Partnership Taxation

Unit 4 Problem 1: A and B are partners in a newly-formed cash method general partnership. They will share profits and losses equally (although their capital accounts may not always be equal). The partnership will maintain capital accounts in accordance with Regulation § 1.704-1(b)(2)(iv). The partners share recourse liabilities equally. Prepare an opening balance sheet for the partnership (including tax capital accounts), reflecting the formation transaction described in part A below, and then determine the appropriate adjustments to the partners' capital accounts for each of the operating transactions described in part B below. While determining each of these adjustments for book purposes, keep in mind the effect, if any, of each of these transactions on A's and B's bases in their partnership interests. A. A contributes cash: basis of 50 and FMV of 50, and land with a basis of 100, FMV of 200, which is encumbered by a 100 recourse mortgage. B contributes: X's notes payable to B with a basis/FMV of 50; equipment with a basis of 200 and FMV of 100 B. 1. PS earns 600 ordinary 702a8 income 2. PS receives 100 bond interest that is tax exempt under 103 3. PS recognizes a 40 capital losss 4. PS incurs 20 of nondeductible 705a2B expenditures 5. PS borrows 100 from a bank 6. Then, A assumes that 100 from the PS 7. Then, the PS pays off that 100 debt 8. PS pays off the mortgage encumbering the land contributed by A 9. PS purchases common stock for 50 that appreciates to 100 10. PS purchases land for 200 with 100 cash and 100 recourse mortgage

(A) See outline for balance sheet A's outside basis: 100 (150-100+50) B's outside basis: 300 (250+50) Outside basis is different than tax capital account since there are liabilities involved (B) 1. With 600 ordinary income: the book and tax capital accounts (CA) increase by 300 each; outside basis (OB) increases by 300 each (since it is an allocation) 2. with 100 tax exempt bond interest: both book and tax CA increase by 50; OB both increase by 50 3. with 40 capital loss: book and tax CA decrease by 20; both OB decrease by 20 4. with 20 of 705a2b expenditures: book and tax CA decrease by 10; both OB decrease by 10 (because it is nondeductible) 5. 100 borrowed: no change to CA; OB both increase by 50 (deemed contribution of cash for PTSs) 6. A assumes 100 liability: A's CA increases by 100 (because it is moving from the liability to CA on the balance sheet); A's OB increases by 50, B's OB decreases by 50 7. PS pays off 100 debt: A's CA decrease by 100; A's OB decreases by 100 8. PS pays off mortgage: nothing happens to CA; both OB decrease by 50 (b/c relief of liability) 9. Stock purchase of 50 that appreciates to 100: nothing happens to CA account or to OB 10. 200 land purchase with 100 cash and 100 mortgage: nothing happens to CA; both OB increase by 50 (assumed the liability)

Unit 2 Problem 2: D, E and F form a partnership by contributing the following property (in each case worth $200 net of liabilities) in exchange for equal 1/3 interests in the partnership's capital, profits and losses. The partnership assumes all liabilities encumbering the contributed assets. -D contributes land with a fair market value of $400, which is encumbered by a recourse mortgage of $240. D has held the land for several years as an investment, and his basis in the land is $100. D also contributes $40 in cash. -E contributes a building, a § 1231 asset, with a value of $260 in which E has an adjusted basis of $130. The building was purchased several years ago by E and is subject to a recourse mortgage of $60. -F, a cash method taxpayer, contributes $200 cash. (a) With respect to each partner, (i) Is any gain or loss recognized? (ii) What is her outside basis? (b) With respect to DEF: (1) Does it recognize any gain or loss on formation? (2) What is its inside basis in the contributed property? (c) Construct an opening balance sheet for the partnership.

(a) (i) no gain/loss is recognized by Ps (ii) D's outside basis is $0 (100+40+100-240), E's basis is $170 (130+100-60), F's basis is $300 (200+100) (b) (i) no gain/loss is recognized by PS (ii) $240 basis in the cash, $100 basis in the land, $130 basis in the building (c) see outline

Unit 15 Problem 1: A, B, and C form the ABC partnership. A contributes land worth $2500 in which A has a basis of $1000. B and C each contributes $1000 cash. A is to have a 50% interest in profits, losses, and capital; B and C are each to have 25% interests. As part of the basic business transaction, shortly after formation, the partnership distributes $500 to A. (a) What are the tax consequences to A and the partnership as a result of this transaction? (b) How would your analysis change if the distribution to equalize capital accounts occurred one year after formation? Three years after formation? Numbers are not necessary. (c) Suppose, instead of distributing $500 cash, the partnership purchased a bond for $500. According to the partnership agreement, A is allocated 99% of all income, gain and loss from the bond. All other partnership items are allocated 50-25-25. Three years after formation, the bond is distributed to A.

(a) A will be taxed as selling 1/5 of his land to the PS for 500 and contributing the other 4/5 of the land for his PS interest. This means that A has to recognize 300 of gain (the sold part had a basis of 200) and then has a basis of 800 in his PS share that is worth 2000. The PS has a basis of 1300 in the land (800+500 (because the PS takes a cost basis in the sold part)) and a tacked holding period for 4/5 of the land and a new holding period for the sold portion. (b) It wouldn't change after one year because of the presumptions; after three years it may not be treated as a sale because of the opposite presumption but it depends on the facts and circumstances. (c) It likely will still be treated as a sale (taking on debt) but it will depend on all the facts and circumstances

Unit 2 Problem 1: A, B and C, three individuals, form a general partnership by contributing the following property in exchange for equal 1/3 interests in the partnership's capital, profits, and losses: -A contributes land, a capital asset that A acquired several years ago, worth $100 in which A has a tax basis of $40. -B contributes machinery with a basis of $25 and a value of $60, plus $40 in cash. B purchased the machinery several years ago for $75 and has taken $50 of depreciation. -C contributes inventory with a value of $100 in which C has a basis of $90. (a) What gain and/or loss will be recognized by the partners and the partnership on formation? (b) What will be the partnership's "inside basis" and holding period for each of the contributed assets? (c) What will be the partners' "outside bases" and holding period for their partnership interests? (d) Construct an opening balance sheet for ABC.

(a) there will be nonrecognition for Ps and PS (b) Land: basis of $40 and LT holding period Machinery: basis of $25 and LT holding period Inventory: basis of $90 and no holding period (c) Same as (b), but note that B's interest is 60% capital and 40% ordinary (because 60% is from a capital asset and 40% is cash; also, the holding period is split with 60% being long term and 40% not tacking) (d) See outline with balance sheet

Unit 11 Part A: ABC is a cash-method partnership with three equal partners, A, B and C. It has no liabilities. Its assets are (basis/FMV): cash (60/60), inventory (60/90), accounts receivable (0/30), investment land (30/90) for a total of 150/270. Assume the bases of A, B and C for their partnership interests are $40, $30 and $20, respectively. What are the tax consequences to the partnership and the partners if the partnership: (a) Makes a cash distribution of $20 to each partner and also distributes an undivided one-third interest in the land to each partner, (b) Makes a distribution to each partner consisting of $10 in cash, one-third of the inventory and an undivided one-third interest in the land, (c) Distributes $45 cash to A and distributes one-half undivided interests in the land to B and C.

(a) The 20 cash distribution lowers their respective outside bases to 20, 10 and 0. A will have the 1/3 land interest with 10 basis and 10 remaining outside basis, B will have the 1/3 land interest with 10 basis and 0 remaining outside basis, and C will have the 1/3 land interest with 0 basis and 0 remaining outside basis. (the lost 10 basis to C is what would be modified with 734 adjustment) (b) The 10 cash distribution lowers their respective outside bases to 30, 20, and 10. The basis goes first to the 751 property, then to capital assets, then to PS interest, so A will have a basis of 20 in his 1/3 of inventory, 10 in his 1/3 interest in the land, and 0 outside basis; B will have a basis of 20 in the inventory, 0 in the land, and 0 outside basis; and C will have a basis of 10 in the inventory, 0 in the land, and 0 outside basis. (c) A's outside basis will be reduced to 0 and A will have to recognize $5 of gain; B will have a basis of 15 in the land and 15 outside basis; C will have a basis of 15 in the land and 5 outside basis

Unit 12 Part 2: (numbers are in the thousands) ABC is an equal partnership that has made a § 754 election and on January 1, 2018 A's outside basis was $3,200 and the partnership's balance sheet, after a revaluation, was as seen on the outline. On this date, A receives the following alternative liquidating distributions in complete liquidation of A's interest in the partnership. Please determine the basis that A takes in each of the assets she receives, and the adjustments (if any) that the partnership must make to the each of its retained assets. a. A receives $1800 in cash and the accounts receivable. b. A receives $400 in cash, the accounts receivable and Blackacre.

(a) With 1800 in cash and the AR, A has a remaining outside basis of 900, which will result in a basis of 0 in AR and a 900 capital loss. This means the PS has to reduce its basis in its capital assets by 900, 540 of which is allocated to Blackacre (2360) and 360 of which is allocated to Greenacre (2140). (b) with 400 in cash, the AR, and Blackacre, A has a ROB of 2300 and basis of 0 in the AR and 2300 in Blackacre. This is 600 less than its transferred basis so the PS has to increase its basis in its capital assets by 600. The first 200 goes to Whiteacre (to reach 1100), and the next 400 is split with 170 going to Whiteacre (1270) and 230 to Greenacre (2730).

Unit 12 Part 1: ABC is an equal partnership that has made a § 754 election. On January 1, 2018, A's outside basis is $2100 and, in anticipation of liquidating A's interest in the partnership, ABC elects to revalue its assets under § 1.704-1(b)(2)(iv)(f). After the revaluation, the partnership's balance sheet is as on the outline. On this date, immediately following the revaluation, the partnership makes the following alternative distributions in liquidation of A's interest in the partnership. Determine the basis that A takes in each of the assets she receives, and the adjustments (if any) that the partnership must make to the each of its retained assets. a. A receives $600 cash, the accounts receivable and Blackacre. b. A receives $600 cash, ½ the inventory, and Whiteacre. c. A receives $300 cash, the accounts receivables, and Greenacre. d. A receives $1800 in cash and the receivables. 2. What difference would it make in Question #1(b), if there were no § 754 election in place at the time of the distribution? 3. What difference would it make in Question #1(c), if there were no § 754 election in place at the time of the distribution?

(a) With 600 cash, the AR, and Blackacre, A's ROB is 1000 (2100-(600+500)) which is all allocated to Blackacre, so A has a basis of 0 in the AR and 1000 in Blackacre. This is a 500 reduction from the PS's previous basis, which means that the PS increases its capital assets' basis (because BA was a capital asset) by 500. This is split 250 to Whiteacre (basis of 850) and 250 to Greenacre (basis of 1150) (because it is allocated based on relative appreciation and each has a BIG of 600). (b)With 600 cash, 1/2 the inventory, and Whiteacre, A's ROB is 1000, the first 150 of which goes to the inventory and the next 850 goes to Whiteacre. This 250 increase in Whiteacre's basis which means that the PS must reduce its capital assets' basis by 250. This is all allocated to Blackacre (which is the only BIL capital asset and it has 300 of depreciation) so Blackacre finishes with a basis of 1250. (c) with 300 cash, the AR, and Greenacre, A has a ROB of 1300, which is allocated all to Greenacre. So A has a basis of 0 in the AR and 1300 in Greenacre This is a 400 increase over the PS basis so the PS must decrease its capital assets' bases by 400. The first 300 goes to Blackacre (with depreciation of 300) to get to a basis of 1200. The remaining 100 is split between Blackacre (66%) and Whiteacre (33%) based on their adjusted basis so Blackacre has a basis of 1134 and Whiteacre has a basis of 567. (d) With 1800 cash and the AR, A has a ROB of (200) so A has to recognize 200 of gain and has a zero basis in the AR. This means the PS must increase its capital assets with unrealized appreciation by 200, so 100 is allocated to Whiteacre (700) and 100 is allocated to Greenacre (1000). 2. There would be a difference because this 250000 decrease that the PS must take (remember, the numbers are in the thousands) is not MORE than 250000, so it is NOT a substantial basis reduction (it must be MORE than 250000) and thus the PS does not make a basis reduction but rather the basis in Blackacre stays at 1500. 3. There wouldn't be a difference because the 400,000 basis reduction is a substantial basis reduction (it is more than 250,000) and so the PS has to make the same reduction, regardless of whether there is a 754 election.

Unit 5 Problem 1: A and B, calendar year individuals, are partners in the AB general partnership to which they each contributed $100 cash. Their interests under the partnership agreement are as follows: Capital: split 50-50 Profits: A has 60 and B has 40 Losses: A has 30 and B has 70 Capital accounts (including deficit restoration obligations) will be followed in making all distributions, both current and liquidating. During the first year of operations, AB loses $100. In the second year of operations, AB loses $100. In the third year of operations, AB has $200 of net income. Please prepare a balance sheet that reflects the situation at the end of each of the three years of operation. (a) How would AB allocate profits and losses for the first three years of operations? (b) If AB were to liquidate at the end, alternatively, of each of the first three years of operations, who would receive what? (c) What if, in June of Year 3, when it looks as though AB will earn about $200, A and B amend the partnership agreement to adjust their profit shares for Year 3 only: A goes from 60% to 30%; B goes from 40% to 70%. What effect might that have on your conclusions about the allocation of tax losses in years 1 and 2 and the allocation of bottom line income in Year 3?

(a) see balance sheet in outline (b) at the end of year 1: A receives 70 and B receives 30; at the end of year 2: A receives 40 and B owes 40; at the end of year 3: A receives 160 and B receives 40. (c) This means that the previous allocations may not have had substantial economic effect because this looks like it might be a transitory allocations that violates the substantiality prong.

Unit 10 Part B: see outline for balance sheet 1. Consider the following questions about B's treatment given that X sells her interest in the partnership to B for $50 cash: a. What is B's initial outside basis in his newly acquired partnership interest, and what are the balances in his book and tax capital accounts? b. In the absence of any elections, how much income will B report if the partnership collects the receivables and sells the land? Might B find that result problematic? c. If the partnership makes a § 754 election: (i) What is the amount of the § 743(b) adjustment and how should it be allocated among the partnership's assets? (ii) Is this adjustment reflected on our balance sheet? 2. In 2016, A, B and C each contributed $1 million dollars to form a partnership that invested in real estate. The partnership did not make a section 754 election. Over the course of three years, the partnership's real estate fell in value from $3 million to $1.2 million. At this time, A sells her interest to P for $400,000, taking a $600,000 loss. What are the tax consequences to P upon acquisition?

1. (a) B's initial outside basis is 50 and his book and tax CAs are both 20 (b) If the PS collects the receivables and sells the land B will report 30 of gain, which is problematic for B because then B would be overtaxed by 30 and have an outside basis of 80, which will persist until B sells his interest for a 30 loss (c) with a 754 election (i) the 743b adjustment would be 30, which would be allocated 20 to the AR and 10 to the land (ii) no, it is not reflected on the balance sheet but is kept separate 2. P will have an outside basis of 400 and will step into a tax CA of 1M. However, because there is a substantial built in loss, there will be a 743 adjustment which will be (600). So while there are no tax consequences upon acquisition, if P sells her interest or if the PS sells one of its property, the 743 adjustment will step in to lower the amount of P's basis so that P will not recognize a loss unless the assets have depreciated while P has been a member of the PS.

Unit 9 Part B: 1. A, B and C decide to form a partnership for the purpose of developing real property. A and B are wealthy individuals, with no particular real estate experience. C is an experienced developer. The parties agree that A and B will each contribute $1,000,000 to the venture, and that C will contribute his expertise. What tax consequences will result from formation of the venture under each of the following alternatives? (a) In exchange for cash contributions of $1,000,000 apiece, A and B each receive a 40% interest in the profits, losses and capital of the venture. In exchange for his future services C receives the remaining 20% interest in profits, losses and capital. (b) In exchange for their cash contributions A and B each receive a 50% interest in capital and losses. Profits of the venture are divided 40% to A, 40% to B, and 20% to C. (c) What if in (a) instead of contributing cash, A and B jointly contribute a piece of raw land that they have held for investment for several years. The property is worth $2,000,000, and it has a basis of $100,000. Also, C receives the 20% interest in exchange for services done before the partnership was formed. (d) Would your answer to part (c) differ if A and B form a partnership in year one, and admit C as a partner in year three? 2. Five years ago T created a partnership to operate a fund to invest in various private enterprises. He raised $95 million from limited partners and invested $5 million of his own. T is the sole general partner. The partnership agreement provides that T will receive, as compensation for his services as general partner, (i) an annual management fee equal to 2% of the initial capital of the fund, ($2,000,000 per year) and (ii) 20% of the fund's profits (defined as realized gains). Net profits, i.e., realized gains minus T's 20% share, are divided among the partners in proportion to capital contributions. The fund has been successful and this year it sold one of the stocks in its portfolio for a long term capital gain of $52 million. As a result, T receives allocations of the following in the current year: (i) $2,000,000 as his annual management fee. (ii) $10,000,000 as his 20% profit share (iii) $2,000,000 as his 5% share of the net profits that he receives as a result of his 5% capital contribution. How will T be taxed on each of these amounts?

1. (a) A and B will each receive nonrecognition under 721 while C will include his 20% interest ($400K) upon receipt (which is a guaranteed payment and treated as ordinary income). That $400K will result in a deduction that is allocated to A and B so A and B will have a CA of $800K and C will have a CA of $400K (this is not a good situation for C because he has to recognize $400K of gain and A and B are giving up value before C has done anything). (b) if C has a profits interest, AA and B have nonrecognition under 721 and C does not have any taxable gain until the PS makes money. A and B will each have a CA of $1M and C has 0 (good for the exact opposite reasons from the first). (c) A and B are treated as first transferring part of the property to C, and then all jointly transferring it to the PS at formation. So both A and B contributed $200K to C (and each had a $10K basis in that part of the property) and so they have to realize a gain of $190K. So upon contribution to the PS, A and B have nonrecognition and each have a book CA of 800 and a basis of 40; C has to recognize the 400 of gain and then has a book and tax CA of 400. (d) Yes, because in this case it is treated as if the PS paid C for the services (not the PTs) and C then contributed the cash back for the PS interest. Under Prop. Reg. 721-1(b), this is a nonrecognition transaction for the existing PTs so when the PS gives C 400 of value, there is a 162 deduction for the payment of the services and A and B each receive a 200 tax and book deduction. This means that their CAs of 1000/50 is lowered to 800/(150) and C's CA will be 400/400. This is different from (c) because A and B did not have to recognize any gain, whereas in (c) they had to recognize 190. 2. (i) the annual management fee is a guaranteed payment that is taxed as ordinary income (ii) the 20% profit share is part of his distributive share that is taxed as LTCG because the PS's gain is LTCG (iii) the 5% profit share is also part of his distributive share that is taxed at capital gain rates

Unit 9 Part A: 1. A is a partner in the ABC partnership. Under the partnership agreement A is entitled to $10,000 each year for his services, which are ordinary in nature and performed in his capacity as a partner. A's share of the partnership's profits and losses, after deduction of the services payment, is one third. For 2014 the partnership's income, before deduction of the $10,000 payment to A, consisted of $4,000 of ordinary income and $15,000 of long-term capital gain. A and the partnership use the calendar year as their taxable years. A is a cash method taxpayer, and the partnership uses the accrual method. (a) Determine partnership taxable income for 2014 and A's distributive share. (b) When is the $10,000 included in A's gross income if it is paid to him on January 3, 2015? (c) How does A's entitlement to the $10,000 and the payment of this sum affect the basis of his interest? 2. In the alternative, assume that A is to receive one third of partnership profits (regardless of character) but not less than $10,000 (this minimum guarantee to be financed from B's and C's accounts). Determine partnership taxable income and A's distributable share of the same if partnership income for 2014 consisted of: (a) Ordinary income of $15,000 and long-term capital gains of $15,000, (b) Ordinary income of $15,000, or (c) Ordinary income of $6,000. 3. X and Y plan to construct a mall. They have hired an architect (Z) to design the project, whose fee would normally be $96,000. X and Y propose that, in lieu of paying Z her normal fee, she receive an interest in the partnership in exchange for her services. Z's interest would entitle her to 8% of the partnership's gross income for its first three years of operations, at which point her interest in the partnership would terminate. X and Y have obtained signed lease agreements for most of the project. Assume the partnership generates $400,000 of gross rental income per year, and $132,000 net income per year, before accounting for Z's share. What might be the advantage of organizing the venture in this way? Will it work?

1. (a) A receives his 707(c) guaranteed payment of $10K of ordinary gain, so the PS has a ($6K) ordinary loss (4-10) and $15K of LTCG. This means that each PT receives a $2K ordinary loss and a $5K LTCG (don't net ordinary and capital). Thus A receives $8K or ordinary gain and $5K of LTCG. (b) It is included in the year 2014 because it accrued during that year and since it is a guaranteed payment the timing is based on the PS, which in this case is an accrual TP. (c) It doesn't because it is not a distribution or an allocation. 2. (a) with ordinary income of $15K and LTCG of $15K, $5K of each type of income is allocated to each PT. This means that A receives $10K as his PS share and thus does not have a guaranteed payment. (b) with ordinary income of $15K, allocate $5K to each PT and then A receives a guaranteed payment of $5K to reach $10K. The guaranteed payment is taxed as ordinary and so both B and C receive a $2.5K ordinary loss, so in the end A receives $10K and B and C each receive $2.5K. (c) with ordinary income of $6K, each PT receives $2K, and then A receives a guaranteed 707c payment of $8K to reach his $10K. Thus, B and C are allocated a $4K loss (to offset the guaranteed payment), and the PTs finish with A receiving $10K and B and C each receiving a $2K ordinary loss. (if $6K was capital, then you wouldn't net the items and A would receive $2K of capital gain and $8K of ordinary gain and B and C would each receive $2K of capital gain and $4K of ordinary loss) 3. If Z is treated as a PT under 704b and there is 132K of net income, each year Z is allocated 32K and X and Y are only allocated 50. If Z is treated as a third party under 707(a) and there is 132K of net income, then Z receives 32K of income (which will be capitalized as part of the basis of the building) and X and Y are allocated 66K (so X and Y have to pay more tax and wait for depreciations over time) So, it is advantageous to treat Z as a PT because then her payment is a distributive share that reduces the PS overall income and does not have to be capitalized. However, it will not work since the payment is not subject to significant entrepreneurial risk (it is an allocation of gross income) and Z's status as a PT is transitory.

Unit 4 Problem 2: The XYZ partnership has been operating for several years. All of its assets were purchased by the partnership, and at the end of the current year it's balance sheet, which has been expanded to show the current fair market value of assets and capital, is as follows (see Unit 4 problem 2): On the last day of the current year, W joins the partnership. In exchange for a contribution of $1000 cash, he receives a 25% interest in partnership profits, losses, and capital. 1. Reconstruct the balance sheet of the partnership following W's admission to the partnership, assuming, in the alternative: a. The partnership does not elect to revalue its assets under § 1.704- 1(b)(2)(iv)(f), or b. The partnership does elect to revalue its assets under the regulations. 2. If W had purchased X's interest in the partnership instead of acquiring an interest through a contribution to the partnership, would the partnership be permitted to revalue its assets under the regulations? Why or why not?

1. (a) & (b): see outline 2. No, the PS could not revalue its interests because there are not significant non-tax reasons to do so and the PTs do not have adverse interests (see Unit 10 for how to handle PS interest sales)

Unit 7 Problem C: Several years ago A and B formed a partnership that acquired an apartment building to rent. A and B are equal partners. On the first day of the current year, when the building has a value of $120 and the partnership's adjusted tax basis in the building is $40, A and B admit C as a one-third partner in exchange for a $60 cash contribution. 1. Assume that the partnership revalues its capital accounts as permitted by § 1.704-1(b)(2)(iv)(f) to reflect fair market value of the building as of C's admission, and elects to use the traditional method for allocations with respect to the revalued property. Reconstruct the partnership's balance sheet. 2. If the building is subsequently sold at a time that its basis is still $40, how would the partnership allocate the resulting book and tax gain or loss if the building is sold, in the alternative, for: (i) $120 (ii) $90 (iii) $15

1. After revaluation, A and B each have a book of 60 and a tax of 20, while C has a book and tax of 60. On the asset side the building has a book of 120 and a basis of 40 (along with the 60 of cash), so there is an 80 BIG that is allocable 40 to A and 40 to B. 2. (i) if sold for 120, there is no book gain and an 80 tax gain which is split 40-40 between A and B. So all PTs finish with a book and tax of 60. (ii) if sold for 90, there is a 30 book loss and a 50 tax gain. The 30 book loss is split between the three PTs 10 each, and the 50 tax gain is split between A and B 25 each. So A and B have a book of 50 and a tax of 45 and C has a book of 50 and a tax of 60 (so 10 of gain is shifted to C) (iii) if sold for 15, there is a 105 book loss and a 25 tax loss. The 105 book loss is split between the three PTs 35 each, and the 25 tax loss goes to C. So all three PTs have a book of 25, but A and B have a tax of 20 and C has a tax of 35.

Unit 7 Problem B: Five years ago, A acquired equipment to use in her leasing business. The equipment had a recovery period of 10 years and A elected to use straight line depreciation. On January 1 of this year, A formed an equipment leasing partnership with B. A contributed the equipment with a fair market value of $100 and B contributed $100 in cash. A and B agreed to share all profits and losses equally. The partnership will maintain the partners' capital accounts according to § 1.704-1(b)(2)(iv). The equipment would have had a 10 year recovery period if the partnership had purchased the equipment this year. Each year the partnership will have gross rental income of $20 before taking into account depreciation. The partnership will have no other income and no expenses other than depreciation. 1. Under the "traditional method", how will the partnership allocate each year's depreciation on the equipment for book and tax purposes if A's basis in the equipment (at the time of contribution) was, alternatively: (a) $80 (b) $50 (c) $20 (d) $120 2. Assume in problem 1(c) above that the partners agreed to use the "traditional method with curative allocations". (a) Would curative allocations affect the partners' 50-50 allocations of "book" items for purposes of § 1.704-1(b)(2)(iv)? (b) How would the partnership allocate its $20 per year of gross rental income and its tax depreciation? 3. Remedial Allocations. Assume instead that the partnership agreement called for the use of the "remedial allocation method." How would the partnership allocate each year's depreciation on the equipment for book and tax purposes if A's basis at the time of contribution was, alternatively: (a) $20 (b) $40

1. All numbers refer to depreciation: (a) if A's basis was 80, then there will be 20 of book and 16 of tax each year. So, B will get 10 for both book and tax and A will get get 10 of book and 6 of tax for the next five years. (b) if A's basis was 50, then there will be 20 of book and 10 of tax. So, B will get 10 for both book and tax and A will get 10 of book and 0 of tax for the next five years. (c) if A's basis was 20, then there will be 20 of book and 4 of tax. So B will get 10 for book and 4 for tax and A will get 10 for book and 0 tax (this means A's 30 of BIG was shifted to B) (d) if A's basis was 120, the property will be split into two and the property for the PS's books will have a basis and book of 100 and there will be a 704c1C account with a basis of 20. Both A and B will receive 10 for book and tax from the PS account property and then A will also receive an additional 4 of tax depreciation from the 704c1C account for the five years (since both properties are being depreciated over the same five year period). 2. (a) No, curative allocations do not affect book items, only tax items (b) AB would allocate 10 to each for book purposes, but would allocate only 4 for tax to B and 16 to A to cure the book-tax distinction over the course of the five year schedule. 3. (a) if A's basis was 20 and remedial allocations are used, the property would be split into two with one property having a book and basis of 20 (depreciated over five years) and the other having a book of 80 and 0 basis (depreciated over new 10 year schedule). This means there would be 4 for book/tax from the first property for the next five years, and 8 of book from the second property for the next ten (or 12 of book loss and 4 of tax loss for the first five years, and then 8 of book loss with 0 tax loss for the next five years). So, for the first five years A and B receive a book loss of 6 and B receives a tax loss of 4, THEN another tax loss of 2 is allocated to B to match the book loss and 2 of tax gain is allocated to A to complete the remedial allocation. For the last five years, A and B both receive a book loss of 4, THEN a tax loss of 4 is allocated to B and a tax gain of 4 is allocated to A for the remedial allocation. (b) if A's basis was 40, the first property would have 40 of basis and book (depreciated over 5 years) and the second property would have 60 of book and 0 basis (depreciated over 10 years). So for the first five years there is 14 of book (8+6) and 8 of tax depreciation (8+0) and for the next five years there is 6 of book depreciation and 0 of basis. So, for the first five years both A and B receive 7 of book depreciation and B receives 7 of tax depreciation and A receives 1 (no ceiling rule). For the next five years, both A and B receive 3 of book depreciation and then B receives 3 of tax depreciation and A receives 3 of tax gain for offsetting remedial allocations.

Unit 3B: The AB partnership, a cash method, calendar year partnership, had the following income and expenses for the past calendar year: (1) Gross income from business operations - $130 (2) Expenses deductible under § 162(a) - $40 (3) Depreciation on machinery (calculated under the 200% declining balance method) - $30 (4) Charitable gifts - $20 (5) Gain on sale of equipment used in the partnership business, $20 of which is ordinary under § 1245(a), and $10 of which is §1231 gain - $30 (6) Short-term capital gain on stock sale - $10 (7) Interest on tax exempt bonds - $40 (8) Dividends on stock - $20 (9) Gain on the sale of land held for 4 years by the partnership for investment purposes - $100 A and B are equal partners who use the cash method and the calendar year. 1. How will the partnership, A and B report these items? 2. Would the treatment of the gain in item (9) be different if A were a dealer in real estate? Assume, in the alternative, that the partnership acquired the land (i) from A as a contribution to the partnership, or (ii) by purchase from a third party. 3. A's adjusted basis for her partnership interest was $20 at the beginning of this taxable year of the partnership. What would be her adjusted basis at the end of the year if the partnership made no distributions to the partners during the year? 4. How would your answer in Question 3 differ if on March 1 the partnership distributed $40 to each of the partners?

1. Reported in the following way following 702(a)(1)-(8): (1) Gross income: bottom line* (8) (2) expenses: bottom line (8) (3) depreciation: separately stated (7) (4) separately stated under (4) and non-deductible under 703(a)(2)(C) (5) ordinary 1245 income is bottom line (8), 1231 gain is separately stated (3) (6) STCG: separately stated (1) (7) Interest on tax-exempt bonds: non-taxable but still reported (8) dividends: separately stated under (5) (9) LTCG: separately stated (2) The separately stated items net out to $110 (-30+10+10+20+100), the bottom line items net to $110 as well (130-40+20) *bottom line means not separately stated since they are all netted under 702(a)(8) 2. No, it is still a LTCG because the character is determined at the PS level, not the PT 702(b); in the alternative, (i) if received from the PT the gain would be ordinary under 724(b), and (ii) if purchased then it would still be a LTCG 3. A's adjusted basis: 20 + 55 (1/2 of separately stated) + 55 (1/2 bottom line) + 20 (1/2 interest on tax exempt bonds) - 10 (charitable deduction) = 140 4. 100 because distributions decrease outside basis

Unit 11 Part B: ABC is an equal partnership. On January 1, 2018, A's outside basis is $170, and the partnership elects to revalue its assets under § 1.704-1(b)(2)(iv)(f). After the revaluation, the partnership's balance sheet is as follows: (see outline) On this date, immediately following the revaluation, A receives the following alternative distributions in complete liquidation of her interest in the partnership. What are the tax consequences to A as a result of each of these distributions? 1. The accounts receivable and Land #1. 2. The accounts receivable and Land #2. 3. One-half the inventory and Land #1. 4. The accounts receivable and a one-half interest in both Land #1 and Land #2. 5. One-third of both the inventory and the accounts receivables and $120 cash.

For all of these problems, the remaining outside basis is 120 after the liability relief of 50. (1) A takes 0 basis in the AR and 120 basis in land #1 (correct for A but the loss of 60 basis means B and C are responsible for more gain. This is what 734(b) adjustment fixes) (2) A takes 0 basis in the AR and 120 in land #2 (3) A takes a basis of 15 in the inventory and 105 in land #1 (4) A takes a basis of 0 in the AR and a basis of 75 in land #1 and 45 in land #2 (723(c): decrease in basis is allocated first to BIL properties and then among the properties according to respective bases) (5) A takes a basis of 0 in the inventory and AR because the cash reduces his ROB to 0. With all of these problems, the answer is right for A but they are wrong for the PS and B and C because there is either an increase or decrease in basis that decreases or increases the amount of gain B and C are responsible for. This is what the 734(b) adjustment fixes.

Unit 10: Intro and Part A Introductory Example: X, Y and Z form an equal partnership to which X and Y each contribute $100 cash and Z contributes Land with a FMV of $100 and a basis of $300. One year later, Z sells her partnership interest to B for $100. Assume no change in value of any of the partnership assets. 1. What are the tax consequences to Z? 2. What is the balance in B's initial capital account and her basis in the partnership? Part A: see outline for the balance sheet 1. X sells her interest in the partnership to B for $50 cash. What is the amount and character of the gain or loss realized by X upon sale of his partnership interest to B?

Introductory Example: 1. $200 capital loss 2. B has a 100 outside basis (that is what she paid for the interest) and 100 in both CA (since B steps into Z's shoes for the CA, which was 100 in both because Z had a 704c1C account; however, B does NOT inherit the 704c1C account which disappears). Z's loss was kept track of in two places, outside basis and the 704c1C account to avoid ceiling rule issues, and it was Z' outside basis of 300 that allowed her to recognize a 200 loss. However, when the loss is realized in outside basis, the 704c1C account must disappear in order to prevent the taxpayers from recognizing the loss twice. So, buyers step into the sellers CA but do not receive the sellers 704c1C account Part A: 1. X recognizes 30 of gain, 20 of which is ordinary and 10 of which is capital because 2/3 of the gain is coming from 751 property and the other 1/3 is coming from capital gain property

Unit 7 Problem A: 1. On January 1 of the current year A and B form a partnership to invest in property. A contributes investment land that she acquired two years ago, and that has a fair market value of $100. B contributes $100 in cash. Each partner receives a 50% interest in the partnership's capital, profits and losses. For purposes of this Problem 1, assume that A's basis in the land at the time she contributed it to the partnership is $50. (a) Under the "traditional method" of accounting for § 704(c) gain, how will the partnership allocate its gain or loss for book and tax purposes if the partnership sells the land for: i. $100 ii. $150 iii. $ 70 iv. $ 30 (b) Assume the partnership invests B's cash in stock that appreciates and the partnership sells the stock at a tax and book gain of $60 in the same taxable year in which it sells the land. Would your answer to (a)(iii) above differ if the partnership used the "traditional method with curative allocations?" (c) What if, in (b), the partnership does not sell the stock and, in fact, has no items of income, gain, loss or deduction in the year that the land is sold other than from the sale of the land: would your answer to (a)(iii) above differ if the partnership used the "traditional method with curative allocations?" (d) How would your answer to (a)(iii) differ if the partnership used the "remedial allocation method"? 2. For purposes of this Problem 2, assume that the land has a basis in A's hands at the time of contribution of $140 and its fair market value is $100. Under the "traditional method", how will the partnership allocate its gain or loss for book and tax purposes if the partnership sells the land for: (a) $70 (b) $120 (c) $160

Problem 1 (a) (i) if sold for 100, there is no book gain and a 50 tax gain, so B receives nothing and A receives the 50 tax gain (ii) if sold for 150, there is a 50 book gain and 100 tax gain, so both A and B receive a 25 book gain, B receives a 25 tax gain to match the book gain, and A receives the remaining 75 tax gain (iii) if sold for 70, there is a 30 book loss and a 20 tax gain, so both A and B receive a 15 book loss and A is allocated the 20 tax gain (iv) if sold for 30, there is a 70 book loss and a 20 tax loss, so both A and B receive a 35 book loss and B receives the 20 tax loss (b) Yes, because after A and B both receive a 30 book gain on the stock, AB can allocate 15 of the tax gain to B (to make up for the 15 book loss without a corresponding tax loss from the land) and the remaining 45 tax gain to A which (combined with the 20 tax gain) eliminates the tax-book discrepancy for both (c) No, because there is no other tax item that can be used to eliminate the tax-book discrepancy. (d) with the remedial allocation method, AB could make a remedial allocation of a 15 tax loss to B (to match the 15 book loss) and a corresponding 15 tax gain to A (which, combined with the 20 tax gain eliminates the book-tax discrepancy for both A and B) Problem 2 (first separate the 40 tax loss for the 704c1C account because this is done upon contribution, before any later dispositions) (a) if sold for 70, there is a 30 loss for the PS account (and the 704c1C loss). The 30 PS account loss is split between A and B with each receiving a 15 book and tax loss; the 704c1C 40 tax loss is then allocated entirely to A (b) if sold for 120, there is 20 of book/tax gain for the PS account (and the 704c1C account). So A and B both receive a 10 book and tax gain from the PS account and A receives the 40 tax loss from the 704c1C account for a net tax loss of 30 (c) if sold for 160, there is a 60 book/tax gain for the PS account (and the 704c1C account). So A and B both receive a 30 tax/book gain and then A receives the 40 tax loss from the 704c1C account for a net tax loss of 10

Unit 1 Problem 2: A, B and C have decided to leave their current positions as software designers in a large company and to start up their own firm. A and B have been very successful and are now quite wealthy. C, on the other hand, is a brilliant young programmer who is still paying off student loans. Although A and B both plan to invest capital in the new firm, they hope to eventually attract additional outside investors. They have come to you for advice in setting up their new venture. What are their options in choosing a business entity, and what considerations should they take into account in making that choice?

Pros and Cons for a LLC/PS: with a PS, the members can recognize the losses right now to offset other income (Corps only get NOLs to use in he future), plus only one layer of taxation. However, it will be more difficult to add on more people or to attract outside investors than it would be with a Corp. Pros and cons with a Corp: Can't recognize early losses now and have double taxation, but it is more flexible to bring people on later by authorizing more shares and is easier to attract outside investors.

Unit 5 Problem 2 Targeted Allocations: G and L form a limited partnership. L contributes $200, and G, who does not contribute cash, will use her immense brainpower to earn money for the partnership. The business deal is that L receives all cash distributions until L has received back the amount of her capital investment. Subsequent distributions will be split 80% to L and 20% to G. In year one, the partnership buys two parcels of land, Blackacre and Whiteacre, each for $100. At year end, the partnership sells Blackacre for $140 and distributes the entire $140 to L. How should the $40 gain on Blackacre be allocated between L and G to be consistent with the business deal?

Targeted Allocations 3 Steps: 1. PACA: 60 for L (200 CA - 140 distribution) and 0 for G 2. Target: 92 for L, 8 for G (This is because there is 100 remaining in Whiteacre and if it were sold, the first 60 would go to L to recoup original investment. Then, to follow the business deal, of the remaining 40 L gets 32 (80%) and and G gets 8 (20%)) 3. Targeted allocations = Target - PACA, so of the 40 gain on Blackacre, 32 is allocated to L and 8 to G

Unit 3A: A, B, and C Corp. form the ABC partnership. A and B are individual, cash method, calendar year taxpayers. C Corp. is a small corporation that, over the last three years, has had average annual gross receipts in excess of $26 million. C Corp. is an accrual method taxpayer using a June 30 fiscal year. The partners share profits, losses and capital equally. a. The ABC partnership must choose a taxable year. If there were no constraints on this choice, what taxable year would you expect A to favor? C Corp.? b. What is ABC's "required taxable year" within the meaning of § 444(e)? c. ABC must also choose a method of accounting. Is it permitted to elect to use the cash method of accounting?

a. Expect A/B to favor January 31st (has to be last day of month); Corp to favor July 31st b. Calendar year c. Yes, it is only if the PS has made over $25M and has a PT that is a C Corp (what the C Corp has made is irrelevant)

Unit 15 Problem 2 (not on final): On January 1, 2013, X, Y, and Z form an equal partnership to which X contributes Blackacre (value = $1000, basis = $600), Y contributes nonmarketable securities (value = $1000, basis = $200), and Z contributed $1000 cash. The partnership uses the cash to buy Greenacre. All three assets are capital assets in the partnership's hands. On January 1, 2017, the partnership's balance sheet is as seen on the outline. On this date, the following alternative distributions take place. What are the tax consequences to all parties of each of distribution? a. Z receives Blackacre in complete liquidation of her interest in the partnership. How would your answer change, if at all, if Blackacre were worth only $800 on the date of distribution? b. Y receives Greenacre in complete liquidation of her interest in the partnership. c. Y receives Blackacre in complete distribution of her interest in the partnership

a. If Z receives Blackacre, then X would have to recognize 400 of gain (increasing X's outside basis and tax CA and the PS inside basis to 1000) and Z would take Blackacre with 1000 basis and 1500 FMV. If Blackacre were only worth 800, then X would only have to recognize 200 of gain (increasing X's outside basis and tax CA and the PS's inside basis to 800) and Z would take it with 1000 basis and FMV of 800 (b) If Y receives Greenacre in complete liquidation, then Y must recognize 800 of gain (increasing Y's outside basis and tax CA and the PS's inside basis to 1000) and then take Greenacre with a basis of 1000 and FMV of 1500. (c) If Y receives Blackacre in complete liquidation, X must recognize 400 of gain (increasing the accounts to 1000) and Y must recognize 800 of gain (increasing the accounts to 1000) and then Y takes Blackacre with a basis of 1000. (this ends all of the BIG)

Unit 1 Problem 1: A and B purchase unimproved land as cotenants. In each of the following alternatives, determine whether A and B have created an "entity" for tax purposes: a. They hold the land for appreciation; b. They lease the land to Z who uses the land for farming; c. They construct a motel on the land and hire C to manage the motel for them.

a. No entity, holding land for appreciation is not a business but just an investment. b. No entity, leasing land to farmer is not a business (the farmer has the business) c. This is a separate entity because it is a trade/business from which A and B divide profits.