ACC610 Week 3 Assignment Exercises

Name

Ashford

ACC 610

5th Dec 2022

Chapter 10 – Problem 28 Emma and Laine form the equal EL Partnership. Emma contributes cash of $100,000. Laine contributes property with an adjusted basis of $40,000 and a fair market value of $100,000.

a. How much gain, if any, must Emma recognize on the transfer? Must Laine recognize any gain? If so, how much?

There is no recognized benefit or loss for either the partner or the partnership.

b. What is Emma’s basis in her partnership interest?

$100,000

c. What is Laine’s basis in her partnership interest?

$40,000

d. What basis does the partnership take in the property transferred by Laine?

There are carryover regulations that gave it a $40,000 starting point.

Chapter 10 – Problem 31

Mike and Melissa form the equal MM Partnership. Mike contributes cash of $40,000 and land (fair market value of $100,000, adjusted basis of $120,000), and Melissa contributes the assets of her sole proprietorship (value of $140,000, adjusted basis of $115,000). What are the tax consequences of the partnership formation to Mike, Melissa, and MM Partnership?

Mike and Melissa won’t benefit or lose through MM Partnership. Mike’s MM Partnership share will be $160,000 ($40,000 in cash + $120,000 in property basis). The property will lose $20,000 (the difference between the adjusted basis of $120,000 and the fair market value of $100,000) when sold. Melissa’s $115,000 partnership stake is her single proprietorship carryover basis. Melissa won’t recognize her loss until she sells her contributions.

MM Partnership’s basis is $275,000 ($40,000 in cash from Mike + $120,000 adjusted basis from Mike’s property + $115,000 adjusted basis from Melissa’s single proprietorship assets). Mike’s contribution of land with a built­in loss because its value is below its basis can be attributed as a capital loss if the property is disposed of within five years of Mike’s contribution date. At that point, the partnership is limited to the amount of built­in loss on the land calculated and tracked from the time of contribution to the time of sale.

Chapter 10 – Problem 33

Sam and Drew are equal partners in SD LLC formed on June 1 of the current year. Sam contributed land that he inherited from his uncle in 2007. Sam’s uncle purchased the land in 1982 for $30,000. The land was worth $100,000 when Sam’s uncle died. The fair market value of the land was $200,000 at the date it was contributed to the partnership.

Drew has significant experience developing real estate. After the LLC is formed, he will prepare a plan for developing the property and secure zoning approvals for the LLC. Drew would normally bill a third party $50,000 for these efforts. Drew will also contribute $150,000 cash in exchange for his 50% interest in the LLC. The value of his 50% interest is $200,000.

a. How much gain or income will Sam recognize on his contribution of the land to the

LLC? What is the character of any gain or income recognized?

Contributed property is not subject to gain or loss recognition under section 721.Accordingly,

Sam will not be entitled to any profit or revenue from the land he contributed to the partnership.

b. What basis will Sam take in his LLC interest?

Sam acquired the property as an inheritance when his uncle died away, and the value of an inheritance is typically determined by the asset’s fair market value on the date of death. As a result, Sam’s cost basis is set at $100,000. His new basis in the given property is the same as his old one.

c. How much gain or income will Drew recognize on the formation of the LLC? What is the character of any gain or income recognized?

To Drew, $50,000 is just regular pay. As per 721, performed services do not qualify as property for the purposes of non­recognition treatment.

d. What basis will Drew take in his LLC interest?

To account for Drew’s LLC stake, we’ll use a total of $200,000 (150,000 plus 50,000).

Chapter 11 – Problem 25

Gil’s outside basis in his interest in the GO Partnership is $100,000. In a proportionate no liquidating distribution, the partnership distributes to him cash of $30,000, inventory (fair market value of $40,000, basis to the partnership of $20,000), and land (fair market value of $90,000, basis to the partnership of $40,000). The partnership continues in existence.

a. Does the partnership recognize any gain or loss as a result of this distribution? Explain.

To comply with 731b, the partnership will not record any gain or loss from this distribution.

b. Does Gil recognize any gain or loss as a result of this distribution? Explain.

Gil will not recognize a gain or loss given that this was a proportionate non­liquidating \distribution. A gain would have accrued to Gil if the amount of the cash distribution was more than his whole basis in the firm.

c. Calculate Gil’s basis in the land, in the inventory, and in his partnership, interest immediately following the distribution.

Outside basis in partnership $100,000

Less: cash distribution $30,000

Less: inventory basis to the partnership $20,000

Less: land basis to the partnership $40,000

Interest in partnership immediately following distribution $10,000

Chapter 11 – Problem 27

In each of the following independent cases in which the partnership owns no hot assets, indicate:

• Whether the partner recognizes gain or loss.

• Whether the partnership recognizes gain or loss.

• The partner’s adjusted basis for the property distributed.

• The partner’s outside basis in the partnership after the distribution.

a. Kim receives $20,000 cash in partial liquidation of her interest in the partnership. Kim’s outside basis for her partnership interest immediately before the distribution is $3,000.

Kim would have a gain of $17,000 ($20,000 minus $3,000) after receiving the cash distribution, bringing her basis to $0.

b. Kourtni receives $40,000 cash and land with an inside basis to the partnership of $30,000 (value of $50,000) in partial liquidation of her interest. Kourtni’s outside basis for her partnership interest immediately before the distribution is $80,000.

There would be no profit or loss for Kourtni or the partnership. Kourtni’s base would drop to

$10,000 as a result (40,000­30,000).

c. Assume the same facts as in (b), except that Kourtni’s outside basis for her partnership interest immediately before the distribution is $60,000.

Yet again, neither Kourtni nor the partnership would see any profit or loss. Kourtni’s basis would be $20,000 (60,000­40,000) with her partnership \basis being $0.

d. Klois receives $50,000 cash and inventory with a basis of $30,000 and a fair market value of $50,000 in partial liquidation of her partnership interest. Her basis was $90,000 before the distribution. All partners received proportionate distributions.

Given that Klois got a non­liquidating disproportional distribution, the partnership and she are both precluded from recording any gains or losses. Because of this, her starting point is lowered to $40,000 after the initial $50,000 is awarded in cash. The inventory is \distributed next. The cost to maintain the stock is $30,000 each year. This is \stern makes her allotted basis in assets of $80,000.

Klois’s remaining \partnership stake would be $10,000.

Reference

Hoffman, W. H., Raabe, W. A., Smith, J. E., Maloney, D. M., & Young, J. C. (2016). South­

western federal taxation 2016: Corporations, partnerships, estates and trusts (39th ed.).

Mason, OH: South­Western Cengage Learning.