct under § 179?
Research Problem 4. Use the search feature on your favorite business news site on the Web (e.g., CNN, Bloomberg, or Fox News) and search for news on partnerships,
LLCs, or limited partnerships. What entities did you find that are taking advantage of the partnership entity form? (Make sure these entities are truly legal partnerships.
Some entities called “partnerships” by the news media actually involve transfers of stock or formation of a corporation to manage the joint venture.)
Research Problem 5. Download a copy of the legislation with which your state began to allow the formation of limited liability companies. What types of business activities can an LLC conduct in your state?
Roger CPA Review Questions
1. Which of the following is (are) correct about the holding period of the property acquired by a partnership as a contribution to the contributing partner’s capital account?
I. The holding period begins on the date the partner’s holding period of the contributed asset began
II. The holding period depends on the character of the property transferred
III. The holding period excludes the period during which the property was held by the contributing partner
a. I and II
b. II and III
c. I only
d. None of the above
2. Guaranteed payments made by a partnership to partners for services rendered to the partnership include which of the following?
a. Sales of partners’ assets to the partnership at guaranteed amounts regardless of market values
b. A salary of $170,000 annually without regard to partnership income
c. Payments of principal on secured notes honored at maturity
d. Net long-term capital gains earned by the partnership
3. A guaranteed payment for a partner’s services that is payable to the partner without regard to partnership profits will have which of the following effect(s)?
I. The guaranteed payment increases the receiving partner’s ordinary income by the entire amount paid during the partnership’s tax year
II. The guaranteed payment decreases every partner’s tax basis in the partnership by the entire amount paid during the tax year
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
Internet
Activity
III. The guaranteed payment is either capitalized or deducted by the partnership in computing its ordinary income or loss for the tax year, depending on the nature of the services provided by the partner
a. All of the above
b. I and III, but not II
c. I and II, but not III
d. None of the above
4. On March 17, 2016, Packer became a partner in Cats & Dogs Co., an already formed partnership. Packer does not have property to contribute and thus contributes services in exchange for his 5% interest in Cats & Dogs. Cats & Dogs’s net assets are as follows (including the value of Packer’s services received by the partnership):
Basis Fair Market Value
January 1, 2016 $150,000 $150,000
March 17, 2016 150,000 170,000
December 31, 2016 150,000 175,000
On Packer’s 2016 tax return, what amount must Packer include as ordinary income from the receipt of the partnership interest?
a. $0
b. $7,500
c. $8,500
d. $8,750
5. On a partnership tax return, all of the following are subject to special limitations and must be separately passed through to the partners, except:
a. Charitable contributions
b. Salaries to non-partners
c. Long-term capital gains
d. Dividend income
6. Prairee partnership has four equal partners, Dodd, Crank, Pick, and Mack. Each of the partners had a tax basis of $320,000 as of January 1, 2016. Prairee’s 2016 net business income was $152,000. During 2016, Prairee paid Mack guaranteed payments of $4,000 for deductible services rendered, which were not included in determining
Prairee’s net business income. During 2016, each of the four partners took a distribution of $50,000. What amount from Prairee should be included as income on
Dodd’s 2016 tax return?
a. $152,000
b. $42,000
c. $38,000
d. $37,000
7. Prairee partnership has four equal partners, Dodd, Crank, Pick, and Mack. Each of the partners had a tax basis of $320,000 as of January 1, 2016. Prairee’s 2016 net business income was $152,000. During 2016, Prairee paid Mack guaranteed payments of $4,000 for deductible services rendered. During 2016, each of the four partners took a distribution of $50,000. What is Mack’s tax basis in Prairee on December
31, 2016?
a. $307,000
b. $358,000
c. $422,000
d. $472,000
8. Osha, a cash basis calendar year partnership, began business on April 1, 2016. Osha incurred and paid the following during 2016:
Legal work associated with formation of the partnership $15,260
Accounting work associated with raising additional capital 10,000
What is the maximum amount of deductible organizational costs on Osha’s 2016 partnership return?
a. $5,000
b. $5,513
c. $5,684
d. $6,013
9. During formation of Beecky partnership, Sam contributed property with an adjusted basis of $130,000 in exchange for a 25% interest in Beecky. The fair market value of the contributed property was $170,000, and the property was encumbered by a mortgage with a balance of $120,000. What amount of gain should Sam recognize from contributing the property into Beecky partnership?
a. $50,000
b. $40,000
c. $10,000
d. $0
10. Catherine has a $100,000 basis in her partnership interest. On April 28 of the current tax year, the partnership distributes to her cash of $32,000, cash basis receivables with an inside basis of $0 and a fair market value of $12,000, and a parcel of land with a fair market value of $75,000 and a basis to the partnership of $65,000. After accounting for this distribution, what is Catherine’s basis in the land?
a. $65,000
b. $53,000
c. $63,000
d. $56,000
11. Which of the following lists of distributed assets shows the proper order in which these assets should be accounted for in a partnership distribution having a total inside basis exceeding the outside basis of the distributee partner?
a. Cash, unrealized depreciation recapture income, unimproved land
b. Improved land, cash, inventory
c. Cash, inventory, marketable securities
d. Unrealized depreciation recapture income, cash, unimproved land
12. Preakness Partnership makes a current distribution to Prasad, consisting of $30,000 in cash, land with a fair market value of $50,000 (partnership basis $55,000), and inventory with a fair market value of $8,000 ($3,000 partnership basis). Immediately prior to the distribution, Prasad’s outside basis in the partnership was $35,000. What amount of gain will Prasad recognize on the distribution, and what is Prasad’s resulting basis in the land?
Recognized Gain Basis in Land
a. $3,000 $5,000
b. $0 $0
c. $0 $2,000
d. $3,000 $0
13. Pelican Partnership makes a current distribution to Prabhakar, consisting of $30,000 in cash and capital assets worth $10,000 (partnership basis $8,000). Immediately prior to the distribution, Prabhakar’s outside basis in the partnership was $35,000.
What amount of gain will Prabhakar recognize on the distribution, and what is
Prabhakar’s resulting outside basis in the partnership?
Recognized Gain
Outside Basis in Partnership
a. $5,000 $0
b. $0 $0
c. $0 ($3,000)
d. $3,000 $0
14. Brooke, Baker, and Bulstrode own 25%, 25%, and 50% interests, respectively, in the
B&B Partnership. B&B is a cash basis tax entity with the following balance sheet:
Tax Basis Fair Market Value
Cash $250 $250
Accounts Receivable – 250
Goodwill – 350
Total Assets $250 $850
Liabilities $150 $150
Brooke, capital 25 175
Baker, capital 25 175
Bulstrode, capital 50 350
Total liabilities & capital $250 $850
Assume that liabilities are shared proportionately by the partners and that each partner’s capital account equals the partner’s basis before considering liabilities. On the balance sheet date, Brooke purchases Baker’s 25% interest in the partnership, paying
Baker $175 cash and assuming Baker’s share of the partnership liabilities. As a result of this buyout of her partnership interest, what is the total gain on sale that
Baker should report on her individual tax return?
a. $112.50
b. No gain or loss will be reported
c. $187.50
d. $150
15. Cadwallader has had a 30% interest in C&C Associates, a partnership, since 2009. In
2016, the partnership is liquidated. The partnership’s only assets at the time of liquidation are $50,000 in cash and land with a fair market value of $60,000 and a basis of $65,000. C&C Associates has no liabilities. Cadwallader’s adjusted basis for her partnership interest is $34,500, and she receives $30,000 cash in liquidation of her entire interest. What amount and type of loss should Cadwallader recognize on her 2016 tax return?
a. $4,500 ordinary loss
b. $4,500 long-term capital loss
c. $4,500 short-term capital loss
d. $0
16. Perry Partnership distributed cash of $15,000 and a parcel of land in a liquidating distribution to Gupta, a partner. The land had a fair market value of $50,000 and an inside basis of $52,000 at the time of the distribution. Gupta’s outside basis in Perry just prior to the distribution was $70,000. What is Gupta’s resulting basis in the land?
a. $50,000
b. $55,000
c. $53,000
d. $52,000
17. Pettifog Partnership distributes cash of $20,000, hot assets worth $5,000, and a parcel of land in a proportionate liquidating distribution to Gupta, a partner. The hot assets have a basis of $0 to the partnership. The land has a fair market value of $80,000 and an inside basis of $55,000. Gupta’s outside basis in Pettifog just prior to the distribution is $85,000. Identify the amount of gain or loss Gupta must recognize and Gupta’s resulting basis in the land.
Gain or Loss Basis in Land
a. $0 $60,000
b. $10,000 loss $0
c. $0 $65,000
d. $5,000 loss $0