paraphrasing the solution

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timer Asked: Nov 22nd, 2016

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I have a case and I want you to paraphrase the solution that is attached with the case. Also, I want you to change the style of the answer.

Tax Research Problems C:9-61 Basis at Time of Contribution Wally’s basis in the property at the time of contribution: Office furniture: Cost Minus: MACRS 7-year property ($60,000 x .1429 x 8/ 12) Basis at contribution (September 20, 2015) $60,000 ( 5,716) $54,284 Sources: Sec. 168(e)(1), Sec. 168(k), and Rev. Proc. 87-57, 1987-2 C.B. 687, Table 1. (Also see Table 1 in Appendix C of the text.) Building: Cost Prior years’ depreciation (MACRS 39year straight-line depreciation): 2011 (0.01391 x $100,000) 2012 (0.02564 x $100,000) 2013 (0.02564 x $100,000) 2014 (0.02564 x $100,000) 2015 (0.02564 x $100,000 x 8/ 12) Basis at contribution (September 20, 2015) $100,000 $1,391 2,564 2,564 2,564 1,709 ( 10,792) $ 89,208 Sources: Sec. 168(c)(1) and IRS Publication 946, Table A-7a. (also see Table 9 in Appendix C of the text.) Land: Cost basis $ 8,000 Partnership Depreciation The partnership continues the depreciation method used by the related party prior to the contribution (Sec. 168(i)(7)). The partnership is assumed to have held the property for the entire month in which the property is transferred (Prop. Reg. Secs. 1.168-5(b)(4)(i) and 1.168-5(b)(2)(i)(B)). Accordingly, the current year depreciation is: Office furniture ($60,000 x 0.1429 x 4/ 12) $ 2,858 Building (0.02564 x $100,000 x 4/12) $ Copyright © 2016 Pearson Education, Inc. C:9-38 855 Allocation of Depreciation to the Partners Section 704(c)(1) requires that depreciation on contributed property be allocated to take into account the difference between the basis and FMV amounts at the time of contribution. Treasury Regulations describe three alternatives for allocating depreciation between the partners. Regulation Sec. 1.704-3(b), and especially Reg. Sec. 1.704-3(b)(2) Example 1, illustrates the traditional method of allocation between the partners. For book purposes, the partnership records contributed property at its FMV at the time of contribution (Reg. Sec. 1.704-1(b)(2)(iv)(d)). Caitlin is treated as though she purchased a one-half interest in this book value. Consequently, she has an allocable right to tax depreciation in an amount that equals one-half the book depreciation. According to Reg. Sec. 1.704-1(b)(2)(iv)(g)(3), book depreciation is based on the following ratio: Book depreciation = Tax depreciation x (Book value / Adjusted basis) Thus, for the year of transfer, book depreciation is calculated as follows: Office furniture: $2,858 x ($66,000 / $54,284) = $3,475 Building: $855 x ($120,000 / $89,208) = $1,150 The $66,000 and $120,000 book values in the above calculations are the FMVs at the time of contribution. Caitlin, then, is allocated tax depreciation equal to one-half these book amounts, and Wally receives any remaining tax depreciation. The following table summarizes the allocation of tax depreciation. Partnership Office Furniture: ($3,475 x 0.5) ($2,858 - $1,738) $2,858 Building: ($1,150 x 0.5) ($855 - $575) $ 855 Caitlin Wally $1,738 $1,120 $ 575 $ 280 Treasury Regulations provide two other methods of allocating depreciation on contributed property among the partners: the traditional method with curative allocations and the remedial method. These elective methods are used only if the traditional method cannot give the noncontributing partner (in our case, Caitlin) tax depreciation equal to her share of book depreciation because the partnership’s tax depreciation on the contributed asset is less than the book value depreciation to be allocated to the noncontributing partner. One of these two methods would be used if partnership tax depreciation on the office furniture was less than $1,738 or if the partnership depreciation on the building was less than $575. Neither of these methods applies to our situation because the traditional method already gives Caitlin tax depreciation equal to her share of book depreciation. Copyright © 2016 Pearson Education, Inc. C:9-39 Depreciation Recapture and Unrecaptured Sec. 1250 Gain Both the office furniture and the building are Sec. 1231 property at the time of the contribution. The building is technically subject to Sec. 1250 recapture but only to the extent that accelerated depreciation claimed exceeds straight-line depreciation (Sec. 1250(a)). Because MACRS mandates straight-line depreciation, no Sec. 1250 depreciation recapture potential exists for the building. However, the building is subject to the unrecaptured Sec. 1250 gain rules of Secs. 1(h)(1)(D) and 1(h)(7), which tax such gain at a 25% rate (and possibly an additional 3.8%). At the time of the contribution, the office furniture is subject to Sec. 1245 recapture for the full $5,716 depreciation that Wally has claimed (Sec. 1245(a)). However, the contribution of the office furniture to the partnership triggers recapture only if gain must be recognized (Sec. 1245(b)(3)), and Wally recognizes no gain on this contribution. The recapture potential carries over to the partnership (Reg. Sec. 1.1245-2(c)(2)). At the time of contribution, the building has potential unrecaptured Sec. 1250 gain of $10,792, the amount of depreciation that Wally has claimed. However, because the contribution triggers no gain recognition, the unrecaptured Sec. 1250 gain potential carries over to the partnership. Note for instructors: The problem did not request the allocation of recapture upon sale of the furniture by the partnership. However, students may ask, and the answer is not the expected one. The allocation of Sec. 1245 recapture at the time of the sale of the office furniture by the partnership will not necessarily allocate all the precontribution recapture amounts to Wally. Regulation Sec. 1.1245-1(e)(2) specifies that the recapture is to be “allocated to the partners in the same proportion as the total gain is allocated” if the partnership agreement does not specifically allocate the Sec. 1245 recapture. This pro rata allocation may or may not allocate the full precontribution recapture to the contributing partner depending on the amount and allocation of postcontribution gain. Similar treatment probably also applies to unrecaptured Sec. 1250 gain. C:9-62 For financial accounting purposes, the asset transfer will be reported in the same manner as the corporate formation transaction described in Tax Research Problem C2-64. Lisa will recognize no gain on the transfer of the $50,000 in cash to the Lima General Partnership. Matthew will report a $15,000 gain for financial accounting purposes on the land transfer to the partnership. Again, as mentioned in the solution to Tax Research Problem C2-64, the actual financial accounting reporting for the two transferors may be immaterial because neither of the two individuals may maintain financial accounting records for their personal transactions. However, Lima will report the cash at its $50,000 face amount and will report a $50,000 carrying value for the land. For tax purposes, Lisa will report no gain or loss on the cash contribution (Sec. 721(a)). Lisa’s basis for her partnership interest is $50,000 (Sec. 722). The holding period for the partnership interest begins on the day after the contribution. The partnership’s basis for the cash is $50,000 (Sec. 723(a)). The partnership’s holding period for the cash is irrelevant. For tax purposes, Matthew will report no gain or loss on the land contribution (Sec. 721(a)). Matthew’s basis for his partnership interest is $35,000 (Sec. 722). The holding period for the partnership interest includes Copyright © 2016 Pearson Education, Inc. C:9-40

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