Question:
1. George, Harriet and Ingrid are equal Partners in the GHI Partnership. George's Adjusted Basis (AB) in his Partnership Interest is $40,000, Harriet's is $60,000 and Ingrid's is $20,000. The Partnership distributes property to George which has an AB to the Partnership of $100,000 and is subject to a $75,000 liability. George assumes the liability.
Is any gain or loss recognized by George, Harriet or Ingrid under § 731 as a result of this distribution?
What is each of George, Harriet and Ingrid's AB in their Partnership Interests after the distribution?
What is George's AB in the Property distributed to him?
Consider §§ 731, 733, 732, 705, 752
2. Arnold (an individual with a calendar year), Big Co. (a corporation with a June 30 fiscal year) and C Corp. (a corporation with a November 30 fiscal year) form ABC general partnership to operate a retail store selling sporting goods. ABC will be operated and managed by Arnold. Arnold contributes $450 cash for a 22.5% partnership interest; Bigco contributes $750 cash for a 37.5% partnership interest; and C Corp. contributes $800 of cash for a 40% partnership interest.
What is the ABC Partnership's required tax year?
Consider § 706
3. Sherri and Todd are equal Partners in the ST Partnership. Both Partners expect to have the same marginal tax bracket for several years, but Sherri has a Net Operating Loss Carry-Forward that will expire at the end of ST's second year.
Sherri and Todd agree to allocate all the Partnership net taxable income to Sheri for the Partnership's first two tax years. Beginning in the third year, Partnership net taxable income is allocated to Todd, until the amount of income allocated to Sherri in the first two years is offset.
The Partnership Agreement requires capital accounts to be maintained in accordance with the §1.704-1(b)(2) Regulations, liquidating distributions to be made in accordance with positive Capital Account Balances and provides an unqualified obligation for Partners to restore deficits in their Capital Accounts within the time limits set out in the Regulations.
The ST Partnership's income is primarily from highly rated corporate bonds, which are expected to produce enough income in the 3rd through 7th Partnership Tax Years to offset the allocation of income to Sherri in the first two years.
Do the allocations have Substantial Economic Effect?
If the IRS determines the allocations lack Substantial Economic Effect what is the effect upon Sherri and Todd's reported income (loss) from the Partnership?
4. Charles and Don are equal Members in the CD Limited Liability Company (LLC). Charles contributes Cash of $20,000 and Don contributes equipment valued at $20,000, in which Basis his Adjusted Basis is $10,000. The equipment contributed by Don is depreciable for federal income tax purposes using a straight line method at the rate of 20% per year (ignoring the first year convention). Each Member's Capital Account is credited with the $20,000 value of his contribution.
Assuming that the LLC's total income over the remaining 5 year life of the equipment exceeds its total losses and deductions, other than depreciation, by $20,000 determine (a) each of Member's Tax Basis in his Member Interest in the LLC
(b) each Member's Capital Account
Consider: § 704(c) and the Regulations under that section; the "Traditional Method"
5. In Year 1 Abbey of Tax Year Rules contributes $100,000 for a 25% interest in the ABC General Partnership. The Partnership obtains a $4.0 Million recourse loan to finance construction of a building.
In Year 2 Abbey's distributive share of the Partnership's losses is $200,000. In Year 2 the fair market value of the building declines to $1.6 Million and the Partnership does not make any payments of Principal on the loan.
In Year 3 the total the partnership losses in total (before allocation to the Partners) are $400,000.
(a) Assuming that, Abbey sells 50% of her 25% Interest to Olivia for $1000 in cash on June 30, Year 3 - what is the amount of Abbey's gain or loss on sale of that Interest?
(b) Assuming, instead, that Abbey sells her entire 25% Interest to Olivia for $2000 in cash on June 30, year 3 - what is the amount of Abbey's gain or loss on sale of that Interest?