Question;1125. CHAPTER;10?PARTNERSHIPS: FORMATION, OPERATION, AND BASIS Quest91;In the current year, the DOE Partnership received revenues of $100,000 and paid;the following amounts: $20,000 in rent and utilities, a $30,000 guaranteed;payment to 50% partner Dave, $6,000 to partner Ethan for consulting services;and $10,000 as a distribution to partner Olivia. In addition, the partnership;earned $4,000 of interest income during the year. Dave?s basis in his;partnership interest was $35,000 at the beginning of the year, and includes a;$10,000 share of partnership liabilities. At the end of the year, his share of;partnership liabilities was $20,000.;a.;How much;income must Dave report for the tax year and what is the character of the;income?;b.;What is;Dave?s basis in his partnership interest at the end of the tax year?;1126. CHAPTER;10?PARTNERSHIPS: FORMATION, OPERATION, AND BASIS Quest92;Sharon and Sara are equal partners in the S&S Partnership. On January 1 of;the current year, each partner?s adjusted basis in S&S was $50,000;(including each partner?s $15,000 share of the partnership?s $30,000 of;liabilities). During the current year, S&S repaid the $30,000 of;liabilities and borrowed $20,000 for which Sharon and Sara are equally liable.;In the current year ended December 31, S&S also sustained a net operating;loss of $25,000 and earned $5,000 of interest income from investments. If;liabilities are shared equally by the partners, on January 1 of the next year;how much is each partner?s basis in her interest in S&S?;1127. CHAPTER;10?PARTNERSHIPS: FORMATION, OPERATION, AND BASIS Quest93;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 long-term 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?;1128. CHAPTER;10?PARTNERSHIPS: FORMATION, OPERATION, AND BASIS Quest94;In the current year, Derek formed an equal partnership with Cody. Derek;contributed land with an adjusted basis of $110,000 and a fair market value of;$200,000. Derek also contributed $50,000 cash to the partnership. Cody;contributed land with an adjusted basis of $80,000 and a fair market value of;$230,000. The land contributed by Derek was encumbered by a $60,000 nonrecourse;debt. The land contributed by Cody was encumbered by $40,000 of nonrecourse;debt. Assume the partners share debt equally. Immediately after the formation;what is the basis of Cody?s partnership interest?;1129. CHAPTER;10?PARTNERSHIPS: FORMATION, OPERATION, AND BASIS Quest95;Meagan is a 40% general partner in the calendar year, cash basis MKK;Partnership. The partnership received $100,000 income from services and paid;the following other amounts;Rent expense;$10,000;Salary;expense to employees;30,000;Payment to;Meagan for services, per the partnership agreement;20,000;Distributions;to partners, Kristin and Kaylyn;12,000;Payment to;40% cash basis partner Kaylyn for tax and accounting services;8,000;How much will Meagan?s adjusted gross income increase as a result of the above;items?;1130. CHAPTER;10?PARTNERSHIPS: FORMATION, OPERATION, AND BASIS Quest96;The MOP Partnership is involved in leasing heavy equipment under long-term;leases of five years or more. Patricia has an adjusted basis for her;partnership interest on January 1 of the current year of $600,000, consisting;of the following;Capital;account;$350,000;Share of;partnership recourse debt;50,000;Share of;partnership nonrecourse debt;200,000;$600,000;During the year, the partnership has an operating loss of $1.2 million and;distributes $60,000 of cash to Patricia. Partnership liabilities were the same;at the end of the tax year, and the nonrecourse debt is not ?qualified nonrecourse debt.? If she owns a 60% share of;partnership profits, capital, and losses, and is a material participant in the;partnership, how much of her share of the operating loss can Patricia deduct?;What Code provisions could cause a suspension of the loss?;1131. CHAPTER;10?PARTNERSHIPS: FORMATION, OPERATION, AND BASIS Quest97;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 RSTU, in which her basis is $30,000. Cassandra is allocated;an $80,000 loss from C&C, and $20,000 of income from RSTU. How much of the;loss from C&C may Cassandra deduct? Under what Code provisions are the;remaining losses suspended?;1132. CHAPTER;10?PARTNERSHIPS: FORMATION, OPERATION, AND BASIS Quest98;James and Kendis created the JK Partnership by contributing $60,000 each. The;$120,000 cash was used by the partnership to acquire a depreciable asset. The;partnership agreement provides that the partners? capital accounts will be;maintained in accordance with Reg. ? 1.704-1(b) (the ?economic effect?;Regulations) and that any partner with a deficit capital account will be;required to restore that capital account when the partner?s interest is;liquidated. The partnership agreement provides that MACRS will be allocated 10%;to James and 90% to Kendis. All other items of partnership income, gain, loss;deduction, and credit will be allocated equally between the partners. In the;first year, MACRS is $20,000 and no other operating transactions occur. The;property is sold at the end of the year for $100,000 and the partnership is;liquidated immediately thereafter.;To satisfy the economic effect test, how much of the $100,000 cash (from the;sale) is allocated each to James and Kendis?;1133. CHAPTER;10?PARTNERSHIPS: FORMATION, OPERATION, AND BASIS Quest99;Allison and Taylor form a partnership by each making contributions of $90,000;cash to partnership capital. The partnership purchases an asset for $600,000;using the cash and financing the rest with a $420,000 recourse note. Allison is;allocated 75% of partnership profits and losses until the date when the total;partnership profits exceed total partnership losses. After that date, the;profits and losses are shared equally between the two partners. The partners;expect the partnership to have losses for the first three years of operations;and profits thereafter. How will the recourse debt be shared between the;partners for basis purposes immediately after the property is acquired?;1134. CHAPTER;10?PARTNERSHIPS: FORMATION, OPERATION, AND BASIS Ques100;The MOG Partnership reports ordinary income of $60,000, long-term capital gain;of $12,000, and tax-exempt income of $12,000. The partnership agreement;provides that Molly will receive all long-term capital gains and George will;receive all tax-exempt interest income. Their allocation of ordinary income;will be reduced accordingly, and Olivia will be allocated a proportionately;greater share of ordinary income. (In other words, each partner will receive;allocations totaling 1/3 of the total $84,000 of partnership income.) This;allocation was agreed upon because Molly and George are in a high marginal tax;bracket and Olivia is in a low marginal tax bracket.;a.;Describe the;elements that must be included in a partnership agreement in order for an;allocation to have "economic effect.;b.;Discuss;whether or not the MOG allocation would be permitted and provide your;reasoning.;1135. CHAPTER;10?PARTNERSHIPS: FORMATION, OPERATION, AND BASIS Ques101;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.
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