10-1

Check figures: Partnership: Formation, Operation and Basis (2014 edition) 27. a. b. c. d. 28. a. Neither partner recognizes any gain or loss.

updated: September 27, 2013

Emma takes a $100,000 adjusted basis in her partnership interest. Laine takes a substituted basis of $40,000 in his partnership interest. The partnership takes a carryover basis in the property $40,000 contributed by Laine. Shawna has a realized loss of $20,000 [$360,000 (fair value) $380,000 (adjusted basis)]. Shawnas recognized loss is $0. Kenisha takes a $360,000 adjusted basis in her LLC interest. Shawna takes a $380,000 adjusted basis in her LLC interest. KS, LLC takes a carryover basis of $380,000 in the property contributed by Shawna. Shawna could sell the property to an unrelated party for $360,000, recognize the $20,000 loss, and contribute the $360,000 cash to the LLC. Lizs has a realized gain of $15,000 [$90,000 (fair value) $75,000 (adjusted basis)]. Johns has a realized gain of $150,000 [$170,000 (fair value) $20,000 (adjusted basis)]. Neither partner nor the partnership recognizes any gain or loss. Liz takes a substituted basis of $155,000 in her partnership interest [$80,000 (cash) + $75,000 adjusted basis)]. John takes a substituted basis of $20,000 in his partnership interest [$20,000 (adjusted basis)].

b. c. d. e.

29.

a.

b. c.

d.

The partnership takes a carryover basis in the assets; $75,000 adjusted basis in the land and $20,000 adjusted basis in the equipment. The partners outside bases equal $175,000 [($155,000 (Liz) + $20,000 (John)]. This equals the partnerships inside bases in the assets of $175,000 [$80,000 (cash) + $75,000 (land) + $20,000 (equipment)]. The partnership will step into the partners shoes to compute depreciation expense. It will use the same depreciation method over the remaining property class life. No gain or loss is recognized. Sam takes a substituted basis of $100,000 in his LLC interest. In general, Sams basis in the property he inherited from his uncle is fair value on the date of death. Drew recognizes $50,000 of ordinary income (fair value of the services). Drews takes a $200,000 basis in his LLC interest [$150,000 (cash) + $50,000 (ordinary income)].

e.

f.

32.

a. b.

c. d.

10-2

33.

a.

Assets Cash Land Land improvements Total assets Sams capital Drews capital Total capital

Basis $150,000 100,000 50,000 $300,000 $100,000 200,000 $300,000

FMV $150,000 200,000 50,000 $400,000 $200,000 200,000 $400,000

b.

Drew could perform the work prior to forming the LLC and he could then contribute the completed plan to the LLC. The completed plan would be considered property. He would not recognize any income on the contribution of property to the LLC. Both partners receive a substituted basis in their partnership interests (equal to their bases in the contributed property). Jessicas adjusted basis Matts adjusted basis $420,000 720,000

35.

a.

b.

The 2013 sale results in ordinary income of $200,000 to the partnership (the land is held as inventory by the partnership). Selling price Adjusted basis (carryover basis) Recognized gain $620,000 (420,000) $200,000

c.

The 2014 sale results in a $120,000 capital loss and a $20,000 Sec. 1231 ordinary loss. Selling price Adjusted basis (carryover basis) Recognized loss $580,000 (720,000) ($140,000)

A portion of the loss is considered capital because: (1) the land had a pre-contribution capital loss when contributed by Matt [$600,000 (fair value) $720,000 adjusted basis)]; and (2) the land was sold within five years of Matts contribution to the partnership. d. If the property Matt contributed was sold in 2019, the entire $140,000 loss would be treated as an ordinary loss (the land is held as inventory by the partnership). Note: This problems use capital as a rough surrogate to compute adjusted basis. Capital account balance beginning Share of AMs debt ($200,000 1/2) Amys basis beginning b. Amys basis beginning Add: Ordinary partnership income Interest income Net short-term gain Less: Share of AMs debt increase [($200,000 $140,000) ] Distribution Charitable contribution Amys basis ending $300,000 100,000 $400,000 $400,000 200,000 2,000 3,000

43.

a.

205,000 $605,000

30,000 20,000 2,000 (52,000) $553,000

10-3

44.

Amy would report the following items on her individual Form 1040:

$200,000 of ordinary partnership income $2,000 interest income $3,000 net short-term capital gain

If she itemizes her deductions she can claim an additional $2,000 of charitable contributions. Neither the cash distribution nor the decrease in Amys share of partnership liabilities would be reported on her tax return. Both reduce her basis in her partnership interest. As a general partner, Amys share of the partnerships ordinary income is subject to selfemployment tax. Beginning in 2013 her partnership interest and capital gains could be subject to the additional 3.8% Medicare tax on net investment income. 45. Amys capital beginning Add: Ordinary partnership income Interest income Net short-term gain Less: Distribution Charitable contribution Amys capital ending $300,000 200,000 2,000 3,000

205,000 $505,000

20,000 2,000 (22,000) $483,000 $150,000 (80,000) (20,000) (14,000) (18,000) $ 18,000 $6,000

46.

a.

Sales revenue Cost of sales Depreciation expense Utilities Rent Total ordinary partnership income Separately stated items: Long-term capital gain

b & c. Kayla 20,000 9,000 3,000 (12,000) 20,000 Lisa 16,000 9,000 3,000 (15,000) 13,000 $100,000 (80,000) (20,000) (14,000) (18,000) $ (32,000) $6,000

Beginning basis Partnership ordinary income Long-term capital gain Distribution (no tax consequences) Ending basis 47. a. Sales revenue Cost of sales Depreciation expense Utilities Rent Total ordinary partnership loss

Separately stated items: Long-term capital gain

10-4

b & c. Kayla 20,000 3,000 (12,000) 11,000 (11,000) 0 5,000 Lisa 16,000 3,000 (15,000) 4,000 (4,000) 0 12,000 $200,000 40,000 $240,000 $380,000 (100,000) 60,000 $340,000

Beginning basis Long-term capital gain Distribution (no tax consequences) Basis before loss Partnership loss (limited) Ending basis Suspended loss (carryforward) 48. a. Basis of contributed property Share of partnership nonrecourse debt Suzys beginning basis Basis of contributed property Debt relief (assumed by the partnership) Share of partnership nonrecourse debt Annas beginning basis b.

Suzys Schedule K-1 reports the following (40% of the partnership totals): Ordinary income ($560,000 $360,000) Short-term capital gain Tax-exempt interest income Charitable contributions Distribution received by Suzy On her individual Form 1040, Suzy reports

$80,000 4,000 1,600 3,200 10,000

$80,000 of ordinary partnership income on Schedule E $4,000 short-term capital gain on Schedule D $3,200 charitable contributions on Schedule A $240,000 40,000 40,000 80,000 4,000 1,600 (3,200) (10,000) $392,400

c.

Suzys beginning basis Increase in Suzys share of recourse debt (40% $100,000) Increase in Suzys share of qualified nonrecourse debt [40% ($200,000 $100,000)] Partnership ordinary income Short-term capital gain Tax-exempt interest income Charitable contributions Distribution Suzys ending basis

Suzys amount at risk is $392,400 because the nonrecourse debt is qualified nonrecourse financing (QNRF). 49. a. Suzys beginning capital account balance is $200,000 (adjusted basis of property contributed). Suzys beginning capital account Partnership ordinary income Short-term capital gain Tax-exempt interest income Charitable contributions Distribution Suzys ending capital account $200,000 80,000 4,000 1,600 (3,200) (10,000) $272,400

b.

10-5

c.

Suzys share of the partnership debt (both recourse and nonrecourse) is not included in her ending capital account.

51.

a. Capital beginning partnership loss 80/20 split of MACRS Basis end of year 1 partnership profit 80/20 split of MACRS Basis end of year 2 b. Bryan 120,000 (40,000) (28,800) 51,200 20,000 (46,080) 25,120 Cody 120,000 (40,000) (7,200) 72,800 20,000 (11,520) 81,280

The special allocation has economic effect because (1) allocations are reflected in capital account balances, (2) liquidating distributions are in accordance with ending capital account balances, and (3) deficit capital account balances must be restored. Selling price Less: Adjusted basis Original basis Less: MACRS year 1 Less: MACRS year 2 Recognized gain (split 50/50) $150,000 $200,000 (36,000) (57,600)

52.

a.

(106,400) $ 43,600

Basis end of year 2 recognized gain Basis before liquidating distribution Liquidating distribution Ending basis b.

Bryan 25,120 21,800 46,920 (46,920) 0

Cody 81,280 21,800 103,080 (103,080) 0

Each partner will receive cash from the $150,000 sales price equal to their ending capital account. Bryan receives less cash from the liquidating distribution than he would have if he hadnt received 80% of the MACSR depreciation in year 1 and year 2. Without the special allocation, each partner would have received $75,000 from the liquidating distribution.

c.

54.

Allocation of the recourse debt under the constructive liquidation rules: Melinda $14,000 (20,000) ($ 6,000) 6,000 $ 0 $ 6,000 Gabe $14,000 (20,000) ($ 6,000) 6,000 $ 0 $ 6,000 Pat $ 2,000 (20,000) ($18,000) 18,000 $ 0 $18,000

Capital Deemed loss on sale of assets Deficit capital Deemed cash contribution Share of recourse debt 58. a.

Burgandy, Inc., reports income of $140,000 [$100,000 (guaranteed payment) + $40,000 (1/2 of the LLCs 2013 ordinary income)]. Vilot reports $45,000 (1/2 of the LLCs 2014 ordinary income) Both ordinary partnership income & guaranteed payments are allocated to the partners on the last day of the partnership tax year (December 31).

b.

10-6

60.

a. b.

Lacy recognizes a $50,000 loss; Lacy is not a related party (less than 50% ownership). Four GRRLs recognizes a $60,000 gain [$260,000 (selling price) $200,000 (adjusted basis)]. Zero. Lacys $50,000 realized loss is not recognized. She is a related party (greater than 50% ownership). Four GRRLs recognizes a $10,000 gain. Under the related party rules (Section 267), the partnership can offset the $60,000 realized gain by the previously disallowed loss [$60,000 (realized gain) $50,000 (disallowed loss)].

c.

d.

Lacy recognizes a $80,000 gain. Lacys gain would be ordinary under unless the investment property is held as a capital asset by the GRRLs Partnership.