39. In 2013, Tom and Missy form TM Partnership, Ltd. (an LLLP), to
own and operate certain real estate. Tom contributed land, and Missy
contributed cash to be used for setting up the entity and creating a plan for
developing the property. Once a development plan was in place, the partnership
sold interests in the partnership to investors to raise funds for constructing
a shopping center. The partnership incurred expenses of $30,000 for forming the
entity and $60,000 for starting the business (e.g., setting up the accounting
systems, locating tenants, and negotiating leases). It also paid $5,000 in
transfer taxes for changing the ownership of the property to the partnership’s
name. The brokerage firm that sold the interests to the limited partners
charged a 6% commission, which totaled $600,000. The calendar year partnership
started business in November 2013. Describe how all of these initial expenses
are treated by the partnership.
The KL Partnership is owned equally by Kayla and Lisa.
Kayla’s basis is $20,000 at the beginning of the tax year. Lisa’s basis is
$16,000 at the beginning of the year. KL reported the following income and
expenses for the current tax year:
Sales revenue $150,000
Cost of sales 80,000
Distribution to Lisa 15,000
Depreciation expense 20,000
Rent expense 18,000
Long-term capital gain 6,000
Payment to Mercy Hospital for Kayla’s
medical expenses 12,000
a. Determine the ordinary partnership
income and separately stated items for the partnership.
b. Calculate Kayla’s basis in her
partnership interest at the end of the tax year. What items should Kayla report
on her Federal income tax return?
c. Calculate Lisa’s basis in her partnership interest at
the end of the tax year. What items should Lisa report on her Federal income
50. Suzy contributed business-related assets valued at $360,000
(basis of $200,000) in exchange for her 40% interest in the Suz-Anna
Partnership. Anna contributed land and a building valued at $640,000 (basis of
$380,000) in exchange for the remaining 60% interest. Anna’s property was
encumbered by a qualified nonrecourse debt of $100,000, which was assumed by
the partnership. The partnership reports the following income and expenses for
the current tax year:
Utilities, salaries, and other
operating expenses 360,000
Short-term capital gain 10,000
Tax-exempt interest income 4,000
Charitable contributions 8,000
Distribution to Suzy 10,000
Distribution to Anna 20,000
During the current tax year, Suz-Anna
refinanced the land and building. At the end of the year, Suz-Anna had recourse
debt of $100,000 for partnership accounts payable and qualified nonrecourse
debt of $200,000.
a. What is Suzy’s basis after
formation of the partnership? Anna’s basis?
b. What income and separately stated
items does the partnership report on Suzy’s
Schedule K–1? What items does Suzy
report on her tax return?
c. Assume that all partnership debts are shared
proportionately. At the end of the tax year, what are Suzy’s basis and amount
at risk in her partnership interest?