Escolar Documentos
Profissional Documentos
Cultura Documentos
b.
Sell or lease the property to the partnership, or sell the property to a third party
who then contributes the property to the partnership. pp. C9-26 and C9-27.
c.
Ordinary income recognition is required on a partner's sale of property to the
partnership where the seller owns more than 50% of the capital or profits interests if the property
is either depreciable, or is not a capital asset, in the hands of a partnership. If the partner leases
property to a partnership, the partner retains the depreciation and other deductions with respect to
the property. The leasing partner also avoids the depreciation recapture provisions. Rentals
received from the partnership are taxed as ordinary income. A sale of the property to a third party
is taxed as any other sale would be with no special tax consequences. pp. C9-26 and C9-27.
C9-6 a.
The partner must recognize gain on the contribution of property and assumption of
a liability if the amount of the liability assumed by the other partners exceeds the contributing
partner's basis in the contributed property plus her share of existing partnership liabilities. pp. C95 through C9-7.
b.
The basis in the partnership interest will be decreased by the amount of the liability
assumed by the other partners. pp. C9-7 and C9-8.
C9-7 a, b, and d. p. C9-12.
C9-8 Partnership ordinary income, or Sec. 702(a)(8) income, is the total of partnership income
and deduction items which do not have to be separately stated. This partnership has $100,000 of
ordinary income. Partnership taxable income is the sum of all taxable items which are either
separately stated or included in ordinary income. BW has taxable income of $150,000 ($100,000
ordinary income + $50,000 long-term capital gain). p. C9-17.
C9-9 b, c, d, e, and g. pp. C9-15 through C9-17.
C9-10 The partner's distributive share will equal the sum of his earnings for one-half of his
beginning-of-the-year interest for the entire year and his earnings for the other one-half of his
beginning-of-the-year interest for nine months (calculated on a daily basis). pp. C9-17 through
C9-18.
C9-11 Yes. A limited partner's basis can be increased by recourse liabilities only to the extent the
limited partner is liable to stand an economic loss. This would add to the limited partner's basis
any amounts that he would be obligated to repay a general partner should the general partner have
to pay the debt as well as any amounts of the debt which were guaranteed by the limited partner.
pp. C9-20 through C9-24.
C9-12 Qualified nonrecourse real estate financing is included in the at-risk basis of both general
and limited partners. This financing meets the requirements for qualified nonrecourse real estate
financing. pp. C9-24 and C9-25.
C9-13 The Sec. 704(d) loss limitation rule is less restrictive than the at-risk rules. Section 704(d)
limits the loss to the adjusted basis (before reduction by current year's losses) of a partner's
interest in the partnership at the end of the partnership tax year in which the loss is incurred. The
at-risk rules reduce this basis amount by any nonrecourse debt. pp. C9-23 through C9-25.
C9-2
C9-14 As a limited partner in the JRS Partnership, Jeff is almost certainly subject to the passive
loss limitation rules on losses from this partnership. Accordingly, income from a general
partnership in which Jeff does materially participate (and thus earns active income) cannot be used
to offset the passive losses. Losses from the JRS Partnership can only be used to offset passive
income or can be claimed when Jeff sells the entire interest in the JRS Partnership or the
partnership terminates. pp. C9-25 and C9-26.
C9-15 ABC Partnership will hold the land as inventory for resale to customers and not as a
capital asset. Since Helen owns more than a 50% interest in the ABC Partnership, the sale of the
land to the partnership will generate ordinary income instead of capital gain for Helen. If Helen
instead contributes the land to the partnership, no gain will be recognized until the partnership
sells the lots. Then, when each lot is sold, Helen will recognize the pre-contribution gain as well
as her share of any post-contribution appreciation and all of the gain will be ordinary income
taxable at a marginal rate(s) of up to 39.6%. In total, the ordinary income under this alternative
will be the same as if Helen had sold the land to the partnership. A contribution will allow her to
delay the gain recognition. Even better results occur if Helen can dispose of 5% or more of her
partnership interest so then she owns, directly and indirectly, 50% or less of the ABC Partnership.
If she owns 50% or less, she can recognize capital gain on the sale of the land to the partnership
and use these gains to offset any capital losses she may have already recognized or that she may
desire to recognize. The capital gains are taxed to most taxpayers at a maximum marginal tax rate
of 20% or up to 19.6 percentage points below the rate applicable to ordinary income.
Alternatively, she could sell the land to a third party who would then contribute the land to the
ABC Partnership. Her gain on the sale of the land would then be capital gain, and the
contributing partner would recognize no gain when the land was transferred to the partnership.
pp. C9-26 and C9-27.
C9-16 A guaranteed amount is stated as a fixed dollar amount regardless of the partnership's
income or loss. A guaranteed minimum can only be determined after the profitability of the
partnership's operations has been determined. A guaranteed minimum may be paid partly out of
the partner's distributive share and partly as a guaranteed payment which total to the amount of
the guaranteed minimum. pp. C9-27 and C9-28.
C9-17 Regulation Sec. 1.707-1(c) provides that a partner reports guaranteed payments as
ordinary income in the partner's tax year which includes the last day of the partnership's tax year
in which the partnership deducted the payments under its method of accounting. A partner's
distributive share of partnership items (determined under Sec. 702(a)) is reported in the tax year
which includes the last day of the partnership's tax year. Thus, to report the two payments is the
same to Tracy. pp. C9-27 and C9-28.
C9-18 The Sec. 704(e) rules apply only to a capital interest in a partnership, where capital is a
material income producing factor, and where the family member is the true owner of the interest.
If capital is a material income producing factor for the partnership, the family partnership rules
apply. pp. C9-29 and C9-30.
C9-19 The distributive shares allocated to Andrew and Steve will be combined and then a
reasonable salary for Andrew's personal services will be allocated to him. The remaining portion
C9-3
of the distributive share (after a reasonable salary to Andrew) will be allocated 30/50ths to
Andrew and 20/50ths to Steve. pp. C9-29 and C9-30.
Does Bob recognize any gain on the formation? When will his
precontribution gain be recognized?
What is Bob's basis and holding period for his partnership interest?
Does Kate recognize any loss on the contribution of property in exchange for her
partnership interest? When will her precontribution loss be recognized? What will
the character of the loss be?
What is Kate's basis and holding period for the partnership interest she
received in exchange for property?
What basis and holding period does the partnership have in the property received?
What happens to the depreciation recapture for the building?
Did Kate receive any of her partnership interest for services?
Bob must determine his basis in the partnership interest ($65,000 = $95,000 - $60,000 +
$30,000 share of liabilities) and his holding period for his interest in the partnership
(begins with his ownership of the office building). Since Bob recognizes no gain or loss,
he does not have to be concerned with any recapture potential under Sec. 1250. Bob will
have to recognize precontribution gain on the office building at a future date.
Kate must determine her basis in the partnership interest ($105,000 = $75,000 + $30,000
share of liabilities) and her holding period for her interest in the partnership (begins with
her ownership of the land). Kate recognizes no loss at the time of the partnership
formation. If the land was a capital asset to Kate and the land is sold by the partnership
within five years of Kate's contribution, the loss will be a capital loss up to $25,000 and
that capital loss will be allocated to Kate as a precontribution loss. After five years, the
character of the loss will be determined by the character of the land to the partnership, but
Kate will still have to report any precontribution loss which is recognized. Guaranteed
payments will be reported as ordinary income.
The partnership must be concerned with the basis and holding period of the assets it
receives (carryover for both basis and holding period). The partnership can deduct from
ordinary income the guaranteed payments made to Kate.
There is an additional tax issue which must be addressed. Bob contributed property with a
net value of $70,000 for a one-half interest in the partnership while Kate contributed
property with a net value of only $50,000 for a one-half interest in the same partnership.
The total partnership has a net value of $120,000 ($130,000 + $50,000 - $60,000
liability). There must be some explanation. One possibility is that Bob has made a
$10,000 gift to Kate. If this is so, both partners bases must be adjusted to reflect the gift.
Alternatively, the facts suggest that Kate may be receiving some of her partnership interest
C9-4
in exchange for her services in managing the business for the first year while receiving no
guaranteed payment. If this is so, Kate must recognize ordinary income and increase her
basis for the value of the partnership interest she received in exchange for services. If
Kate is receiving some of her partnership interest for services, the partnership must
recognize gain or loss in the partnership assets she is deemed to receive and must adjust
the basis of the assets for her deemed recontribution. The partnership must also deduct
the guaranteed payment. pp. C9-5 through C9-12.
C9-21
C9-22
What is Cara's basis and holding period for her partnership interest?
The receipt of the partnership interest is not a taxable event. Under Rev. Proc. 93-27
(1993-2 C.B. 343), the receipt of a profits interest is taxable only under circumstances where the
FMV of the interest can be readily determined. This situation does not fit into one of the three
C9-5
exceptions contained in the revenue procedure guidelines as being a taxable event. pp. C9-10
through C9-12.
C9-23
$15,000
4,000
$19,000
(20,000)
$ 1,000
compensation amount. Then the remainder of the income originally allocated to Daniel and David
would be reallocated to them based on their relative capital interests. pp. C9-29 and C9-30.
Problems
C9-26 a.
b.
Basis of contributed property
Minus: Partnership assumption
of individual liabilities
Plus: Share of partnership liabilities
Basis in partnership
Suzanne
$59,000
Bob
$95,000
40,000
$99,000
(80,000)a
40,000
$55,000
Bob's basis can also be determined by reducing the basis of his contributed property by the
liabilities assumed by the other partner ($95,000 - $40,000 = $55,000).
a
c.
The partnership takes a carryover basis in each asset:
$14,000; land, $45,000; and building, $50,000.
d.
Amount realized
Minus: Adjusted basis
Realized gain
inventory (securities),
$20,000
( 14,000)
$ 6,000
$ 9,000
( 50,000)
($41,000)
$15,000
50,000
($35,000)
Total loss
Minus: precontribution loss
Post-contribution loss
$41,000
(35,000)
$ 6,000
Pre-contribution loss
Plus: Share of post-contribution
loss (0.15 x $6,000)
Dave's distributive share of loss
$35,000
900
$35,900
$ 5,100
Note that each partner can claim his share of the $5,100 loss only when he has enough basis in his
partnership interest. pp. C9-5 through C9-11, and C9-18 and C9-19.
C9-28 a.
Julie and Kay recognize no income on the partnership formation. Susan
recognizes ordinary income equal to the value of the partnership interest received, or $30,000.
b.
Julie
Kay
$ -027,000
$80,000
36,000
(90,000)
$27,000
$26,000
Susan
N/A
$27,000
30,000
$57,000
c.
Accounts receivable
$ -0Land
50,000
Building
30,000
Organizational expenditure
30,000
d.
All of Kay's precontribution loss is allocated to her and the remaining loss, if any, is
shared ratably among the three partners.
Julie
(30%)
Precontribution loss*
Postcontribution loss**
Total loss
Kay (40%)
$30,000
800
$30,800
$ 600
$ 600
Susan
(30%)
$ 600
$ 600
Total (100%)
$30,000
2,000
$32,000
C9-30 Marjorie:
Eldorado:
C9-10
C9-31 a.
6/30
Partner
Name
Beth
Cindy
Delux
Partnership
Interest
Tax
Year
Months
Deferred
1/3
1/3
1/3
6/30
9/30
10/31
0
3
4
9/30
Total
.00
1.00
1.33
2.33
Months
Deferred
9
0
1
10/31
Total
3.00
.00
.33
3.33
Months
Deferred
8
11
0
Total
2.67
3.67
.00
6.34
The partnership must use a June 30 year-end, or with a Sec. 444 election, a tax year which
ends on March 31, April 30, or May 31.
b.
The natural business year which ends on January 31.
c.
The partnership would be required to use an October 31 year-end, or the tax year
of the majority partner. Alternatively, if IRS permission was received, a natural business year-end
(January 31) could be used, or with a Sec. 444 election, a tax year which did not exceed a threemonth deferral of income could be used. pp. C9-12 through C9-15.
C9-32 a.
The tax year-end of majority partners Bipin and Damien is December 31, and this
is the required year-end for the partnership.
b.
Yes. Possible year-ends are those that allow for no more than a three-month
deferral from the required December 31 year-end. These include September 30, October 31, and
November 30. pp. C9-12 through C9-15.
C9-33 a.
$ 19,000*
18,000
29,000*
25,000**
28,000
4,000
5,000
23,000
16,000*
37,000
164,000
*Items which must be separately stated so that investment interest limitation and portfolio income
can be properly reported by the partners.
**The land was held by Karen as inventory and therefore will generate $40,000 of ordinary
income if sold by the partnership within five years of the contribution. All pre-contribution gain
($25,000) must be allocated to Karen while the remaining $15,000 of post-contribution gain is
shared by all of the partners in part b.
b.
$83,000
15,000
(36,000)
$62,000
Transaction
INCOME
Operating Profit
Rental income
Interest municipal bonds
Interest corporate bonds
Dividend
Gain on investment land
LTCG
STCL
Sec. 1231 gain
Sec. 1251 gain
EXPENSES
Depreciation
Interest:
Mortgage
Mun. bond loan
Guaranteed payment
TOTAL
(a.)
Taxable
Income
(b.)
Ordinary
Income
$ 94,000
30,000
15,000
3,000
20,000
60,000
10,000
( 7,000)
9,000
44,000
$ 94,000
31,000*
$ 94,000
3,000
20,000
66,000b
10,000
( 7,000)
9,000
44,000
44,000
( 39,000)
( 41,000)d
( 29,000)
( 18,000)
( 5,000)
( 30,000)
$186,000
( 18,000)
Book
Income
-0- e
$211,000
(c.)
Separately
Stated Items
$ 31,000
15,000
3,000
20,000
66,000c
10,000
( 7,000)
9,000
( 30,000)
$ 79,000
12,000
( 18,000)
( 5,000)
30,000
Each partner will be notified of his share of low income housing expenditures qualifying for the
credit.
pp. C9-15 through and C9-20.
C9-35 a.
Partner
Items
Total
Ordinary income
Long-term capital gain
Short-term capital loss
Charitable contribution deduction
$120,000
18,000
6,000
20,000
Becky
Chuck
Dawn
$24,000
3,600
1,200
4,000
$36,000
5,400
1,800
6,000
$60,000
9,000
3,000
10,000
b.
Partnership
Total
Becky's
Amount
Chuck's
Amount
$59,507
8,925
2,975
9,918
20%
20%
20%
20%
$11,901
1,785
595
1,984
30%
30%
30%
30%
$17,852
2,678
893
2,975
$60,493
9,074
3,025
10,082
25%
25%
25%
25%
$15,123
2,269
756
2,521
25%
25%
25%
25%
$15,123
2,269
756
2,521
C9-36 a.
Ordinary loss
LTCG
Sec. 1231 gain
STCL
Total
Amy (25%)
Brad (35%)
($120,000)
190,000
40,000
( 30,000)
($30,000)
47,500
10,000
( 7,500)
($42,000)
66,500
14,000
( 10,500)
Craig (40%)
($48,000)
76,000
16,000
( 12,000)
b.
Brad
Partnership
Ordinary Loss
1/1-6/30a
7/1-12/31b
LTCG
1/1-6/30
7/1-12/31
Sec. 1231
1/1-6/30
7/1-12/31
STCL
1/1-6/30
7/1-12/31
35%
Craig
55%
($59,507)
( 60,493)
($20,827)
94,219
95,781
32,977
19,836
20,164
6,943
( 14,877)
( 15,123)
( 5,207)
($33,271)
40%
($23,803)
20%
($12,099)
32,688
52,680
11,090
19,156
7,934
4,033
( 5,951)
( 8,318)
( 3,025)
Dave reports $4,800 ($8,000 x 0.60) of ordinary income and $2,400 ($4,000 x 0.60) of long-term
capital gain.
pp. C9-18 through C9-19.
C9-38 a.
Yes. If any income is allocated in any way other than according to the partner's
interest in the partnership, there is a special allocation. Neither the capital gain nor the ordinary
income is allocated according to the partners' 50-50 interests. However, the special allocation
does not meet the test of having substantial economic effect, and will not be acceptable to
IRS.
b.
The special allocation affects only the partners's tax consequences and not
economic consequences. Each partner's distributive share is still $100,000. Accordingly,
special allocation will not be accepted, and the income must be allocated according to
partners' 50-50 interest in the partnership. The partners must report the following:
Capital gain
Ordinary income
Total
$ 60,000
140,000
Clark
$30,000
70,000
the
the
the
the
Lois
$30,000
70,000
$ 6,000
15,000
2,000
40,000
$63,000
Purchase price
Plus: Share of liabilities (0.40 x $200,000)
$ 50,000
80,000
b.
c.
39,000
6,000
( 8,000)
$167,000
$ 50,000
60,000
39,000
6,000
32,000
( 30,000)
$157,000
$ 50,000
39,000
6,000
32,000
$127,000
City Corporation
January 1 basis
Short-term capital gain
Nonrecourse liability
Sec. 704(d) basis before losses
At-risk basis before losses
$300,000
150,000
50,000
$500,000
$450,000
$300,000
150,000
50,000
$500,000
N/Aa
$450,000
50,000
450,000
$450,000
50,000
500,000
City Corporation is not closely-held and is therefore exempt from the at-risk rules.
b.
The basis after the loss is zero for each partner.
c.
The nonrecourse liability is considered to be at-risk. Therefore, both partners can
deduct the full $500,000 loss and have a zero basis for their partnership interest after the year's
operations. pp. C9-24 and C9-25.
a
C9-44
Gary
(general
Tax Basis
Beginning basis
Recourse debt
Nonrecourse debt
Operating loss
Deductible loss
Ending basis
$ 60,000
18,000
60,000
$138,000
(120,000)
$ 18,000
At-Risk Basis
$ 60,000
18,000
$ 78,000
( 78,000)
$ -0-
Mary
(general
Tax Basis
At-Risk Basis
$40,000
12,000
40,000
$92,000
(80,000)
$ 40,000
12,000
$ 52,000
( 52,000)
$ -0-
$12,000
Gary recognizes a $78,000 loss and Mary recognizes a $52,000 loss both of which have
been limited because of the at-risk rules.
pp. C9-24 and C9-25.
C9-45 a.
Eve
Tom
Beginning basis
Plus: Share of LTCG
Basis before losses
$46,000
8,000
$54,000
$75,000
12,000
$87,000
Share of losses
$56,000
$84,000
$54,000
54,000
N/A
$87,000
87,000a
12,000b
Deductible loss
$54,000
$12,000
Since the partnership has no nonrecourse liabilities, the at-risk basis equals the regular
basis for both partners and the at-risk rules do not limit the losses they can deduct.
a
Eve materially participates in the partnership business so the partnership's ordinary loss is
an active loss for her. Tom is a limited partner and does not materially participate so his
deduction for losses is limited to the passive income he earns from this (and all other)
passive activities during this year. Since the problem states that he has no other income
except his salary, Tom's losses can be deducted only to the extent of his share of the
income (long-term capital gain) from this partnership. [Note that these rules determine the
b
amount of loss which Tom can deduct. The character (and the treatment of Tom's income
on the tax return) remains $12,000 ordinary loss and $12,000 long-term capital gain.]
b.
The additional $100,000 recourse debt would increase both the Sec. 705 basis and
the at-risk basis for Eve. This would give her enough basis to deduct her full $56,000 distributive
share of partnership losses. As a limited partner, Tom would have a basis increase only if he had
some agreement to assume an economic risk of loss related to the recourse borrowings. Even if
he had a basis increase (which is unlikely), Tom would not likely be able to deduct any additional
loss since the passive activity loss rules still limit passive losses to passive income.
pp. C9-24 through C9-26.
C9-46 a.
Kate
Chad
Stan
$100,000
20,000
$120,000
$ 70,000
$100,000
20,000
$120,000
$ 70,000
$ 50,000
10,000
$ 60,000
$ 35,000
$ 80,000
Active
$ 70,000
$ 80,000
Passive
$ 20,000*
$ 40,000
Passive
$ 10,000*
*The passive losses are deductible to the extent of passive income earned during the year. This
assumes there is no passive income from other sources which can be offset by the passive loss and
that the capital gains are not portfolio income.
b.
Rental activities are passive activities so Kate and Chad are limited to a $25,000
loss deduction which may be reduced if Kate and Chad have AGIs in excess of $100,000. Stan
does not actively participate in the rental activity so he has the same deductible loss as above. pp.
C9-24 through C9-26.
C9-47 a.
Amount realized
$ 40,000
Minus: Adjusted basis
( 60,000)
Realized loss
($20,000)
The loss cannot be recognized because Susan is deemed to own 100% of the partnership. The
partnership has a cost basis of $40,000 in the securities.
b.
Amount realized
$ 40,000
Minus: Adjusted basis
( 50,000)
Realized loss
($10,000)
The realized loss is fully recognized because Susan owns only 15% of the partnership.
c.
Amount realized
$ 40,000
Minus: Adjusted basis
( 30,000)
Realized gain
$ 10,000
The entire $10,000 is recognized as a capital gain, even though Susan owns, directly and
indirectly, 65% of the partnership, because the property is a capital asset to the partnership.
Amount realized
$ 30,000
Minus: Adjusted basis
( 40,000)
Realized loss
($10,000)
The loss is fully recognized by Jack as a capital loss.
b.
Amount realized
$ 30,000
Minus: Adjusted basis
( 44,000)
Realized loss
($14,000)
Jack's loss is not recognized since he owns directly and indirectly more than 50% of the
partnership.
c.
Amount realized
$ 30,000
Minus: Adjusted basis
( 20,000)
Realized gain
$ 10,000
The gain is recognized by Jack as a capital gain.
d.
The gain is recognized as ordinary income since Jack owns directly and indirectly
100% of the partnership and the land is ordinary income property to the partnership.
pp. C9-26 and C9-27.
C9-49
Maura
KLM
15%
35%
Kara
(Maura's Mother)
45%
20%
3%
Lynn
Maura's interest in KTV is counted as indirectly owned by Kara. Therefore, KLM and KTV are
partnerships in which the same persons own directly or indirectly more than 50% of the capital or
profits interests.
a.
Amount realized
Minus: Adjusted basis
Realized loss
The loss is not recognized by the KTV Partnership.
b.
Amount realized
Minus: Adjusted basis
Realized gain
The gain is recognized as a capital gain by the KTV Partnership.
$50,000
(80,000)
$30,000
$50,000
(23,000)
$27,000
c.
Amount realized
Minus: Adjusted basis
Realized gain
The gain is recognized as ordinary income by the KTV Partnership.
$50,000
(35,000)
$15,000
$23,000
(10,000)
$13,000
$14,000
Allocation to
Partner:
Scott
$5,000 OI
$6,500 OI
$7,000 LTCG
$5,000 OI
$6,500 OI
$7,000 LTCG
$ 90,000
70,000a
$160,000
Allocation to
Partner:
Allen
$35,000
$35,000
$ 90,000
35,000
$125,000
b.
AB
Partnership
Allocation to
Partner:
Allen
$160,000
$80,000
$ 80,000
-0$160,000
(10,000)
$70,000
10,000
$ 90,000
$ 90,000
( 80,000)
$ 10,000
c.
AB
Partnership
LTCG
Guaranteed payment
Minus: Ordinary loss allocatedb
Total received
$140,000
80,000
( 80,000)
$140,000
Allocation to
Partner:
Allen
$70,000
(40,000)
$30,000
$ 70,000
80,000
( 40,000)
$110,000
$ 10,000
40,000
(40,000)a
$ 10,000
b.
Allocation to
Partner:
Pam
$ 3,000
40,000
(12,000)
$31,000
$ 7,000
( 28,000)
($21,000)
PS
Partnership
Guaranteed payment
Ordinary income allocated
Sec. 1231 gain
Total received
$ 35,000
35,000b
60,000
$130,000
Allocation to
Partner:
Pam
$35,000
Susan
7,000
12,000
$54,000
$28,000
48,000
$76,000
c.
Guaranteed payment
Ordinary income allocated
Total received
$ 12,000
108,000c
$120,000
Allocation to
Partner:
Pam
$12,000
48,000
$60,000
$120,000
x 0.40
$48,000
12,000
$60,000
$60,000
$60,000
$ 70,000
10,000
20,000
$100,000
$160,000
( 70,000)
$ 90,000
$ 54,000
18,000
18,000
Total
$ 90,000
In addition to his distributive share, Steve would receive $70,000 of ordinary income from
the guaranteed payment, or $124,000.
pp. C9-29 through C9-30.