46. LO.7, 13 Assume the same facts as in Problem 45. What income, gains, losses, and deductions does Amy report on her income tax return? Based on the information provided, what other calculations is she required to make?
47. LO.11 Assume the same facts as in Problem 45. Prepare Amy’s capital account rollforward from the beginning to the end of the tax year. How does her capital account differ from her basis as calculated in Problem 45?
48. LO.7, 9, 13 The KL Partnership is owned equally by Kayla and Lisa. Kayla’s basis is $20,000 at the beginning of the tax year. Lisa’s basis is $16,000 at the beginning of the year. KL reported the following income and expenses for the current tax year:
Sales revenue $150,000
Cost of sales 80,000
Distribution to Lisa 15,000
Depreciation expense 20,000
Rent expense 18,000
Long-term capital gain 6,000
Payment to Mercy Hospital for Kayla’s medical expenses 12,000
a. Determine the ordinary partnership income and separately stated items for the partnership.
b. Calculate Kayla’s basis in her partnership interest at the end of the tax year. What items should Kayla report on her Federal income tax return?
c. Calculate Lisa’s basis in her partnership interest at the end of the tax year. What items should Lisa report on her Federal income tax return?
49. LO.7, 9, 12, 13 How would your answers in Problem 48 change if partnership revenues were $100,000 instead of $150,000?
50. LO.3, 7, 9, 10 Suzy contributed business-related assets valued at $360,000 (basis of $200,000) in exchange for her 40% interest in the Suz-Anna Partnership. Anna contributed land and a building valued at $640,000 (basis of $380,000) in exchange for the remaining 60% interest. Anna’s property was encumbered by a qualified nonrecourse debt of $100,000, which was assumed by the partnership. The partnership reports the following income and expenses for the current tax year:
Utilities, salaries, and other operating expenses 360,000
Short-term capital gain 10,000
Tax-exempt interest income 4,000
Charitable contributions 8,000
Distribution to Suzy 10,000
Distribution to Anna 20,000
During the current tax year, Suz-Anna refinanced the land and building. At the end of the year, Suz-Anna had recourse debt of $100,000 for partnership accounts payable and qualified nonrecourse debt of $200,000.
a. What is Suzy’s basis after formation of the partnership? Anna’s basis?
b. What income and separately stated items does the partnership report on Suzy’s
Schedule K–1? What items does Suzy report on her tax return?
c. Assume that all partnership debts are shared proportionately. At the end of the tax year, what are Suzy’s basis and amount at risk in her partnership interest?
51. LO.11 Assume the same facts as in Problem 50, and assume that Suz-Anna prepares the capital account rollforward on the partners’ Schedules K–1 on a tax basis.
a. What is Suzy’s capital account balance at the beginning of the tax year?
b. What is Suzy’s capital account balance at the end of the tax year?
c. What accounts for the difference between Suzy’s ending capital account and her ending tax basis in the partnership interest?
52. LO.3, 7, 9, 10 Assume the same facts as in Problem 50, except that Suz-Anna was formed as an LLC instead of a general partnership.
a. How would Suz-Anna’s ending liabilities be treated?
b. How would Suzy’s basis and amount at risk be different?
53. LO.3, 7, 9, 12 Bryan and Cody each contributed $120,000 to the newly formed BC
Partnership in exchange for a 50% interest. The partnership used the available funds to acquire equipment costing $200,000 and to fund current operating expenses. The partnership agreement provides that depreciation will be allocated 80% to Bryan and 20% to Cody. All other items of income and loss will be allocated equally between the partners.
Upon liquidation of the partnership, property will be distributed to the partners in accordance with their capital account balances. Any partner with a negative capital account must contribute cash in the amount of the negative balance to restore the capital account to $0.
In its first year, the partnership reported an ordinary loss (before depreciation) of $80,000 and depreciation expense of $36,000. In its second year, the partnership reported $40,000 of income from operations (before depreciation), and it reported depreciation expense of $57,600.
a. Calculate the partners’ bases in their partnership interests at the end of the first and second tax years. Are any losses suspended? Explain.
b. Does the allocation provided in the partnership agreement have economic effect?
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.