Chapter 1 – What Is a Partnership? Reading: Paragraphs 101106.

Transcription

Chapter 1 – What Is a Partnership?
Reading:
Paragraphs 101106. 1.
What is a partnership?
2.
Define each of the following in terms of the liability of the partners:
General partnership
Limited partnership
Limited liability partnership
Limited liability limited partnership
3. If a partnership wants to be taxed as a corporation, how would it go about doing
so? If a corporation (incorporated under state laws) wants to be taxed as a
partnership, how would it go about doing so? If an unincorporated multi-owner
organization doesn’t select a tax entity, how will it be taxed?
4. Compare the tax treatment of the formation of a partnership to the formation of a
corporation. Compare the tax treatment of partnership distributions to the tax
treatment of corporate distributions.
5. If one expected a business to (1) incur heavy initial losses and (2) be highly
leveraged, for tax purposes would it be better to operate as a corporation or a
partnership? Why?
Chapter 2 – Partnership Interest Received for Contribution of Property
Reading:
Paragraphs 201-206.
1. If a partner contributes appreciated property to a partnership, and the
partnership later sells the property, how will the deferred gain be allocated
between the partners?
2. Suppose a partner contributes appreciated property to a partnership and then
later sells his partnership interest for a gain. Is there any way for the partnership
to adjust the basis of the partnership property upward?
3. What is the one transaction which will cause an inside-outside basis disparity,
but does not allow a Code Sec. 754 election?
4. What amount is a contribution of property recorded at for tax purposes and what
amount is it recorded at for book purposes?
5. How does a partner determine the holding period of his partnership interest?
6. How does a partnership determine the holding period of assets contributed by
the partners?
7. If depreciable property is contributed to the partnership, what depreciation
method should the partnership use to depreciate it?
8. If a partner contributes encumbered property and has net debt relief (a net
decrease in her liabilities) as a result, it is treated as a deemed distribution to the
partner of what?
9. Under what circumstances will a partner contributing encumbered property to a
partnership have to recognize a gain?
10. Does the depreciation recapture potential of contributed property carry over to
the partnership?
11. Partners W, X, Y, and Z form the Ace partnership, contributing the following:
W
X
Y
Z
Interest
40%
40%
10%
10%
Prop. 1
Prop. 2
Prop. 3
Prop. 4
Basis
$40,000
$120,000
$10,000
$30,000
FMV
$200,000
$60,000
$70,000
$20,000
Liability
$160,000
$20,000
$60,000
$10,000
How much is each partner’s basis in their partnership interest?
How much is each partner’s capital account?
What is each property’s basis to the partnership, assuming that a Code Sec. 754 election
is not in effect?
12. On April 6, Cathy contributes the following to the ABC Partnership:
Inventory (FMV = $10,000, basis = $7,000) purchased on December 10 of last
year.
Land (FMV = $160,000, basis = $250,000) purchased on January 15 of last
year.
Cash = $30,000.
What will Cathy’s holding period for her partnership interest be on April 6?
Chapter 3 – Receipt of a Partnership Interest for Services
Reading:
Paragraphs 301-304.
1. If a capital interest in a partnership is received for services, what are the tax
effects to the service partner, the continuing partners, and the partnership?
2. If the capital interest is not vested, when will the service partner recognize the
income from the receipt of the partnership interest?
3. What are the tax effects if a §83(b) election is made by a service partner if they
get a partnership capital interest that is not vested?
4. What are the two benefits of making a §83(b) election in the case of a nonvested
capital interest exchanged for services?
5. By when does the §83(b) election have to be made?
6. The XYZ partnership has the following balance sheet:
Assets
Real estate
Liabilities
Capital
X
Y
Z
Tax Basis
$120,000
FMV
$180,000
$0
$0
$40,000
$40,000
$40,000
$120,000
$60,000
$60,000
$60,000
$180,000
If Q provides $45,000 of services in exchange for a $25% interest in the partnership,
what is the tax effect to Q, X, Y, Z, and XYZ? Assume all of the partners are individuals.
How much income does Q recognize? How much gain do X, Y, and Z recognize? How
much of a deduction do they get? What basis will XYZ have in the Real estate? What is
the balance sheet afterward? If the property is later sold for $180,000, how much gain
will each partner recognize? What if it is later sold for $200,000?
What would your answer to the above questions be under the Proposed Regulations?
Assets
Real estate
Liabilities
Capital
X
Y
Z
Tax Basis
$300,000
FMV
$210,000
$0
$0
$100,000
$100,000
$100,000
$300,000
$70,000
$70,000
$70,000
$210,000
If Q provides $52,500 of services in exchange for a $25% interest in the partnership,
what is the tax effect to Q, X, Y, Z, and XYZ? Assume all of the partners are individuals.
How much income does Q recognize? How much gain do X, Y, and Z recognize? How
much of a deduction do they get? What basis will XYZ have in the Real estate? What is
the balance sheet afterward? If the property is later sold for $210,000, how much gain
will each partner recognize? What if it is sold for $180,000?
Chapter 4 – Calculation of Partnership Taxable Income
Reading:
Paragraphs 401-404.02.
1.
2.
What types of items should be separately stated on Schedules K and K-1?
Where do all of the nonseparately stated items go on the Form 1065? Where is the
net of all of those items reported on Form 1065?
3. Which of the following are examples of the entity approach to partnership taxation,
and which are examples of the aggregate approach?
Passive activity loss limits
At-risk limits
Most elections
Income tax return preparation
Tax return filing requirement includes partner’s share of partnership gross income
Pass-through of income character to the partners
Depreciation elections
4. When there is an involuntary conversion of partnership property, can the partners get
deferral of gain if the proceeds of the involuntary conversion are distributed to the
partners, who then invest in replacement property?
5. Code Section 1244 allows for ordinary losses on the sale of stock, as long as the stock
is sold by its original owner. If a partnership buys stock and distributes it to its
partners, who then sell it for a loss, will the sale qualify for ordinary loss treatment
under Code Sec. 1244?
6. What three categories do payments to partners fall into?
7. How is a Sec. 707(a) payment to a partner for services treated by the partner and the
partnership? When will it be recognized by a cash basis partner? When will it be
deducted by a partnership?
8. Partner A performs $5,000 of contract-type Code Sec. 707(a) services for the ABC
partnership in December of 2009, but does not get paid until January of 2010. A and
ABC are both calendar-year taxpayers, but A is on the cash basis and ABC is on the
accrual basis. When will A recognize it, and when will ABC deduct it?
Is your answer any different if ABC has to capitalize the expense for services, and must
amortize it?
Is your answer any different if A is accrual basis and ABC is on the cash basis, and the
expense is not capitalized?
9. How is a guaranteed payment for services treated by the partner and the partnership?
When is it recognized or deducted?
10. Partner D (a calendar-year, cash basis taxpayer) performs services for the DEF
partnership (a FYE 10/31, accrual basis taxpayer) in October, 2009. In return, D is to
get a guaranteed payment of $10,000. DEF pays D the guaranteed payment in
January, 2010. When is it deducted by DEF? When is it included in D’s income?
Assume that DEF is an equal partnership and earns $100,000 of income before
considering the guaranteed payment. How much income will D have from the
partnership in 2009?
11. Partner Z of the EZ partnership provides services to the partnership in exchange for
30% of the profits, but not less than $150,000. The partnership had $300,000 of
taxable income before the guaranteed payment. How much is Z’s guaranteed
payment, and how much is his total income for the year from EZ?
12. The ABCD partnership agreement provides that D will receive 25% of partnership
ordinary income before taking into account any guaranteed payment, but not less
than $100,000, and he will receive 25% of the ordinary losses after taking into
account the guaranteed payment. All capital gains will be split equally among the
partners. For the year the partnership has $200,000 of ordinary income (before the
guaranteed payment) and $80,000 of long term capital gains. How much is D’s
guaranteed payment? How much is her share of ordinary income? How much is her
share of long term capital gains? How much, in total, of the ordinary income and
long term capital gain will the other partners be allocated? What would your answer
to the above questions be if D is to receive 25% of total partnership income before
any guaranteed payment, but not less than $100,000, and the capital gains are not
separately allocated?
13. Are guaranteed payments for capital treated as interest income for purposes of the
investment interest expense limitation? Are guaranteed payments for capital active
income, passive income, or portfolio income, according to the passive loss rules?
Reading:
Paragraphs 405-406.
1. In what taxable year must a partner recognize her share of partnership income?
2. The months of deferral of partnership income that a partner gets is the number of
months from when to when?
3. If a partnership can not come up with an acceptable business purpose for a taxable
year, how must it determine its taxable year (what three methods, in order)?
4. If no group of partners with the same taxable year own, in the aggregate, more than
50% of the partnership, how will the partnership taxable year be determined?
5. A principal partner must own at least what percent of the partnership?
6. Under the de minimis rule, a partnership will not be required to change its taxable
year, even though the taxable year of least aggregate deferral changes, if what
happens?
7. Even if it is unlikely, could a partnership potentially be required to change its taxable
year end every year?
8. One way for a partnership to demonstrate a business purpose taxable year is to show
that there is a natural business year. How does it show that?
9. The CDE partnership has the following:
Partner
C
D
E
Partner’s
Year end
5/31
6/30
10/31
Interest
35%
10%
55%
What is the required year end, assuming a business purpose year end can’t be shown?
What is the year end with the least aggregate deferral?
10. The CDE partnership has the following:
Partner
C
D
E
Partner’s
Year end
5/31
6/30
10/31
Interest
30%
40%
30%
What is the required year end, assuming a business purpose year end can’t be shown?
What is the year end with the least aggregate deferral?
11. The DEF partnership had the following gross receipts for the past three years:
Year
2003
2004
2005
FYE 11/30
Oct, Nov.
FYE 6/30
May, June
FYE 11/30
Oct, Nov.
FYE 6/30
May, June
FYE 11/30
Oct, Nov.
FYE 6/30
May, June
What natural business year(s) can they adopt?
120,000
40,000
110,000
30,000
150,000
35,000
160,000
42,000
170,000
45,000
160,000
50,000
Reading:
Paragraphs 407-408.
1. If a partnership has organizational expenses of $53,000, how much of the
expenses can the partnership deduct (not including amortization)?
2. What are three examples of partnership organizational expenses?
3. When must expenses be incurred in order to be organizational expenses?
4. If the election to expense or amortize is not made, then how will organizational
expenses be treated by the partnership?
5. In what month does the amortization of the organizational expenses begin?
6. What are five examples of nondeductible syndication costs?
7. In 2007 the XYZ partnership incurs $35,000 of expenses that qualified as
organizational expenses. They are a calendar year partnership, and begin business
in July of 2007. How much is their deduction and amortization of the
organizational expenses in 2007, assuming they elect the maximum of each?
8. In 2007 the GHI partnership incurs $60,000 of expenses that qualified as
organizational expenses. GHI is a calendar year partnership and begins business
in November of 2007. How much is GHI’s deduction and amortization of the
organizational expenses in 2007, assuming it elects the maximum of each?
9. Does Section 195 apply to the cost of investigating and deciding whether or not to
buy a store or outlet in a different location, but in the same line of business as the
taxpayer already was in? How would such expenses generally be treated?
10. Are the actual costs of acquiring a business in a new trade or business subject to
Code Section 195 treatment?
11. Section 195 applies to both investigation expenses and start-up expenses. Name
four examples of start-up expenses.
12. Section 709 allows amortization of organizational expenses beginning when the
partnership is ready to begin doing business (for 709 purposes that is the
definition of when the trade or business begins). When can amortization begin
under Section 195?
13. In 2005 the PQR partnership, a clothing wholesaler, incurs $60,000 of expenses
as follows:
$10,000 advertising for the grand opening of a retail clothing outlet PQR just built.
$5,000 in legal fees involved in purchasing the land the outlet is located on.
$30,000 for a market study to see if a retail clothing outlet in that location would have
sufficient demand.
$15,000 in advertising to publicize a new, more efficient, wholesale clothing
distribution center to its customers,
PQR is a calendar year partnership, and they actually open the doors of the retail
clothing outlet in November of 2005, even though they were ready to open in
September. How much is PQR’s deduction and amortization of the above expenses
in 2005, assuming it elects to deduct the maximum?
14. In the current year the Taylor Partnership, a calendar-year partnership, was
organized and began a new business. It had the following expenditures in the
current year:
$10,000 Accounting fees for preparations of offering materials
$20,000 Printing costs of the brochures used in selling the partnership interests
$15,000 Legal fees for drafting the partnership agreement
$38,000 Local and state filing fees
$25,000 Pre-opening wages paid to employees being trained and their instructors
$20,000 Pre-opening travel and other expenses incurred to line up prospective customers
$6,000 Expenditures to get property (for store site) appraised during purchase.
How much deduction and amortization will it be able to take in the current year, if it is
ready for and begins business in October?
Chapter 5 – Character and Presentation of Partnership Taxable Income
Reading:
Paragraphs 501-506.
1. Does a partnership have a limitation on the charitable contribution deduction, like
an individual does? What line of Schedule K do charitable contributions go on?
Does a partnership get to deduct oil and gas depletion? What box of the K-1 does
the information necessary for the partners to compute depletion go in?
2. What type of income and expenses go on line 2 of Schedule K? What type of
income and expense goes on line 3? Why are they separated this way? Do all
rental activities (such as a hotel, for instance) go on these lines?
3. Guaranteed payments to partners go on what two lines of the Form 1065? What
type of interest goes on line 5 of Schedule K? What types of dividends go on line
6a of Schedule K? What type goes on line 6b? Does line 6a include those on line
6b?
4. What line of Schedule K do specially allocated items of ordinary income and
deductions go on? What line do Code Sec. 179 expenses go on? Is there a
limitation on these at the partnership level?
5. Look at the Worksheet for Figuring Net Earnings (Loss) from Self-Employment
(p. 31 for 2008) of the Form 1065 instructions. What lines from Schedule K are,
in general, involved in the calculation of Self-Employment income? What
guaranteed payments are included in a partner’s self-employment income?
However, look at Rev. Rul. 65-272 and Technical Advice Memorandum 9750001.
What do they tell you about using the Worksheet?
6. Identify which of the following fringe benefits are deductible to the partnership
and excludible by the partner:
Child and dependent care assistance
Qualified employee discounts
Exclusion for meals and lodging
De minimis fringe benefits
Qualified moving expenses
Chapter 6 – Allocation of Partnership Income Among the Partners: The
Substantial Economic Effect Requirement
Reading:
Paragraphs 601-605.
1. What requirements must be met in order for an allocation of income or loss to
have economic effect?
2.
A, B, and C form the equal ABC partnership. Capital accounts are properly
maintained. Depreciation is allocated completely to C, but any distributions in
liquidation will be made equally to each partner, although partners are required to
restore deficit capital accounts upon liquidation. Does the allocation of
depreciation have economic effect?
3. A, B, and C form the equal ABC partnership. Capital accounts are properly
maintained. Depreciation is allocated completely to C, and any distributions in
liquidation will be made according to the capital accounts of each partner.
However, under local law any excess of liabilities over assets at the time of
liquidation must be made up equally by each partner. Does the allocation of
depreciation have economic effect?
4. A, B, and C form the equal ABC partnership. Depreciation is allocated
completely to C, and any distributions in liquidation will be made according to the
capital accounts of each partner. Partners are required to restore deficit capital
accounts upon liquidation. The capital accounts of each partner are kept on a tax
basis, so contributions and distributions of property are recorded in the capital
accounts at the properties’ bases. Does the allocation of depreciation have
economic effect?
5. A, B, and C form the equal ABC partnership by contributing $100,000 each, and
purchasing some equipment for $300,000. The equipment has a depreciable life
of six years, and all depreciation (straight line) is allocated to A. Capital accounts
are properly maintained. Any distributions in liquidation will be made according
to the capital accounts of each partner. Partners are required to restore deficit
capital accounts upon liquidation. Income aside from depreciation is $60,000
each year. If the partnership were liquidated at the end of year three, how much
would each partner get?
What would your answer be if the liquidation occurred at the end of year four?
6. A, B, and C form the equal ABC partnership by contributing $100,000 each, and
purchasing some equipment for $300,000. The equipment has a depreciable life
of six years, and all depreciation (straight line) is allocated to A. Capital accounts
are properly maintained. Any distributions in liquidation will be made according
to the capital accounts of each partner. No partners are required to restore deficit
capital accounts upon liquidation, but if partner A’s capital account ends up with a
deficit balance, A is to be allocated income sufficient to offset the difference as
soon as possible. Income aside from depreciation is $60,000 each year. How
much depreciation will be allocated to each partner in year 3? How much will be
allocated to each partner in year 4?
7. Partner A of the AB partnership has $100,000 of NOLs, and partner B has
$100,000 of long term capital losses. The partnership is expected to earn
$100,000 of ordinary income and $100,000 of long term capital gains during the
year. The partnership agreement is amended to allocate this year’s ordinary
income to A and long term capital gain to B. Assume that the three tests for
economic effect are met. Is this allocation substantial? Why or why not? What
type of allocation is it, a shifting allocation or a transitory allocation? Would the
allocation be substantial if A did not have a net operating loss carryforward?
8. The ABCD Partnership owns an office building. In a special allocation that has
economic effect, partner D is allocated all of the depreciation from the building,
and all of the gain from any sale of the building, up to the amount of depreciation
taken. Any gain in excess of depreciation taken is to be split equally among the
partners. The building is expected to be sold for a substantial gain within four
years. Is this allocation substantial? Why or why not?
Reading:
Paragraph 606.
1. Who bears the risk of loss where nonrecourse debt is concerned?
2. What is the most fundamental requirement concerning allocations of deductions
derived from nonrecourse financing?
3. Allocations of deductions attributable to nonrecourse debt will be deemed to be
valid if what four conditions are met?
4. How would you calculate minimum gain for a particular asset, and why is it
called minimum gain? Why is it significant for determining the economic effect
of deduction allocations?
5. Partners A, B, C and D each contribute $100,000 for 25% of the ABCD
partnership. The partners all meet the three tests for economic effect, and the four
tests for allocation of nonrecourse deductions are met as well. They use the
$400,000 cash and $3,600,000 of nonrecourse financing to buy a building that is
depreciable over 20 years on a straight line basis. Income equals expenses in all
years, except for depreciation, which is allocated completely to D. How much of
the depreciation deduction in each year (from year 1 to year 3) will D be allowed
to take?
6. Assume the same facts as the prior problem. If the building is sold at the end of
year three for $4,100,000, how much gain would each partner have to recognize?
7. Partners A and B each contribute $100,000 for 50% of the AB partnership. The
partnership allocations meet the three tests for economic effect, and the four tests
for a valid allocation of nonrecourse deductions are met as well. They use the
$200,000 cash and $1,800,000 of debt to buy a building that is depreciable over
20 years on a straight line basis. $200,000 of the debt is nonrecourse, and is
subordinate to the other $1,600,000 of recourse debt. Income equals expenses in
all years, except for depreciation, which is allocated completely to B. How much
of the depreciation deduction in each year (from year 1 to year 5) will B be
allowed to take?
8. Assume that in Problem 7 above B does not have a deficit capital account
restoration requirement (A still does), but with respect to B the alternate test for
economic effect is met. The partnership agreement still allocates all depreciation
to B. How would the depreciation be allocated in years 1-5?
9. What would your answer to Number 8 be if the nonrecourse debt had priority over
the recourse debt?
10. LP is a limited partner and GP is a general partner of the LG partnership. LP
contributes $90,000 and GP contributes $10,000 to the partnership, which then
gets a $400,000 nonrecourse loan and purchases a building for $500,000. GP is
required to make up any capital account deficit, but LP is not. However, the
partnership agreement has a qualified income offset provision for LP and also a
minimum gain chargeback provision. The partnership allocates 90% of all
partnership items to LP and 10% to GP, until the partnership generates minimum
gain. At that point they will be allocated 50/50. Is this allocation “reasonably
consistent” with the allocation of items that do have substantial economic effect?
What would your answer be if, after the partnership generates minimum gain,
items of income and loss are allocated 99% to LP and 10% to GP?
Reading:
Paragraph 607.
1. In order for special allocations of items of income or deduction to have substantial
economic effect, the capital accounts of the partnership must be properly
maintained under the rules of Code Sec. 704(b). Under those rules, when
someone contributes property, is their capital account increased by its FMV or its
basis?
2. When appreciated or depreciated property is distributed, what is the effect on the
capital accounts?
3. Suppose that a partner’s capital account balance and tax basis in her partnership
interest is $200, and the FMV of her partnership interest is $300. In liquidation of
her interest she gets distributed property with a FMV of $300 and a book value of
$200. She had a 25% interest, so this leaves her with a capital account of $200 +
$25 - $300 = -$75. She is no longer a partner, so what can the partnership do to
make this deficit capital account go away?
4. If a partner contributes encumbered property to a partnership, what are the effects
on his capital account for book purposes? How is this different from the effects
on his basis when he contributes encumbered property?
5. If a partnership distributes encumbered property to a partner, what are the effects
on her capital account? How is this different from the effects on her basis when
she is distributed encumbered property?
6. Partner A is a 25% partner, and has a basis in her interest and capital account
balance of $200,000. She contributes some land (FMV = $100,000, basis =
$60,000, liability attached = $40,000) to the partnership. How much are her book
capital account and basis afterward?
7. Partner A is a 25% partner, and has a basis in her interest and capital account
balance of $200,000. She is distributed some land (FMV = $100,000, basis =
$60,000, book value = $60,000, liability attached = $40,000) by the partnership.
How much are her book capital account and basis afterward?
Chapter 7 – Allocation of Income and Losses from Contributed
Property: Code Sec. 704(c)
Reading:
Paragraphs 701-702.
1. T and K formed new partnership TK to operate a charter boat service in Florida. T
contributed a boat with a tax basis of $210,000 and a fair market value of
$350,000. K contributed $350,000 cash. The partnership agreement allocates
profits, losses, and capital 50% to each partner. The agreement satisfies the
requirements of Code Sec. 704(b).
a. Assume the fishing boat is depreciated using the straight-line method over 7
years. Further assume that the partnership deducts a half-year of depreciation
expense in its first year of operations. How will year 1 book and tax
depreciation be allocated between the partners?
b. Assume the partners agreed to dissolve the partnership at the end of year 1. The
partnership sold the boat for $400,000 and liquidated. How much gain will it
recognize on sale of the boat for book and tax? How will this gain be allocated
2. Assume the same facts as above, except that the tax basis of the fishing boat was
only $140,000, rather than $210,000. If the partnership uses the traditional
method under Code Sec. 704(c), how will year 1 tax depreciation be allocated
3. Assume the tax basis of the fishing boat was $140,000 as above. Further assume
that the partnership used the traditional method to allocate tax depreciation in year
1, and that at the end of year 1, it sold the boat for $400,000 and liquidated. How
will it allocate book and tax gain between the partners? Will this allocation offset
the distortion caused by the ceiling rule in allocating year 1 depreciation between
the partners?
4. A and B form the equal AB partnership. A contributes property (FMV =
$100,000, basis = $60,000) and B contributes $100,000 cash. The property is
depreciated straight line over a 10 year life for both book and tax purposes. Using
the traditional method under Code Sec. 704(c), how much of the tax depreciation
in the first year will A get? How much will B be allocated? How much of the
gain would be allocated to A if the asset is sold for $110,000 at the beginning of
year 2?
Reading:
Paragraph 703.
1. Daisy Tree Partnership owns and operates two apartment complexes in the
metropolitan area. The first complex was contributed to the partnership by partner L.
The other two partners (M and N) contributed cash which, together with borrowed
funds, was used to purchase the second complex. The three partners share partnership
income, loss, gain and deduction equally. The tax basis and book value of the
partnership’s assets at the end of the current year are as follows:
Tax
Book
$60,000
$60,000
0
45,000
600,000
1,500,000
Accumulated depreciation, complex 1
(120,000)
(300,000)
Apartment Complex 2
2,475,000
2,475,000
Accumulated depreciation, complex 2
(180,000)
(180,000)
200,000
200,000
$2,035,000
$4,070,000
Cash and equivalents
Receivables
Apartment Complex 1
Land and other assets
Total assets
Assume that the partnership uses the traditional method with curative allocations to
make allocations under Code Sec. 704(c). Further assume that complex 1 has a
remaining useful life of 8 years for book and tax. Complex 2 has a remaining useful
life of 25.5 years. Both are depreciated using the straight line method for both book
and tax. Show how book and tax depreciation will be allocated among the partners.
c. Does the curative allocation of depreciation on complex 2 from L to M and N
completely “cure” the discrepancy caused by the ceiling rule with respect to the
allocation of depreciation on complex 1?
d. How can the partnership eliminate the remaining discrepancy?
2. Assume the partnership in the above problem sells apartment complex 1 in
January next year for $1,000,000.
a. What will be its gain or loss for book and tax?
b. How will the tax gain be allocated between the partners?
c. Does the application of the ceiling rule create any book/tax distortions under
Code Sec. 704(c)? Can this discrepancy be cured this year?
3. A and B form the equal AB partnership. A contributes property (FMV =
$100,000, basis = $40,000) and B contributes $100,000 cash. The property is
depreciated straight line over a 10 year life for both book and tax purposes. The
partnership also has other property (FMV = $200,000, basis = $200,000) that is
depreciated straight line over 10 years. Under Code Sec. 704(c), how much of the
tax depreciation of the contributed property in the first year will B get? Assuming
a curative allocation is made, how much will it be? If there were no other
depreciable assets, what type of curative allocation could be made?
Reading:
Paragraph 704.
1. A and B form the equal AB partnership. A contributes property (FMV = $100,000,
basis = $30,000) and B contributes $100,000 cash. The property has three years
remaining on its 10 year life. The partnership uses the remedial allocations method to
eliminate ceiling rule disparities. Under Code Sec. 704(c), how much of tax
depreciation with respect to the contributed property in the first year will be allocated
to B? Assuming a remedial allocation is made, how much will it be? What will be its
character?
2. K, G and L form a new partnership to operate a charter airplane company. K
contributes a plane with a tax basis of $400,000 and fair market value of $1,200,000
in exchange for a one-third interest. The plane is subject to a $600,000 liability, for
which the partnership assumes responsibility. G contributes a second plane with a tax
basis of $450,000 and a book value of $600,000 in exchange for a one-third interest.
L contributes $600,000 cash in exchange for the remaining one-third interest. Assume
that both planes have remaining useful lives for book and tax purposes of 10 years
and that the partnership uses the straight-line method to compute depreciation.
a. Show how the partnership will allocate tax depreciation among the partners using
the traditional method under Code Sec. 704(c). Assume that the partnership
agreement allocates all items of income, deduction, gain and loss equally among
the partners.
b. How would depreciation expense be allocated if the partnership uses the
traditional method with curative allocations under Code Sec. 704(c)? (Assume the
partnership had gross rental income of $120,000 from its charter activity in the
current year).
c. How would depreciation be allocated if the partnership uses the remedial
allocations method under Code Sec. 704(c)?
Reading:
Paragraph 705.
1. J contributed rental real estate to JD Partners with a tax basis of $525,000 and a fair
market value of $825,000. The property is 27.5-year property with 15 years left in its
depreciable life for tax purposes. The partnership uses the straight-line method to
compute depreciation expense for book and tax purposes.
a. Compute tax and book depreciation for year 1 assuming the partnership uses the
traditional method with curative allocations under Code Sec. 704(c).
b. Compute tax and book depreciation for year 1 assuming the partnership uses the
remedial allocations method under Code Sec. 704(c).
2. Johnson Partners admitted Tina Smith as an equal 25% partner at the beginning of
this year. The partnership’s only asset was a hotel with a tax basis of $600,000 and a
fair market value of $1,500,000. The hotel had 15 years remaining in its useful life
when Tina joined the partnership. The partnership opted to revalue the hotel for book
purposes under Code Sec. 704(b) following the admission of Tina as a new partner.
If the partnership uses the traditional method to make allocations under Code Sec.
704(c), how will tax and book depreciation be allocated in the first year following
Tina’s admission to the partnership?
Assume the partnership uses the remedial allocations method to make allocations
under Code Sec. 704(c), rather than the traditional method. Further assume that
the partnership depreciates the hotel over 39 years for book purposes. How will
book and tax depreciation be allocated in year 16? (Recall that the hotel has 15
years remaining in its useful life for tax purposes).
Chapter 8 – Other Limitations on Partnership Allocations
Reading:
Paragraph 801.
1. Partner A owns a 10% interest in the ABCD partnership. If partner A sells her
partnership interest, will the partnership taxable year have to close on that date?
If A only sells ½ of her interest in the partnership, will the partnership taxable
year have to close on that date? Is there any effect on the timing of the
partnership income to A if there is a sale of only part, versus all, of A’s
partnership interest?
2. What are the two methods of income allocation with respect to the income of a
partner who sells all or part of his partnership interest?
3. On September 30 Partner C buys ½ of partner A’s interest in the equal AB
calendar-year partnership, so A and C each own 25% after the sale. For the year,
the partnership earns income of $2,000 a month for January through August, and
$6,000 a month for September through December. How much income will A and
C each have from the partnership under (a) the interim closing method and (b) the
proration of partnership income method?
4. What are the allocable cash-basis items that must be prorated by cash-basis
partnerships when partnership interests vary during the year?
5. The ABC partnership is a cash-basis, calendar-year partnership. A sells his 1/3
interest to D on September 31. Revenue to the partnership is $4,500 per month,
and expenses are $1,200 per month, except for (1) rent expense for the year of
$6,000, paid on October 15, (2) real estate taxes of $9,000 for the year, paid on
November 1, and (3) a long term capital gain of $15,000 from the sale of property
on December 1. (a) How much income and expenses would A be allocated under
the interim closing method? (b) How would your answer be different under the
interim closing method if the real estate taxes were for the period from November
1 of this year to October 31 of the next year, and the rent expense was for the 12
months from November 1 of the prior year to October 31 of the current year?
Reading:
Paragraph 802.
1. Under Code Sec. 704(e), what relatives are considered “family” for purposes of
the family partnership rules?
2. If a partner was given (by her mother) her interest in a partnership in which
capital is a material income-producing factor, will she be treated as a valid partner
for tax purposes?
3. Partner A was given (by her mother) her 10% interest in a partnership in which
capital is a material income-producing factor. The income of the partnership is
$200,000 before consideration of any guaranteed payment to her mother. Her
mother performs services for the partnership worth $80,000, but only takes a
guaranteed payment of $30,000 in return. How much income will A be allocated
from the partnership? Would your answer be any different if A had purchased her
10% from her mother?
4. Partner D was given (by his mother) his 20% interest in a business in which
capital is a material income-producing factor, resulting in a partnership in which
D and his mother are the only partners. The partnership agreement states that D
will get a distributive share of 20% of the partnership income, but his mother has
capital of $360,000 in the partnership, and D’s capital (given to him by his
mother) was $40,000. The income of the partnership before consideration of any
guaranteed payment is $300,000. His mother performs service es for the
partnership worth $100,000, but only takes a guaranteed payment of $40,000 in
return. D performs no services for the partnership, and any distribution in
liquidation or withdrawal is based on capital account balances. How much should
D’s distributive share of partnership income be?
5. When is capital a material income-producing factor under Code Sec. 704(e)?
6. Partner D was given (by his mother) his 20% interest in a business in which
capital is not a material income-producing factor, resulting in a partnership in
which D and his mother are the only partners. The partnership agreement states
that D will get a distributive share of 20% of the partnership income, but his
mother has capital of $360,000 in the partnership, and D’s capital (given to him
by his mother) was $40,000. The income of the partnership before consideration
of any guaranteed payment is $300,000. His mother performs services for the
partnership worth $100,000, but only takes a guaranteed payment of $40,000 in
return. D performs no services for the partnership, and any distribution in
liquidation or withdrawal is based on capital account balances. How much should
D’s distributive share of partnership income be?
Chapter 9 – Partner’s Share of Partnership Debt
Reading:
Paragraphs 901-905.
1. Partner A of the equal general ABCD partnership contributes property (FMV =
$200,000, basis = $20,000, associated liability = $120,000), to the partnership.
A’s basis in her partnership interest before the contribution (including A’s share
of partnership liabilities) is $30,000, and the partnership has liabilities of $80,000.
The other partners also contribute property, so A’s interest in the partnership does
not change. What is A’s gain or loss, if any, on the contribution, and what is A’s
basis in the partnership after the contribution?
What would your answer be if the contribution increased her interest to 40%?
2. C is “owed” $100,000 by the equal AB partnership. C’s note indicates that the
interest rate will vary depending on the performance of the partnership, and the
note can be rolled over indefinitely as long as the partnership wishes it to be
rolled over. The note is subordinated to any other liabilities of the partnership,
except that it is secured by property with a current value of $120,000. A and B’s
capital accounts total $2,000, and the terms of the note allow C to have a say in
certain business decisions of the partnership. The partnership is in the real estate
rental business, and its properties are rented virtually 100% of the time. At the
current time, C’s debt is the only debt the partnership has. What factors indicate
that the note is debt, and what indicate that it is equity? Which should it be
classified as?
3. Do a partnership’s contingent liabilities and cash-method trade payables increase
any partner’s basis?
4. The constructive liquidation test for allocation of partnership recourse liabilities
involves which five hypothetical events?
5. At the end of the hypothetical liquidation scenario, how do you know if a limited
or general partner bears the economic risk of loss for a liability?
6. If a partner would be obligated to contribute to the partnership at the end of the
constructive liquidation, but the partner is already in bankruptcy and would
therefore not be making any payments under any circumstances, would the
partner still be allocated any of the liabilities of the partnership for purposes of
computing basis?
7. At the end of a hypothetical constructive liquidation, partner A would be
obligated to pay $100,000. However, under the partnership agreement she is not
obligated to pay it for ten years, and at a below-market interest rate. The present
value of her payment obligation, assuming a constructive liquidation, is $45,000.
How much of the partnership liabilities would she be allocated?
8. The equal AB partnership had $100,000 of recourse liabilities. At the end of a
hypothetical constructive liquidation, partner A would be obligated to pay
$100,000, and B would be obligated to pay nothing. Because of the nature of A’s
obligation, B had to guarantee to pay it if A could not. How much of the
partnership liabilities should each partner be allocated?
9. Partner D in the equal ABCD partnership guarantees 40% of the interest on
$300,000 of the partnership nonrecourse debt. It is reasonable to expect that D
will have to pay this interest for the partnership. The present value of the interest
payments that D will have to make is $30,000. How much of the debt will be
allocated to D because of the guarantee?
10. The equal DEF partnership has the following balance sheet:
Cash and other assets
Recourse liabilities
Capital – D
Capital – E
Capital – F
$400,000
$100,000
$100,000
$100,000
$100,000
The profits and losses are allocated 40% to D, and 30% each to E and F. Under the
partnership agreement there is a capital account deficit restoration provision. How
should the liability be allocated?
What would your answer be if E had guaranteed F that she would not be required to pay
any money if the partnership liquidates?
What would your answer be if E had guaranteed the lender that if F did not pay, E would
pay F’s share?
Reading:
Paragraph 906.
1. Partners G and H form the GH partnership, with G contributing $200,000 cash and H
contributing some land with a basis of $600,000 and a FMV of $900,000, subject to a
nonrecourse liability of $700,000. They agree to share profits and losses 60% to G
and 40% to H. What is H’s share of the liability?
2. Partners X and Y own the XY partnership. XY owns a building with a book
value/tax basis of $800,000 and an associated nonrecourse debt of $900,000. All of
the depreciation on the building has been allocated to Y, and the original cost of the
building was $1,100,000. X is allocated 65% of the partnership gains and losses, and
Y gets the other 35%. How much of the nonrecourse debt is allocated to each
partner?
3. Partnership KBCD owns a building with a tax basis of $1,250,000 and a book value
of $1,800,000. The building is encumbered by a nonrecourse mortgage of $2,000,000.
The property was recently appraised at $2,500,000.
a. What is the Code Sec. 704(b) minimum gain (if any) with respect to this
property?
b. What is the Code Sec. 704(c) minimum gain (if any) with respect to this property?
4. V contributed real estate to JVX Partners several years ago. At the date of V’s
contribution, the tax basis of the real estate was $750,000 and its fair market value
was $1,000,000. The property was encumbered by a $900,000 nonrecourse mortgage
at the date of contribution. At the end of the current year, the property’s tax basis is
$600,000 and its book value is $800,000. The principal balance of the nonrecourse
note is $850,000. If V’s share of partnership profits is 20% and her share of
partnership depreciation expense is 10%, how much of the nonrecourse mortgage will
be allocated to her under the general rule?
5. Krypton Partnership owns and operates an office building in the medical district of a
large city. The property was contributed to the partnership several years ago by
partner K. Under the terms of the partnership agreement, K is allocated 20% of the
partnership’s profits, gains, losses and deductions, other than depreciation.
Depreciation is allocated 50% to K and 50% to the other partners. The office building
is encumbered by a nonrecourse mortgage of $750,000. Its tax basis is $650,000 and
its book value is $875,000.
a. Under the general rules governing the allocation of partnership nonrecourse
liabilities, how much of the nonrecourse liability will be allocated to K?
b. Would an allocation of $475,000 of the nonrecourse liability to K be acceptable
under the regulations? Explain.
c. What about an allocation of $330,000?
d. Could the partnership allocate $475,000 of the liability to K this year and change
the allocation to $330,000 next year (adjusted for changes in the tax basis and
book value of the property)?
6. Triple J Partners has the following balance sheets for book and tax at year end:
Cash & equivalents
Property 1
Property 2
Other Assets
Nonrecourse Mortgage, Property 1
Recourse Mortgage, Property 2
Capital, James
Capital, Johnson
Capital, Jackson
Tax Basis
$50,000
1,200,000
1,250,000
800,000
$3,300,000
$1,500,000
1,200,000
0
300,000
300,000
$3,300,000
Book Value
$50,000
1,500,000
1,250,000
800,000
$3,600,000
$1,500,000
1,200,000
300,000
300,000
300,000
$3,600,000
Property 1 was contributed by partner James. The partnership agreement allocates
profits equally, but losses are allocated 25% to James, 25% to Johnson, and 50% to
Jackson.
a. How will the partnership allocate the nonrecourse mortgage?
b. How will it allocate the recourse mortgage?
c. What will be the partners’ tax bases in their partnership interests?
Reading:
Paragraph 907. 1. Q contributed property to Quake Partners in exchange for a 1/3rd partnership interest.
The tax basis and fair market value of the property were $500,000 at the date of the
contribution. It was subject to a contingent liability, however, in the amount of
$300,000.
a. What will be Q’s initial tax basis in her partnership interest (assuming the
partnership has no other liabilities)?
b. Assume that Q subsequently sold her partnership interest to an unrelated buyer for
$250,000 cash. How much gain or loss will she recognize in connection with the
sale?
Chapter 10 – Limitations on the Deductibility of Partnership Losses
Reading:
Paragraphs 1001-1003.
1. In year 1 A and B form the AB equal partnership, with A contributing property
with a FMV of $100,000 and a basis of $60,000, and B contributing $100,000
cash. In year 1 the partnership had ordinary income of $30,000, municipal bond
interest of $2,000, made a $500 political contribution to a presidential campaign,
and paid A’s property taxes on his residence of $9,000. In addition, A was
distributed some property with a FMV of $10,000 and a basis of $12,000 (assume
there is no disguised sale in this problem). What is A’s basis in the partnership at
the end of the year?
2. What are the three common limitations on the deductibility of a partner’s share of
partnership losses, in the order in which they are applied?
3. Partner X of the XYZ equal partnership has a total basis in her partnership interest
of $30,000. The partnership has $21,000 of nonqualified nonrecourse debt, and
no recourse debt. XYZ has a current ordinary loss of ($120,000). X does not
materially participate in XYZ, and also has another passive activity for which her
share of the income for the year is $5,000. How much X’s share of the XYZ loss
is deductible, and how much and at what level (basis, at-risk amount, passive
activity loss) are X’s carryovers to the next year?
4. If partner X in the previous example sold her interest in XYZ at the beginning of
the next year for $50,000, by how much would the sale increase her taxable
income?
Reading:
1. Great West Boating Ventures is a limited partnership formed to purchase and operate
a fishing boat. The partnership was formed by two partners, I and L, who each
contributed $150,000 cash to form the partnership. The partnership then borrowed
$800,000 on a nonrecourse loan from an unrelated bank, and purchased a boat. The
two partners share all items of partnership income, gain, loss and deduction equally.
a. Over the partnership’s first 3 years of operations, it reported net losses of
($580,000), allocated equally between the two partners. It also made principal
payments against the nonrecourse loan of $50,000. Assuming no distributions or
additional contributions were made to or by the partners over that period, what
will be the partners’ tax bases in their partnership interests at the end of year 3?
b. Assume that at the beginning of year 4, I sells her interest in the partnership to L
for $25,000 cash (plus assumption of I’s share of the partnership’s nonrecourse
debt). How will the sale affect I’s taxable income for year 4?
c. How would your answer to part b change if the nonrecourse loan had been used to
purchase real estate rather than a fishing boat?
2. R is a 25% general partner in Forlorn Partners. Her K-1 from the partnership reports
the following:
Net rental real estate income (loss)
($45,000)
Guaranteed payments
20,000
Interest income
1,500
Unrecaptured Sec. 1250 gain
18,000
Other deductions:
Charitable deductions
750
Investment interest expense
800
R is not a real estate professional. She received the guaranteed payment from the
partnership for legal services provided. The Sec. 1250 gain reported by the
partnership is attributable to the partnership’s sale of one of its rental real estate
properties during the year.
a. Compute R’s net passive loss from Forlorn Partners.
b. What is her net portfolio income?
c. How will the guaranteed payment be classified?
d. Assuming R has no passive income or loss from any other source, by how much
will the information reported on this K-1 increase her taxable income?
Reading:
1. The equal QRS partnership had ($90,000) of rental real estate losses in the current
year. Partner Q is the manager of the rental real estate properties for the partnership.
Q’s AGI for the year is $110,000, but Q has no other passive income. How much of
the losses can Q deduct?
2. The equal ABC partnership owns a restaurant in Dallas and a clothing store in San
Diego. It has $300,000 of loss from the restaurant and a $120,000 loss from the
clothing store. Partner A materially participates in the restaurant, but has little to do
with the clothing store. The partnership also earns $21,000 of interest during the
year. A has no passive income from other activities. How much income or loss does
A have from ABC, and how much of the loss can he deduct?
3. W owns limited partnership interests in three partnerships. She is not a professional
real estate developer. The Schedule K-1s received from the partnerships for last year
reported the following:
Share of liabilities:
Nonrecourse
Qualified nonrecourse financing
Recourse
Ending capital account (tax basis)
Ordinary business income (loss)
Net rental real estate income (loss)
Net Section 1231 gain (loss)
Interest income
Partnership
A
Partnership
B
Partnership
C
$30,000
0
0
20,000
(30,000)
0
0
2,000
0
10,000
0
15,000
5,000
0
7,000
0
5,000
0
5,000
5,000
0
(20,000)
0
0
a. By how much will the partnership investments affect W’s taxable income?
b. Compute W’s carryforward under Code Sec. 704(d). To which partnership(s) is this
carryforward attributable?
c. Determine W’s carryforward under Code Sec. 465.
d. What is her total carryforward under Code Sec. 469? How much is attributable to
partnership A?
Chapter 11 – Sale of a Partnership Interest
Reading:
1. Burlington Enterprises LLC is treated as a partnership for purposes of the federal
income tax. It has the following assets and liabilities:
Cash
Land
Other capital assets
Totals
Basis
$39,000
50,000
100,000
$189,000
FMV
$39,000
200,000
190,000
$429,000
Capital, B
Capital, L
Capital, T
Totals
$84,000
35,000
35,000
35,000
$189,000
$84,000
115,000
115,000
115,000
$429,000
The three partners share equally in profits, losses and capital. T is considering the sale of
her one-third interest in the partnership for $115,000 cash. The buyer is unrelated to
either T or the partnership.
a. What will be the amount realized (i.e., selling price) by T on the sale to the
unrelated buyer?
b. What is T’s basis in the partnership interest at the date of sale?
c. How much gain or loss will T recognize on the sale?
d. What will be the buyer’s tax basis in the newly acquired interest in
Burlington Enterprises?
2. Five years ago, Farley Walton purchased a 30% interest in Oak Motte Partners, a
real estate development partnership. He paid $50,000 for a 30% interest in capital,
profits and losses. This year, at the end of the year, Farley sold his interest in the
partnership for $250,000 cash to an unrelated buyer. The following table
summarizes Farley’s distributive share of partnership profits and losses, as well as
distributions received and additional capital contributions made by Farley over the
five year period:
Year
1
2
3
4
5
Profit/(loss)
($18,000)
(15,000)
25,000
37,000
58,000
Additional Capital
Contributions
$50,000*
7,500
0
0
0
Distributions
Received
0
0
0
45,000
25,000
* The Year 1 capital contribution represents Farley’s initial contribution to acquire his
interest in the partnership.
Assume that Farley has not retained sufficient records to support the information
summarized in the above table. He has not retained copies of Schedules K-1 received
from the partnership over the years, and has been haphazard at best in keeping records of
payments made to or received from the partnership. Farley’s tax preparer, however, has a
copy of the Schedule K-1 received this year.
a. What will be the balance in Farley’s capital account at the end of Year 5, as
reported on Schedule K-1 received for that year? (Assume the capital
account has been properly maintained over the entire period).
b. What is Farley’s tax basis in his partnership interest at the end of Year 5?
c. How much gain will he report in connection with sale of that interest?
3. Assume in question 2 above, that Oak Motte Partners has liabilities outstanding of
$500,000. All other information is the same.
a. What is Farley’s tax basis in his Oak Motte interest at the end of year 5?
b. How much gain will he report in connection with sale of that interest?
4. Assume the same facts as in questions 2 and 3. However, assume that the
distribution received in year 4 consisted of property with a fair market value of
$45,000 and a tax basis of only $30,000. Further assume that under the provisions
of IRC §732, Farley correctly took a $30,000 tax basis in this property following
the distribution.
a. What will be the balance in Farley’s §704(b) capital account at the end of
Year 5?
b. What will be the balance in his capital account on the partnership’s tax basis
balance sheet at the end of Year 5?
c. What is Farley’s tax basis in his partnership interest at the end of year 5?
(Assume the partnership has total liabilities of $500,000, as in question 3
above). Which capital account must Farley’s tax preparer be able to access
in order to compute his basis in the partnership interest (and thus the proper
amount of gain to recognize in connection with sale of that interest)?
d. How much gain will Farley recognize in connection with sale of his
interest?
5. Class Time Partners is a general partnership with the following balance sheets:
Cash
Capital assets
Land
Totals
Basis
$15,000
35,000
85,000
$135,000
FMV
$15,000
75,000
240,000
$330,000
Capital, Claire
Capital, Lorie
Capital, Tom
Totals
$90,000
15,000
15,000
15,000
$135,000
$90,000
80,000
80,000
80,000
$330,000
The partners share equally in profits, losses and capital. Tom is negotiating to sell onehalf of his interest in the partnership to an unrelated buyer. Assume the buyer is willing to
pay $50,000 cash for half Tom’s interest.
a. What will be the amount realized by Tom on the sale?
b. What is the tax basis of the interest to be sold by Tom?
c. How much gain will Tom recognize on the sale?
d. What will be the buyer’s tax basis in the newly acquired interest?
Reading:
Paragraphs 1104, 1105.
1. Aside from the items on the list of unrealized receivables in Paragraph 1103.01,
what important items are “unrealized receivables”?
2. What are the first two categories of inventory items your book mentions?
3. Wolcox Partners has the following balance sheets:
Cash
Investment Securities
Depreciable Equipment
(original cost $58,000)
Land
Capital, D
Capital, E
Capital, F
Basis
$15,000
30,000
FMV
$15,000
36,000
22,000
38,000
$105,000
40,000
95,000
$186,000
$35,000
35,000
35,000
$105,000
$62,000
62,000
62,000
$186,000
a. What are the partnership’s total “hot assets” for purposes of §751(a)?
b. Assume that D sells her interest in the partnership for $62,000. How much gain
will she recognize on the sale?
c. What will be the character of D’s gain?
d. Assume the partnership owned depreciable real estate rather than depreciable
equipment. Assume the original cost of the real estate had been $58,000 as above,
that its tax basis was $22,000, and its fair market value were $40,000 (same as
above). Assuming that D’s holding period for the partnership interest is longterm, how will her share of the built-in gain inherent in the real estate affect the
tax consequences associated with sale of her partnership interest?
4. The RKO Partnership has the following balance sheets at December 31:
Cash
Accounts Receivable
Inventory
Land
Capital, R
Capital, K
Capital, O
Basis
$15,000
0
22,000
140,000
$177,000
FMV
$15,000
36,000
40,000
95,000
$186,000
$59,000
59,000
59,000
$177,000
$62,000
62,000
62,000
$186,000
On that date, O sells his interest in the partnership to unrelated buyer G for $62,000.
a. How much gain or loss will O recognize in connection with the sale to G?
b. What will be the character of O’s gain or loss?
5. The DEF partnership has the following balance sheets:
Land
Inventory
Unrealized Rec.
Basis
$40,000
$20,000
$0
FMV
$52,000
$40,000
$10,000
Liabilities
$12,000
$12,000
Capital, D
Capital, E
Capital, F
$16,000
$16,000
$16,000
$60,000
$30,000
$30,000
$30,000
$102,000
If partner D sells his partnership interest (holding period = two years) to G for $30,000
cash, how much income will D recognize, and what will be its character?
Land
Accounts Receivable
Inventory
Collectibles
Basis
FMV
$60,000 $51,000
0
15,000
24,000 45,000
9,000
3,000
$87,000 $120,000
Liabilities
$30,000
$30,000
Capital, X
Capital, Y
Capital, Z
21,000
18,000
18,000
$87,000
30,000
30,000
30,000
$120,000
If X sells her partnership interest to W for $30,000 cash, what is her gain or loss, and
what is its character?
Land
Inventory
Unrealized Rec.
Basis
$60,000
$27,000
$0
FMV
$81,000
$54,000
$15,000
Liabilities
$30,000
$30,000
Capital, X
Capital, Y
Capital, Z
$21,000
$18,000
$18,000
$87,000
$40,000
$40,000
$40,000
$150,000
If X sells her partnership interest to W for $40,000 cash ($10,000 this year and $30,000
next year), what is her gain or loss each year, and what is its character?
8. F sells her interest in the equal FG partnership for $20,000 cash. F’s basis,
including her share of partnership liabilities, is $40,000. Partnership liabilities are
$65,000, and are split equally between F and G before the sale. F has owned the
partnership interest for more than one year. The partnership owns a collection of
valuable antiques (holding period: two years) that have a FMV of $50,000 and a
basis of $20,000. What is F’s gain or loss, and what is its character?
Would your answer be any different if her holding period for the partnership interest was
less than one year?
What would your answer be if her holding period was long term, and the partnership had
held a stamp collection (holding period: 18 months) with a FMV of $20,000 and a basis
of $30,000, instead of the antique collection?
9. Maria is a 25% partner in Anton Partners. Anton has the following balance sheets:
Cash
Bonds, stocks, other investments
Investment in Breakout Partnership
Capital, Maria
Capital, Other Partners
Basis
$60,000
$27,000
145,000
$232,000
FMV
$60,000
$54,000
270,000
$384,000
$ 58,000
174,000
$232,000
$96,000
288,000
$384,000
Anton has a 15% interest in the profits, losses and capital of Breakout Partnership.
Breakout Partnership’s balance sheets are as follows:
Cash
Inventory
Unrealized Rec.
Other Assets
Liabilities
Partner Capital
Basis
$150,000
270,000
0
550,000
$970,000
FMV
$150,000
540,000
300,000
810,000
$1,800,000
$500,000
470,000
$970,000
$500,000
1,300,000
$1,800,000
a. If Maria sells her interest in Anton Partnership to an unrelated buyer for $96,000,
how much gain will she recognize?
b. What will be the character of Maria’s gain on the sale?
10. Assume in question 9 above that the lower tier partnership (Breakout Partners)
also owned collectibles that had appreciated in value by a substantial amount.
Would the 28% maximum rate on collectibles gain be applicable to any portion of
Maria’s gain from sale of her interest in the upper tier partnership (Anton
Partnership)?
11. Clyde sold his 5 percent interest in Bluegrass Developers, LLC this year,
recognizing a profit of $54,000. The LLC made the election several years ago to
be treated as a partnership for purposes of the federal income tax.
a. How will Clyde know whether the partnership owned hot assets at the date of
sale?
b. How does the government know whether Code Sec. 751(a) applies to the sale of
Clyde’s interest?
c. How soon must Clyde inform the partnership that he sold his interest therein?
Reading:
Paragraphs 1106, 1107.
1. The DEF partnership has the following balance sheets:
Land
Liabilities
D
E
F
Basis
$30,000
FMV
$45,000
$0
$0
$10,000
$10,000
$10,000
$30,000
$15,000
$15,000
$15,000
$45,000
D sold his interest to G for $15,000, with $9,000 payable this year and $6,000 next year.
How much and what character of gain will D have to recognize in each of the two years?
2. The DEF partnership has the following balance sheet:
Land
Building
Basis
$40,000
$20,000
FMV
$62,000
$40,000
Liabilities
$72,000
$72,000
D
E
F
-$4,000
-$4,000
-$4,000
$60,000
$10,000
$10,000
$10,000
$102,000
D sold his interest (holding period = three years) to G for $10,000 cash, with $6,000
payable this year and $4,000 next year. How much and what character of gain will D
have to recognize in each of the two years?
3. Karen is a 20% partner in Smith Partners. The other interests in the partnership
are owned by Karen’s parents and siblings. At the end of the year, the partnership
had the following balance sheets (basis and FMV):
Buildings
Land
Capital, Karen
Capital, Parents
Capital, Siblings
Basis
$100,000
200,000
$300,000
FMV
$175,000
450,000
$625,000
$60,000
150,000
90,000
$300,000
$125,000
306,000
187,500
$625,000
At that time, Karen decided to give her interest in the partnership to her alma mater, State
Tech. Assuming that none of the partnership’s assets constitute ordinary income property,
what will be the amount of Karen’s charitable contributions deduction?
4. Assume the same facts as in question 8, except that the partnership has $250,000
of liabilities outstanding. Karen’s share of these liabilities is $50,000 (20%). With
the liabilities, the partnership’s balance sheets would look as follows:
Buildings
Land
Liabilities
Capital, Karen
Capital, Parents
Capital, Siblings
Basis
$100,000
200,000
$300,000
FMV
$175,000
450,000
$625,000
$250,000
10,000
25,000
15,000
$300,000
$250,000
75,000
187,500
112,500
$625,000
a. How much gain must Karen recognize on transfer of the partnership interest to
her alma mater?
b. What is the amount of Karen’s charitable contributions deduction?
Reading:
Paragraph 1110.
1. Austin owns a 20% interest in Hayes Partners, a general partnership. The
partnership allocates profits and losses among partners in proportion to their
interests in partnership capital. At the end of the year, the partnership had the
following balance sheets (tax basis and FMV):
Buildings
Land
Liabilities
Capital, Austin
Capital, other partners
Basis
$100,000
200,000
$300,000
FMV
$200,000
450,000
$650,000
$450,000
(30,000)
(120,000)
$300,000
$450,000
40,000
160,000
$650,000
Austin is considering transferring his interest in Hayes Partners to his wholly-owned
corporation in exchange for additional stock.
a. Will Austin be required to recognize any gain in connection with the transfer to the
corporation? If so, how much?
b. What will be his tax basis in the additional stock received from the corporation in
connection with the transfer?
c. How would your answers change if the partnership’s liabilities had been only
$200,000, rather than $450,000? (Note: partner capital accounts would change
accordingly.)
Chapter 12 – Partnership Distributions
Reading:
1. How are “advances or drawings of money or property against a partner’s
distributive share of income” treated?
2. W is a partner in the equal WXYZ partnership. At the beginning of the year, his
basis in his partnership interest is $40,000. On Feb. 1, W takes a draw against
earnings of $30,000. On June 1, the partnership pays off $60,000 of debt. On
Sept. 1, W gets a distribution of cash of $30,000 that is not a draw against
earnings. The partnership’s income from the year is $200,000. What is the effect
of each of these items on W’s basis?
3. A is a partner in the equal ABC partnership, and is distributed a note from the
partnership for $30,000, payable by the partnership. A then sells the note for
$27,000. A’s basis in the partnership when the note was distributed was $25,000.
What are the tax effects to A? What would the tax effects have been if A was just
distributed $30,000 cash instead?
4. If a partner is distributed encumbered property, what is the ordering in time of the
following for tax purposes: (1) the assumption of the debt by the distributee
partner, (2) the reduction in the distributee partner’s share of the partnership debt,
and (3) the distribution of the property?
5. Partner D of the equal DEF partnership has a basis in her partnership interest of
$7,000. The partnership distributes property to her with a FMV = $102,000, basis
= $90,000, and an associated liability of $72,000. What is her basis in the
partnership and the property after the distribution?
6. A gain from any distribution, whether liquidating or current, will occur under
what circumstances? Can a partner recognize a loss from a nonliquidating
distribution?
7. Partner N of the calendar-year LMN partnership has a basis in her partnership of
$50,000 at the beginning of the year. She is distributed cash of $40,000 on Feb. 1
and property with a FMV of $30,000 and a basis of $30,000 on Nov. 1. Neither
of these distributions is considered a draw on current partnership income.
i.
What is her gain, if any, her basis in her partnership after each distribution, and her
basis in the property?
ii.
What would your answer be if the dates of the two distributions were switched?
iii.
What is your answer if the cash and property were distributed simultaneously?
8. A group of assets is simultaneously distributed to a partner, but the partner’s basis
in their partnership interest is less than the total of the cash and the basis of the
inventory and unrealized receivables distributed. How is the basis allocated to the
assets distributed?
9. Partner A received the following in a nonliquidating distribution:
Cash
Inventory Item 1
Inventory Item 2
Capital Asset 1
Capital Asset 2
i.
Basis
$20,000
$15,000
$10,000
$20,000
$10,000
$75,000
FMV
$20,000
$18,000
$6,000
$7,000
$20,000
$71,000
Assume A’s basis in the partnership before the distribution was $40,000. What
would the bases of the assets be to A?
ii.
Assume A’s basis in the partnership before the distribution was $60,000. What
would the bases of the assets be to A?
10. When will a partner recognize a loss on a distribution from a partnership?
11. In a liquidating partnership distribution, the partner only got cash and ordinary
income property distributed to her, and the total cash and basis of ordinary income
property distributed to her was greater than her basis in her partnership interest.
How would the outside basis be allocated to the distributed assets?
12. Partner Z of the XYZ partnership receives a liquidating distribution of the
following:
Cash
Inventory
Unrealized receiv.
i.
Basis
$40,000
$30,000
$50,000
FMV
$40,000
$45,000
$45,000
Z’s basis in her partnership interest was $95,000. What is her gain or loss and the
bases of the assets distributed to her?
ii.
Assume Z’s basis in her partnership interest was $130,000. What is her gain or loss
and the bases of the assets distributed to her?
13. In a liquidating partnership distribution, the partner got cash, ordinary income
property, and other property distributed to her, and the total cash and bases of
property distributed to her was less than her basis in her partnership interest. How
would the outside basis be allocated to the distributed assets?
14. Partner Z of the XYZ partnership receives a liquidating distribution of the
following:
Cash
Inventory
Unrealized Receiv.
Land
Building
i.
Basis
$40,000
$30,000
$50,000
$25,000
$45,000
FMV
$40,000
$45,000
$45,000
$40,000
$10,000
Z’s basis in her partnership interest was $215,000. What is her gain or loss and the
bases of the assets distributed to her?
ii.
Assume Z’s basis in her partnership interest was $148,000. What is her gain or loss
and the bases of the assets distributed to her?
Reading:
1. The term “hot assets” includes what two classes of partnership assets?
2. When is Code Sec. 751(b) activated?
3. What are the two most common examples of “unrealized receivables”?
4. Why will the right to receive payments for goods delivered or to be delivered
most likely already be recognized?
5. Are unrealized recievables treated as inventory for purposes of determining if
inventory is “substantially appreciated”? Does this make it more likely or less
likely that the inventory of a cash basis taxpayer will be substantially appreciated?
Why or why not?
6. Under Code Sec. 751(b), inventory is substantially appreciated if what condition
is met?
7. What are the steps that should be followed in determining the taxability of a
distribution to which Code Sec. 751(b) applies?
8. The DEF partnership has the following balance sheet:
Cash
Inventory
Capital, D
Capital, E
Capital, F
Basis
$48,000
24,000
$72,000
FMV
$48,000
60,000
$108,000
$24,000
24,000
24,000
$72,000
$36,000
36,000
36,000
$108,000
If partner D gets a cash distribution in liquidation of $36,000, what will be the tax effects
to D and the partnership?
9. The GHI partnership has the following balance sheet:
Cash
Inventory
Land
Capital, G
Capital, H
Capital, I
Basis
$12,000
48,000
12,000
$72,000
FMV
$12,000
$60,000
36,000
$108,000
$24,000
24,000
24,000
$72,000
$36,000
36,000
36,000
$108,000
If partner G gets distributed the land in complete liquidation, what will be the tax effects
to G and the partnership?
10. The GHI partnership has the following balance sheet:
Inventory
Land
Capital, G
Capital, H
Capital, I
Basis
$48,000
24,000
$72,000
FMV
$72,000
36,000
$108,000
$24,000
24,000
24,000
$72,000
$36,000
36,000
36,000
$108,000
If partner G receives a distribution consisting of ¼ of the inventory, reducing her interest
in the partnership from 1/3 to 1/5, what will be the tax effects to G and the partnership?
Chapter 13 – Basis Adjustments to Partnership Property—Code Secs.
743(b), 734(b)
Reading:
1. When will the sale of a partnership interest cause a termination of the partnership
for tax purposes?
2. The ABCDE partnership had the following occur:
11/30/2009 – A died and left her 20% interest to G.
1/1/2010 – B gave his interest to H. The partnership does not have any debt.
3/1/2010 – C contributed her 20% interest to the C corporation in a tax-free exchange.
6/1/2010 – D sold his 20% interest to E.
12/31/2010 – A new partner, F, was allowed into the partnership with a 1/6 interest in
capital and profits.
Which of these constitutes a sale or exchange of a partnership interest under Code
Section 708, and is there an actual termination of the partnership for tax purposes?
3. Answer the following questions regarding termination of a partnership because of
the sale or exchange of at least 50% interest in partnership profits and capital:
i.
ii.
iii.
iv.
v.
Will the partnership need to get a new taxpayer identification number?
Will the partnership have to file a short period return?
Will the termination end any 704(c) gain to the continuing partners?
Will the termination end any loss carryovers under Code Sections 465, 469, and
704(d)?
Will the tax basis of the assets in the hands of the new partnership be different
from their tax bases to the old partnership?
4.
What is the total amount of a Code Sec. 743(b) adjustment to the basis of
partnership property?
5. What does the partnership have to do (and how do they have to do it) in order to
be allowed to make adjustments to the bases of partnership assets under Code Sec.
743(b)?
6. For how long is a Code Sec. 754 election effective?
7. How do you compute the incoming partner’s share of the adjusted basis to the
partnership of partnership property?
8. Why are the tax losses/gains added/subtracted from the hypothetical liquidating
distributions to get previously taxed capital?
9. The equal XYZ Partnership has the following balance sheets:
Cash
Land
Unrealized Receivables
Collectibles
Basis
$54,000
$15,000
$0
$3,000
$72,000
FMV
$54,000
$42,000
$15,000
$9,000
$120,000
Liabilities
$30,000
$30,000
Capital, X
Capital, Y
Capital, Z
$14,000
$14,000
$14,000
$72,000
$30,000
$30,000
$30,000
$120,000
XYZ has a Code Section 754 election in effect, and X sells her interest to W for $30,000
cash. How much is the Code Sec. 743(b) adjustment?
Cash
Land
Unrealized Receivables
Collectibles
Basis
$54,000
$21,000
$0
$3,000
$78,000
FMV
$54,000
$42,000
$15,000
$9,000
$120,000
Liabilities
$30,000
$30,000
Capital, X
Capital, Y
Capital, Z
$12,000
$18,000
$18,000
$78,000
$30,000
$30,000
$30,000
$120,000
cash. However, the land was contributed by X at a time when its FMV exceeded its basis
by $6,000. How much is the Code Sec. 743(b) adjustment?
11. How is the Code Sec. 743(b) adjustment allocated among the assets of the
partnership?
Property A
Property B
Inventory A
Inventory B
Capital, X
Capital, Y
Capital, Z
Basis
$39,000
$60,000
$3,000
$15,000
$117,000
FMV
$54,000
$42,000
$15,000
$12,000
$123,000
$35,000
$41,000
$41,000
$117,000
$41,000
$41,000
$41,000
$123,000
cash. The two Properties are both capital assets. Inventory A was contributed by X at a
time when its unrealized appreciation was $6,000. At the time of the transfer, X’s share
of the partnership’s basis in partnership assets is $35,000.
i.
How much is the Code Sec. 743(b) adjustment to each asset?
ii.
How much income would be allocated to each partner if, one year later, Property
A is sold for $60,000?
13. The equal XYZ Partnership has the following balance sheet:
Property A
Property B
Inventory A
Inventory B
Capital, X
Capital, Y
Capital, Z
Basis
$39,000
$60,000
$3,000
$15,000
$117,000
FMV
$54,000
$42,000
$15,000
$12,000
$123,000
$35,000
$41,000
$41,000
$117,000
$41,000
$41,000
$41,000
$123,000
cash. The two Properties are both capital assets. Inventory A was contributed by X at a
time when its unrealized appreciation was $6,000. At the time of the transfer, X’s share
of the partnership’s basis in partnership assets is $35,000. How much is the Code Sec.
743(b) adjustment to each asset? What will each partner’s gain or loss be if Property B is
later sold for $45,000?
Reading:
1. If there is no Code Sec. 754 election in effect, can the distribution of money
and/or property affect the bases of partnership assets?
2. What are the four situations related to partnership distributions in which the bases
of partnership assets will be adjusted if a Code Sec. 754 election is in effect?
3. For each of the four distribution situations in which the bases of partnership assets
will be adjusted, which does the partnership have, an increase in partnership asset
bases or a decrease?
4. In general, how will a Code Sec. 734(b) adjustment be allocated between different
classes of partnership property?
5. How is a Code Sec. 734(b) adjustment (a result of a distribution) allocated among
the partnership properties within a class?
6. Partner X is distributed the following in complete liquidation of her partnership
interest:
Cash
Inventory
Land A
Basis
$30,000
$30,000
$35,000
$95,000
FMV
$30,000
$40,000
$20,000
$90,000
X had a basis in her partnership interest of $75,000, so the land’s basis was reduced
$20,000 and had only a $15,000 basis in X’s hands. The remaining YZ partnership
(which did have a Code Sec. 754 election in effect) had the following remaining assets:
Cash
Inventory
Unrealized Receiv.
Land B
Building
i.
Basis
$40,000
$30,000
$50,000
$25,000
$45,000
FMV
$40,000
$45,000
$45,000
$40,000
$10,000
How much of an adjustment to basis would each of the partnership assets have?
ii.
How much of an adjustment to basis would each of the partnership assets have if
X’s basis in her partnership interest had been $140,000?
7. As of the end of the current tax year, Valerie Fleming’s tax basis in her
partnership interest was $45,000. At that time she received a $60,000 nonliquidating cash distribution. Assume that all other partners also received
proportionate cash distributions, so that the provisions of §751(b) do not apply to
the distribution. Immediately following the distribution, the partnership had the
following assets:
Cash
Accounts Receivable
Depreciable Equipment
Land (§1231 Asset)
Building
Basis
$ 10,000
0
50,000
25,000
65,000
$140,000
FMV
$ 10,000
45,000
80,000
145,000
105,000
$385,000
Assume that the partnership originally purchased the depreciable equipment for
$100,000. The original purchase price of the building was $80,000. The equipment is
being depreciated using accelerated depreciation, while the straight-line method is used
for the building. The partnership had a §754 election in effect at the date of the
distribution.
i.
By how much will the partnership be required to adjust its tax basis in its
remaining assets under §734(b) in connection with the distribution to Valerie?
ii.
To which class(es) of assets will the adjustment be allocated?
iii.
How will the adjustment be allocated among the partnership’s remaining assets?
8. Samantha is a forty percent partner in Stevens LLC. Her tax basis in her
partnership interest is $57,000. She received a non-liquidating distribution of real
property (§1231 property to the partnership) with a fair market value of $100,000
and a tax basis of $65,000. Following the distribution, the partnership had
remaining assets as follows:
Basis
Cash
$ 10,000
Real Estate (§1231 Property):
Tract 1
54,000
Tract 2
65,000
Tract 3
71,000
$200,000
FMV
$ 10,000
70,000
45,000
95,000
$220,000
i. Assume the LLC has a §754 election in effect. What will be the amount of the basis
adjustment under §734(b)?
ii. How will the basis adjustment be allocated among the partnership’s remaining
properties?
Chapter 14 – Partner/Partnership Sales and Disguised Sales
Reading:
Paragraphs 1401-1403.02
1. When will a sale of property for a gain between a partner and a partnership
produce ordinary income?
2. What are the closest relatives you can think of that don’t qualify as related
parties?
3. How much of a partnership does a partner have to own in order for them to be
considered related parties?
4. Is a loss from a sale between a partner and a related partnership allowed? How
can the loss be used?
5. Partner A in the ABC partnership (an equal partnership between A, B, and C)
sells some land to the partnership. A’s basis in the land is $200,000, and the
FMV and sales price is $300,000. A had held the land for investment, but ABC is
a developer, so the land is inventory to it. What is the character of the gain?
What would your answer be if B is A’s sister? What would your answer be if B
is A’s aunt?
6. Partner X in the XYZ partnership (an equal partnership between X, Y, and Z)
sells some land to the partnership. X’s basis in the land is $200,000, and the
FMV and sales price is $150,000. Is the loss deductible to X? What would your
answer be if Y is X’s father? What would your answer be if Y is X’s cousin?
Suppose that Y is X’s father, X sells the land to the partnership for $150,000, and
the partnership later sells the land for $180,000. What is the partnership’s gain or
loss on the sale? What is your answer if the partnership sells the land for
$230,000?
7. A partner contributes property to a partnership, and is later distributed cash or
other property. How much time must there be between these two events in order
for there to be a presumption that this is not a disguised sale? How much time
must separate the events for there to be a presumption that it is a disguised sale?
8. Partner D of the equal DEF partnership contributes property (FMV = $100,000,
basis = $60,000) to the partnership. One year later, the partnership distributes
$50,000 cash to partner D. How is the original contribution and the later
distribution treated if it is not a disguised sale? How are they treated if it is a
disguised sale?
Reading:
Paragraphs 1403.04, 1403.05.
1. A partner contributes property to a partnership. The partnership later distributes
the property to another partner. The contributing partner will have to recognize
gain or loss if the latter distribution is made within how many years of the
contribution?
2. How much gain or loss will a contributing partner have to recognize if the
property she contributed to a partnership is distributed in four years?
3. The character of the gain recognized by the contributing partner depends on the
property’s character to the partnership, its character in the hands of the distributee
partner, and the percent of the partnership owned by which partner?
4. Does the contributing partner get to increase (decrease) their basis because of the
gain (loss) they have to recognize when the property is distributed?
5. Suppose Joe contributes land (basis = $40,000, FMV = $50,000) to a partnership
in exchange for a partnership interest and three years later the partnership
distributes the land to Susan (at the time of the distribution the land’s basis =
$40,000, and FMV = $70,000). The land is a capital asset to Joe and the
partnership, but an ordinary asset to Susan. Joe and Susan are both partners in the
partnership. If Joe owns 25% and Susan owns 60% of the partnership at the time
of the distribution, how much gain will Joe have to recognize, what will its
character be, what will be Joe’s basis in his partnership interest, and what is
Susan’s basis in the property (assume Susan’s basis in the partnership interest
before the distribution is $100,000)?
Would your answer be any different if Susan only owned 40%?
What would your answer be if Susan owned 40% and the FMV at the time of the
distribution was only $45,000?
What would your answer be if the property’s FMV at the time of the contribution was
only $35,000, Susan owned 40% of the partnership, and the FMV at the time of the
distribution was only $30,000? What would your answer be if Susan owned 60% of the
partnership?
6. In 2005, Adriana contributes land (FMV = $100,000, basis = $60,000) to the
Apex Partnership, of which she is a 20% partner. Twenty-two months later, the
partnership, which held the land for investment, distributes the land to Beatrice, a
40% partner in Apex, who is a land developer and will hold it for development.
Which Code Section applies here, 704, 707, or 737? Would your answer to the
previous question be any different if the time between contribution and
distribution had been six years instead of 22 months? Assuming the time between
contribution and distribution is six years, what is the tax effect if the FMV of the
land at distribution is $150,000 and its basis is still $60,000? What if the FMV at
distribution was only $70,000? What if the FMV at distribution is only $40,000?
7. If a partner contributes property to a partnership and, within 7 years, is distributed
property by the partnership, the contributing partner will recognize gain equal to
the lesser of the (1) fair market value of the distributed property minus the
partner’s basis in their partnership interest immediately prior to the distribution, or
what amount?
8. What is the difference between a disguised sale under Code Section 707 and a
Code Section 737 disguised sale?
9. In a Code Section 737 transaction in which a gain is recognized, does the
contributing partner get to add the gain to the basis of their partnership interest?
10. In a Code Section 737 transaction in which a gain is recognized, the basis of
which asset is increased by the amount of the gain?
11. Christy contributes land (FMV = $50,000, basis = $30,000) to the ABC
partnership, and four years later gets a distribution (that was not assured at the
time of the original contribution) of another piece of land (FMV = $60,000, basis
= $50,000). Her basis in the partnership interest immediately before the
distribution is only $55,000. Assume that she has not contributed any more
properties to the partnership, so her net precontribution gain is still $20,000 (the
unrealized appreciation on the property she contributed), and has been for four
years. How much gain will she have to realize, what will be her basis in the
partnership after the distribution, and what will the partnership’s basis in the
original contributed property be?
12. Assume the same facts as in the previous problem, except that Christy’s basis in
her partnership interest immediately before the distribution was $30,000, and in
the last four years she had contributed property with a FMV at the time of
$20,000 and a basis of $27,000. Her net precontribution gain was therefore
$20,000 - $7,000 = $13,000. How much gain will she have to realize, what will
be her basis in the partnership after the distribution, and what will the
partnership’s basis in the original contributed property be?
13. A client of yours is a partner in a partnership and wants to contribute appreciated
property to the partnership, but feels that it is likely that she will be distributed
other property within seven years, triggering gain under Code Sec. 737. What
can she do to avoid Code Sec. 737 treatment?
14. Sybil transfers land (FMV = $200,000, basis = $120,000 to the Eve Partnership,
in which she is a 1/3 partner. Twenty months later the partnership distributes
property (FMV = $150,000, basis = $50,000) to Sybil, and her basis in her
partnership interest immediately before the distribution (and before the addition of
any gain under Section 737) is $120,000 Which would this set of transactions be
taxed under, Code Section 707 or 737? If, at the time of the contribution, it was
relatively certain that the distribution would be made, what are the tax effects of
these transactions? Assume that at the time of the contribution the distribution
was not assured in any way. How would these transactions be taxed?
Chapter 15 – Death or Retirement of a Partner
Reading:
1. When does Code Sec. 736 apply?
2. In order for capital to be a material income-producing factor, does it have to be
more significant than the use of labor?
3. Your book says that under Code Sec. 736, a retiring partner’s partnership interest
represents an indirect ownership in what three types of assets?
4. How is a retirement payment allocated among the three categories of assets?
5. What is a Code Sec. 736(b) payment? How are Code Sec. 736(b) payments
treated?
1
6. What is a Code Sec. 736(a) payment? How are Code Sec. 736(a) payments
taxed?
7. The XYZ partnership had the following balance sheet:
Cash
Accounts Receivable
Land
Goodwill
Capital, X
Capital, Y
Capital, Z
Basis
$30,000
0
36,000
0
$66,000
FMV
$30,000
48,000
93,000
15,000
$186,000
$22,000
22,000
22,000
$66,000
$62,000
62,000
62,000
$186,000
X receives a payment of $62,000 cash upon his retirement from the partnership. X was a
general partner, capital was not a material income-producing factor for the partnership,
and the partnership agreement said nothing about making payments to a retiring partner
for their share of goodwill. How would the retirement payment be treated by X and the
partnership?
2
8. The XYZ partnership had the following balance sheet:
Cash
Accounts Receivable
Land
Goodwill
Capital, X
Capital, Y
Capital, Z
Basis
$30,000
0
36,000
0
$66,000
$22,000
22,000
22,000
$66,000
FMV
$30,000
48,000
93,000
15,000
$186,000
$62,000
62,000
62,000
$186,000
In liquidation of his interest X receives a distribution equal to 50% of partnership income
for each of the first two years after his retirement. Partnership income was $80,000 in
each of those years. X was a general partner, capital was not a material incomeproducing factor for the partnership, and the partnership agreement specified that a
retiring partner would be paid for their share of goodwill. How would the retirement
payment be treated by X and the partnership?
3
9. Suppose that X in the above problem had been a limited partner, or capital had
been a material income-producing factor for XYZ. How would the tax treatment
of the distributions have changed, in general?
4

Chapter 1 – What Is a Partnership? Reading: Paragraphs 101106.

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Chapter 1 – What Is a Partnership? Reading: Paragraphs 101­106.

Transcription

Similar documents

Chapter 1 – What Is a Partnership? Reading: Paragraphs 101106.