Grimm is a 40% partner in We Four, LLC a super-heroing organization. (He does most of the heavy lifting. Reed has
40%, he is the brains. Sue has 10%--they never see her doing anything. Her
brother Johnny has the other 10%--he gets too hot under the collar to deal with
On 1January 2013, his outside basis in his LLC interest
was $125,000. This included his share of
liabilities--$75,000. (Reed is always repairing and inventing gadgets—saving
the world is expensive.)
In addition to the operating costs, the insurance
premiums alone were six figures---you try paying for the cost of cleaning up
after a visit from Dr. Doom—they still made a profit. The Company’s a net
profit of $300,000 before any payments to partners.
gets a guaranteed payment of $75,000 (a bit of a stretch, but he does invent
the impossible) and Ben gets a guaranteed payment of $20,000 as a return on his
investment (he used an inheritance form his Aunt Petunia to buy their
headquarters). He gets another $30,000 for his services hitting things—this is
a labor intensive business. Johnny and
Sue each get $10,000.
The partnership made distributions during the year to all
of the partners. Ben received:
cash of $65,000;
inventory with a
FMV of $55,000 and a basis of $35,000; and
with a face value of $25,000 and a basis of $0. These were all of the
outstanding receivables as of year-end.
Fantasti-car worth $45,000 with an inside basis of $25,000.
distribution of cash and inventory was pro rata amongst all partners. However,
only Ben received any receivables, the others received additional cash.
Cash flow was good so the company paid off all of its
debt at year end.
Ben has come to you to explain what happened—tax wise.
Specifically, he asks:
What is he
supposed to report on his 2013 return? Income, loss, gain??? (Remember, Ben is
strong but doesn’t understand a Thing about taxes).
What does he do
about the inventory? Reed supplemented their income by selling gadgets to other
superheroes (Tony Stark’s equipment is way overpriced). Ben is thinking about
using the equipment in a new side business on Yancey Street to be called
‘Clobber This’ where it would be used to help heroes de-stress. (Already he has
had inquiries from Frank Castle, Wolverine and Bruce Banner). If the business
proves less than fantastic, he plans to sell the equipment.
What does he do
about the receivables? How will he be taxed and when? How much? He was told he
has no tax until he collects.
What is his
basis in the car? He plans to use it in his business and wants to depreciate
it. The company had been depreciating it over 5 years using MACRS. Ben thinks
straight line is better; he remembers that from an old accounting course. What
can he do?
What is his 31
December 2013 basis in the LLC?
Ben would like
to transfer a 5% interest to his girlfriend, Alicia as a gift—although she
can’t see why. However, his last accountant, Debbie T. Credit, said he’ll still
get clobbered with the income—what does she mean? Only consider the income tax
consequences, not gift tax.
Ben a letter and explain all of this.