54. LO.7, 9, 12 Assume the same facts as in Problem 53. On the first day of the third tax year, the partnership sold the equipment for $150,000 and distributed the cash in accordance with the partnership agreement. The partnership was liquidated at this time.
a. Calculate the partners’ bases in their partnership interests after reflecting any gain or loss on disposal of the equipment.
b. How will partnership cash balances be distributed to the partners upon liquidation?
c. What observations can you make regarding the value of a deduction to each partner?
55. LO.10 The MGP General Partnership was created on January 1 of the current year by having
Melinda, Gabe, and Pat each contribute $10,000 cash to the partnership in exchange for a one-third interest in partnership income, gains, losses, deductions, and credits. On December
31 of the current year, the partnership balance sheet reads as follows:
Basis FMV Basis FMV
Assets $60,000 $75,000 Recourse debt $30,000 $30,000
Melinda, capital 14,000 19,000
Gabe, capital 14,000 19,000
Pat, capital 2,000 7,000 $60,000 $75,000
Pat’s capital account is less than Melinda’s and Gabe’s capital accounts because Pat has withdrawn more cash than the other partners have.
How do the partners share the recourse debt as of December 31 of the current year?
56. LO.3, 9, 10 Paul and Anna plan to form the PA LLC by the end of the current year.
The members will each contribute $80,000 of cash, and in addition, the LLC will borrow $240,000 from First State Bank. The $400,000 will be used to buy an investment property.
The property will serve as collateral, and both members will be required to personally guarantee the debt.
The tentative agreement provides that 65% of operating income, gains, losses, deductions, and credits will be allocated to Paul for the first five years the LLC is in existence.
The remaining 35% is allocated to Anna. Thereafter, all LLC items will be allocated equally. The agreement also provides that capital accounts will be properly maintained and that each member must restore any deficit in the capital account upon the LLC’s liquidation.
The LLC members would like to know, before the end of the tax year, how the $240,000 liability will be allocated for basis purposes. Using the format (1) facts, (2) issues, (3) conclusion, and (4) law and analysis, draft a memo to the tax planning file for PA LLC that describes how the debt will be shared between Paul and Anna for purposes of computing the adjusted basis of each LLC interest.
57. LO.9, 10, 12, 17 The BCD Partnership plans to distribute cash of $20,000 to partner
Brad at the end of the tax year. The partnership reported a loss for the year, and Brad’s share of the loss is $10,000. At the beginning of the tax year, Brad’s basis in his partnership interest, including his share of partnership liabilities, was $15,000. The partnership expects to report substantial income in future years.
a. What rules are used to calculate Brad’s ending basis in his partnership interest?
b. How much gain or loss will Brad report for the tax year?
c. Will the deduction for the $10,000 loss be suspended? Why or why not?
d. Could any planning opportunities be used to minimize any negative tax ramifications of the distribution? Explain.
58. LO.10, 12 Jasmine Gregory is a 20% member in Sparrow Properties, LLC, which is a lessor of residential rental property. Her share of the LLC’s losses for the current year is $100,000. Immediately before considering the deductibility of this loss, Jasmine’s capital account (which, in this case, corresponds to her basis excluding liabilities) reflected a balance of $50,000. Jasmine has personally guaranteed a $10,000 debt of the LLC that is allocated to her as a recourse debt. Her share of the LLC’s nonrecourse debt is $30,000.
This debt cannot be treated as qualified nonrecourse debt. Jasmine spends several hundred hours a year working for Sparrow Properties.
Jasmine is also a managing member of Starling Rentals, LLC, which is engaged in long-term (more than 30 days) equipment rental activities. (This is considered a passive activity.) Jasmine’s share of Starling’s income is $36,000.
Jasmine’s modified adjusted gross income before considering the LLCs’ activities is $300,000. The “active participation” rental real estate deduction is not available to Jasmine.
Determine how much of Sparrow’s $100,000 loss Jasmine can deduct on her current calendar year return. Using the format (1) facts, (2) issues, (3) conclusion, and (4) law and analysis, draft an internal office memo for the client’s tax file describing the loss limitations. Identify the Code sections under which losses are suspended.
59. LO.13 Burgundy, Inc., and Violet are equal partners in the calendar year BV LLC. Burgundy uses a fiscal year ending April 30, and Violet uses a calendar year. Burgundy receives an annual guaranteed payment of $100,000 for use of capital contributed by
Burgundy. BV’s taxable income (after deducting the payment to Burgundy, Inc.) is $80,000 for 2013 and $90,000 for 2014.
a. What is the amount of income from the LLC that Burgundy must report for its tax year ending April 30, 2014?
b. What is the amount of income from the LLC that Violet must report for her tax year ending December 31, 2014?
60. LO.13 Assume the same facts as in Problem 59. Assume that Burgundy, Inc.’s annual guaranteed payment is increased to $120,000 starting on January 1, 2014, and the LLC’s taxable income for 2013 and 2014 (after deducting Burgundy’s guaranteed payment) is the same (i.e., $80,000 and $90,000, respectively). What is the amount of income from the LLC that
Burgundy, Inc., must report for its tax year ending April 30, 2014?