Part I -
Problem 1: On February 1, 2009, Kay and Larry form the KL General Partnership as equal partners by contributing the following assets:
|
Partner
|
Asset
|
Basis
|
FMV
|
|
Kay
|
Equipment
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$40,000
|
$50,000
|
|
Larry
|
Land
|
$20,000
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$110,000
|
Kay purchased the equipment on December 15, 1996, for $$75,000. Larry purchased the land on March 5, 1983 and it is subject to a $60,000 liability, which the partnership assumes.
a. What is each partner's realized and recognized gain or loss?
b. What is each partner's basis in his/her partnership interest? When does his/her holding period begin?
c. Prepare the partnership's tax balance sheet.
d. Prepare the partnership's FMV balance sheet.
e. If each partner sells his partnership interest tomorrow, how much gain or loss will he/she recognize? How do these gains relate to those in part a?
Problem 2: Katrina is a one-third partner in the KYR partnership (calendar year-end). Katrina decides she wants to exit the partnership and she receives the following assets in the liquidating distribution. Katrina's basis in her partnership interest is $280,000.
Basis FMV
Cash 60,000 60,000
Inventory 50,000 90,000
Machinery 50,000 45,000
Land 40,000 105,000
Totals 200,000 300,000
A. What is Katrina's realized gain or loss on the liquidation of her partnership interest?
B. What is Katrina's recognized gain or loss on the liquidation of her partnership interest? Does not recognized any gain or loss on the distribution.
C. What is Katrina's basis in each of the assets?
D. What is Katrina's gain or loss if she sells all of the assets the next day?
E. How does the gain in part D relate to the gain in part A?
Problem 3: A calendar-year S Corp has the following information for the current taxable year:
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Sales
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350,000
|
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Cost of Goods Sold
|
120,000
|
|
Long-term Capital Gain
|
12,000
|
|
Distribution to Owners
|
50,000
|
|
Salary to Z
|
35,000
|
|
Charitable Contribution
|
8,000
|
|
Operating Expenses
|
40,000
|
|
Interest Income
|
15,000
|
Z is a 40% owner with a $100,000 basis in her stock at the beginning of the tax year. No corporate debt is owed to her. Z materially participates in the operations of S Corp. Z also has a $55,000 salary from another job.
Calculate the S corp's ordinary income or loss for the year.
Calculate the S corp's separately stated items.
Calculate Z's adjusted gross income.
Calculate Z's basis in her S stock at the end of the year.
PART II -
You are the senior tax associate in a small public accounting firm. The largest client of the firm is a man named Will "Big Daddy" Varner. Big Daddy owns numerous businesses mainly through his status as the sole shareholder of a Subchapter S Corporation or the sole member a Limited Liability Company (LLC) for each particular business (e.g., a cotton farm, a tobacco farm, a timber operation, a coal strip mine, a gas station, a grocery store, a men's and women's clothing store, a farming and industrial machinery supply warehouse and many others). Through these business entities, he controls virtually the entire economy of a rural county in West Tennessee.
Big Daddy's longtime college friend is the most senior partner in your accounting firm and the firm's accounts with him represent more than 90% of its income. So you know that keeping Big Daddy happy is not only essential to the firm but also essential to your future employment and to your prospects for becoming a partner in the accounting firm.
Recently, Big Daddy's son Grooper (sometimes called "Brother Man"), a "slip and fall" sole practitioner lawyer in Memphis, has been approached by Ben Quick, a "slick talking " real estate developer about having Big Daddy invest in a multi-member LLC that will own a major real estate (residential, industrial and commercial) development in an adjacent county. This development would be financed mostly through a nonrecourse bank loan. But it is in desperate need of initial startup capital and there will be some recourse debt mainly through accounts payable to suppliers and contractors.
The real estate development is expected to produce an inordinate amount of tax losses early in its history. Ben is prepared to allocate virtually all of these losses to Big Daddy if he will become his major equity contributor. Grooper has frequently heard Big Daddy brag about and long for the days of President Reagan when tax losses were plentiful and when sometimes you could report these huge losses without having to pay for them. Big Daddy frequently emphasizes the latter because you are aware that Big Daddy is very suspicious of any enterprise where he may be responsible for anyone else's debt.
Intructions: Your senior partner has asked you to provide a letter to Big Daddy and Grooper explaining the rules for specially allocating tax losses/deductions keeping in mind Big Daddy's aversion to paying for anyone else's debt. In addition, Grooper has mentioned seeing differing provisions dealing with special allocations to LLC members: one providing that a member must restore any deficit balance in his capital account and one not so providing but including in it the odd term "Qualified Income Offset." Grooper has also mentioned seeing the term "Minimum Gain Chargeback." Your task is to explain the special allocation rules to Grooper and Big Daddy and how these terms might apply to Big Daddy should he invest in Ben Quick's development. Keep in mind that Big Daddy is an old relatively unsophisticated southern gentleman and that Grooper is merely a "left turn" lawyer and that your future and your firm's prosperity may depend upon you explaining to these two insophisticates these complex matters.