Federal Taxation of Partnerships I
-Where applicable, answers should include cites to the Code, Regulations or Court Cases.
- Tom, Dick and Harry each contribute $20,000 to form the ABC general partnership. The partnership agreement satisfies the primary test for economic effect under §704(b). Partnership profits and losses are allocated 40% to Tom, 40% to Dick and 20% to Harry. The partnership uses its $60,000 cash and borrows an additional $40,000 on a recourse basis and purchases land for $100,000.
- How will the $40,000 liability be allocated and what will be each partner’s outside basis?
- What result in (a), above if Tom and Dick are limited partners who are not obligated to restore a capital account deficit but the partnership agreement includes a qualified income offset?
- Jim, Kim and Larry form equal partnership JKL. Jim and Kim contribute $20,000 each in cash. Larry, an investor, contributes land (A.B. = $40,000, F.M.V. = $20,000) that he has held for two years.
- What are the tax consequences if the partnership, which is a real estate dealer, sells the land contributed by Larry for $30,000 one year after the land was contributed, assuming the partnership is using the traditional method of allocation?
- How (if at all) would your answer change if the partnership was using the remedial allocation method?
- A and B form AB partnership and agree that each will be allocated a 50 percent share of all partnership items and that AB will make allocations under section 704(c) using the traditional method under Reg. 1.704-3(b). A contributes depreciable property with an adjusted tax basis of $4,000 and a book value (FMV) of $10,000, and B contributes $10,000 of cash.
(a). What is A’s built-in gain on the date of contribution?
(b). Assume the property is depreciated using the straight-line method over a remaining 10-year recovery period. If AB sells the property at the beginning of AB’s second year for $9,000, what are the tax consequences? (How much gain is recognized and to whom is it allocated?)
- L, a 10% partner in LMN, a general partnership, is planning to sell his partnership interest to P on December 1, 20014, for $50,000. Partnership ordinary income for LMN’s tax year ending December 31, 2014 is projected to be $10,000. The partnership is also planning to sell land that it has held for many years. The sale of the land is expected to take place on December 10, 2014, and will result in a $50,000 gain. The following table summarizes the projected partnership income for the year:
Gain on Ord Income Land Sale Total
————— ———— ——
1/1 – 11/30 5,000 —– 5,000
12/1 – 12/31 5,000 50,000 55,000
———– ——— ———
10,000 50,000 60,000
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(a) If the proration method of allocation is used, how will the 10% share of the income/gain be allocated between L and P?
- If the interim closing method is used, how will the 10% share of the income/gain be allocated between L and P?
- A and B form a general partnership with each partner contributing $2,000 cash. The partnership purchases depreciable property for $10,000 using the $4,000 and borrowing $6,000 on a recourse loan for which the partners are both liable. Assume that the property is properly depreciable using the straight-line method over 5 years for both book and tax purposes. The partnership leases the property to a third party. During year 1, the partnership’s rental income equals its operating expenses and the partnership has a net loss of $2,000 arising from depreciation.
A needs tax losses, and therefore, the partners specify in the partnership agreement that all losses will be allocated 100% to A and that all profits will be allocated first to chargeback for the specially allocated losses. Thereafter, profits will be split equally. At the time of the initial allocation, it is uncertain whether the partnership will have future profits. The agreement also adopts the safe harbor capital account provisions [book capital accounts will be maintained under Reg. 1.704-1(b)(2)(iv); all allocations will be reflected in the partners’ book capital accounts; the partnership will be liquidated in accordance with positive capital accounts; and partners with negative book capital accounts on liquidation will restore the deficit within the required time period].
- Will the desired allocation to A in Year 1 be allowed? What will each of the partner’s capital accounts look like at the end of Year 1?
- If in Year 2 the partnership’s rental income again equals its operating expenses, resulting in a net $2,000 loss arising from the depreciation deduction, will the 100% allocation to A in Year 2 be allowed?
- Which of the following statements is false?
- A partner can loan money to a partnership
- The partnership can loan money to a partner
- When a loan to or from a partnership is made, it must be treated as a distribution
- Which of the following statements is true?
- An advance of money by a partner to a partnership must be a capital contribution.
- An advance of money by a partner to a partnership must be in the form of a loan.
- An advance of money by a partner to a partnership may be a capital contribution or a loan.
- None of the above.
- True or False: IRC §754 provides that a partnership can make an election to adjust the basis of partnership property in the event of a transfer of a partnership interest by sales or exchange. (If false explain why)
- True or False: The Section 754 election applies to all distributions and transfers during the tax year with respect to which the election was initially filed, and to all such future transaction only in the subsequent 5 years. (If false explain why)
- True or False: If services are performed by a partner in a nonpartner capacity, the compensation received by the partner is taxed under the rules that apply generally to payments to third parties, subject to some limitations that apply to related party transactions. (If false explain why)
- True or False: Amounts partners receive for services they provide in their partner capacity are guaranteed payments if the amounts are determined without regard to the partnership net income. (If false explain why)
- True or False: Guaranteed payments are treated as ordinary income (If false explain why)
- The RE Partnership is in the real estate development business. The partnership recently was involved in a lawsuit concerning the legal title to a parcel of land it acquired. The partnership paid partner E, who is a lawyer, a $5,000 fee to represent it in legal proceedings. How should the partnership and E treat the payment for tax purposes?
- Scott and Sue form a partnership to develop land into commercial offices and rent them for a profit. Sue contributes land with a fair market value of $1,000,000 and a basis of $500,000. Scott contributes cash of $500,000. Scott and Sue agree to share all profits and losses equally. Determine if Sue has in substance sold all or a portion of the land if immediately after formation the partnership distributes $500,000 of cash to Sue. What are the tax consequences to Sue and to the partnership as a result of the transactions?