Exam 10: Partnerships: Formation, Operation, and Basis

Your client owns a parcel of land that has depreciated in value. He wants to know if there is a way he can contribute the property to his partnership, have the partnership sell the property, and convert the existing capital loss into an ordinary loss. He also wants to know if part of the loss would be allocated to his other partners. What is your reaction?

If the partnership properly makes an election for treatment of a specific tax item, the partner is bound by that treatment.

In the current year, the CAR Partnership received revenues of $400,000 and paid the following amounts: $160,000 in rent, utilities, and salaries; a $40,000 guaranteed payment to partner Ryan; $20,000 to partner Amy for consulting services; and a $40,000 distribution to 25% partner Cameron. In addition, the partnership realized a $12,000 net long­term capital gain. Cameron's basis in his partnership interest was $60,000 at the beginning of the year, and included his $25,000 share of partnership liabilities. At the end of the year, his share of partnership liabilities was $15,000. a. How much income must Cameron report for the tax year? b. What is Cameron's basis in the partnership interest at the end of the year?

Binita contributed property with a basis of $40,000 and a value of $50,000 to the BE Partnership in exchange for a 20% interest in partnership capital and profits. During the first year of partnership operations, BE had net taxable income of $30,000 and tax-exempt interest income of $10,000. The partnership distributed $10,000 cash to Binita. Binita's adjusted basis (outside basis) for her partnership interest at year­end is:

PaulCo, DavidCo, and Sean form a partnership with cash contributions of $80,000, $50,000 and $30,000, respectively, and agree to share profits and losses in the ratio of their original cash contributions. PaulCo uses a January 31 fiscal year-end, while DavidCo and Sean use a November 30 and December 31 year-end, respectively. The partnership must use the least aggregate deferral method to determine its year end.

Cassandra is a 10% limited partner in C&C, Ltd. Her basis in the interest is $60,000 before loss allocations, including her $30,000 share of the partnership's nonrecourse debt. (This debt is not qualified nonrecourse financing.) Cassandra is also a 10% limited partner in MNOP, in which her basis is $30,000. Cassandra is allocated an $80,000 loss from C&C, and $20,000 of income from MNOP. How much of the loss from C&C may Cassandra deduct? Under what Code provisions are the remaining losses suspended?

If a partnership allocates losses to the partners, the partners must first apply the passive loss limitations, then the basis limitation, and finally the at-risk limitations. If all three hurdles are met, the partner may deduct the loss.

Mark and Addison formed a partnership. Mark received a 25% interest in partnership capital and profits in exchange for land with a basis of $40,000 and a fair market value of $60,000. Addison received a 75% interest in partnership capital and profits in exchange for $180,000 of cash. Three years after the contribution date, the land contributed by Mark is sold by the partnership to a third party for $76,000. How much taxable gain will Mark recognize from the sale?

Maria owns a 60% interest in the KLM Partnership. Four years ago her father gave her a parcel of land. The gift basis of the land to Maria is $60,000. In the current year, Maria had still not figured out how to use the land for her own personal or business use; consequently, she sold the land to the partnership for $50,000. The partnership immediately started using the land as a parking lot for its employees. Maria may recognize her $10,000 loss on the sale.

What are "syndication costs" and how are they treated for tax purposes?

Items that are not required to be shown on the partners' Schedules K­1 include AMT adjustments and preferences and taxes paid to foreign countries, as AMT and the foreign tax credit are calculated by the partnership.

Match each of the following statements with the terms below that provide the best definition. a. Organizational choice of many large accounting firms. b. Partner's percentage allocation of current operating income. c. Might affect any two partners' tax liabilities in different ways. d. Brokerage and registration fees incurred for promoting and marketing partnership interests. e. Transfer of asset to partnership followed by immediate distribution of cash to partner. f. Must have at least one general and one limited partner. g. All partners are jointly and severally liable for entity debts. h. Theory treating the partner and partnership as separate economic units. i. Partner's basis in partnership interest after tax­free contribution of asset to partnership. j. Partnership's basis in asset after tax­free contribution of asset to partnership. k. Owners are "members." l. Theory treating the partnership as a collection of taxpayers joined in an agency relationship. m. Allows many unincorporated entities to select their Federal tax status. n. No correct match provided. -Check the box regulations

Kristie is a 30% partner in the KKM Partnership. During the current year, KKM reported gross receipts of $280,000 and a charitable contribution of $30,000. The partnership paid office expenses of $80,000. In addition, KKM distributed $20,000 each to partners Kaylyn and Megan, and the partnership paid partner Kaylyn $20,000 for administrative services. Kristie reports the following income from KKM during the current tax year:

Harry and Sally are considering forming a partnership. Both taxpayers use the calendar year and are cash basis taxpayers. The partnership will not be a tax shelter. The partners are uncertain as to whether the partnership should use the cash or accrual method of accounting. Also, the idea of a tax deferral in the first year of operations has led them to consider using a June 30 fiscal year-end for the partnership. As their tax adviser, identify the issues that must be considered in selecting an accounting method and tax year for the partnership.

Partners' capital accounts should be determined using the same method on Form 1065 Schedule L, Form 1065 Schedule M-2, and the Schedules K-1 prepared for the partners.

Paul sells one parcel of land (basis of $100,000) for its fair market value of $160,000 to a partnership in which he owns a 60% capital interest. Paul held the land for investment purposes. The partnership is in the real estate development business, and will build residential housing (for sale to customers) on the land. Paul will recognize:

Which one of the following is not shown on the partnership's Schedule K on Page 4 of Form 1065?

Misty and John formed the MJ Partnership. Misty contributed $50,000 of cash in exchange for her 50% interest in the partnership capital and profits. During the first year of partnership operations, the following events occurred: the partnership had a net taxable income of $20,000; Misty received a distribution of $12,000 cash from the partnership; and Misty had a 50% share in the partnership's $60,000 of recourse liabilities on the last day of the partnership year. Misty's adjusted basis for her partnership interest at year end is:

George and James are forming the GJ Partnership. George contributes $600,000 cash and James contributes nondepreciable property with an adjusted basis of $400,000 and a fair market value of $750,000. The property is subject to a $150,000 liability, which is also transferred into the partnership and is shared equally by the partners for basis purposes. George and James share in all partnership profits equally except for any precontribution gain, which must be allocated according to the statutory rules for built-in gain allocations. a. What is James's adjusted tax basis for his partnership interest immediately after the partnership is formed? b. What is the partnership's adjusted basis for the property contributed by James? c. If the partnership sells the property contributed by James for $800,000, how is the tax gain allocated between the partners?

Match each of the following statements with the terms below that provide the best definition. a. Adjusted basis of each partnership asset. b. Operating expenses incurred after entity is formed but before it begins doing business. c. Each partner's basis in the partnership. d. Reconciles book income to "taxable income." e. Tax accounting election made by partnership. f. Tax accounting calculation made by partner. g. Tax accounting election made by partner. h. Does not include liabilities. i. Designed to prevent excessive deferral of taxation of partnership income. j. Amount that may be received by partner for performance of services for the partnership. k. Computation that determines the way recourse debt is shared. l. Will eventually be allocated to partner making tax-free property contribution to partnership. m. Partner's share of partnership items. n. Must generally be satisfied by any allocation to the partners. o. Justification for a tax year other than the required taxable year. p. No correct match is provided. -Economic effect test