Carrie DLake, Reed A. Green, and Doug A. Divot share a passion for golf and decide to
Question:
Partner............................Contribution
Carrie DLake..................Land, FMV $460,000
.........................................Basis $460,000, Mortgage $60,000
Reed A. Green................$400,000
Doug A. Divot.................$400,000
Carrie had recently acquired the land with the idea that she would contribute it to the newly formed partnership. The partners agree to share in profits and losses equally. Slicenhook elects a calendar year-end and the accrual method of accounting.
In addition, Slicenhook received a $1,500,000 recourse loan from Big Bank at the time the contributions were made. Slicenhook uses the proceeds from the loan and the cash contributions to build a state-of-the-art manufacturing facility ($1,200,000), purchase equipment ($600,000), and produce inventory ($400,000). With the remaining cash, Slicenhook invests $45,000 in the stock of a privately owned graphite research company and retains $55,000 as working cash.
Slicenhook operates on a just-in-time inventory system so it sells all inventory and collects all sales immediately. That means that at the end of the year, Slicenhook does not carry any inventory or accounts receivable balances. During 2018, Slicenhook has the following operating results:
Sales...........................................................................$1,126,000
Cost of goods sold....................................................400,000
Interest income from tax-exempt bonds..............900
Qualified dividend income from stock..................1,500
Operating expenses.................................................126,000
Depreciation (tax)
.....§179 on equipment......................$39,000
.....Equipment.....................................81,000
.....Building..........................................24,000............144,000
Interest expense on debt.........................................120,000
The partnership is very successful in its first year. The success allows Slicenhook to use excess cash from operations to purchase $15,000 of tax-exempt bonds (you can see the interest income already reflected in the operating results). The partnership also makes a principal payment on its loan from Big Bank in the amount of $300,000 and a distribution of $100,000 to each of the partners on December 31, 2018.
The partnership continues its success in 2019 with the following operating results:
Sales.............................................................................$1,200,000
Cost of goods sold......................................................420,000
Interest income from tax-exempt bonds.................900
Qualified dividend income from stock.....................1,500
Operating expenses....................................................132,000
Depreciation (tax)
......Equipment..............................$147,000
......Building...................................30,000.....................177,000
Interest expense on debt............................................96,000
The operating expenses include a $1,800 trucking fine that one of their drivers incurred for reckless driving and speeding and meals expense of $6,000.
By the end of 2019, Reed has had a falling out with Carrie and Doug and has decided to leave the partnership. He has located a potential buyer for his partnership interest, Indie Ruff. Indie has agreed to purchase Reeds interest in Slicenhook for $730,000 in cash and the assumption of Reeds share of Slicenhooks debt. Carrie and Doug, however, are not certain that admitting Indie to the partnership is such a good idea. They want to consider having Slicenhook liquidate Reeds interest on January 1, 2020. As of January 1, 2020, Slicenhook has the following assets:
Carrie and Doug propose that Slicenhook distribute the following to Reed in complete liquidation of his partnership interest:
Slicenhook has not purchased or sold any equipment since its original purchase just after formation.
a. Determine each partners recognized gain or loss upon formation of Slicenhook.
b. What is each partners initial tax basis in Slicenhook on January 2, 2018?
c. Prepare Slicenhooks opening tax basis balance sheet as of January 2, 2018.
d. Using the operating results, what are Slicenhooks ordinary income and separately stated items for 2018 and 2019? What amount of Slicenhooks income for each period would each of the partners receive?
e. Using the information provided, prepare Slicenhooks page 1 and Schedule K to be included with its Form 1065 for 2018. Also, prepare a Schedule K-1 for Carrie.
f. What are Carries, Reeds, and Dougs bases in their partnership interest at the end of 2018 and 2019?
g. If Reed sells his interest in Slicenhook to Indie Ruff, what is the amount and character of his recognized gain or loss? What is Indies basis in the partnership interest?
h. What is Indies inside basis in Slicenhook? What effect would a §754 election have on Indies inside basis?
i. If Slicenhook distributes the assets proposed by Carrie and Doug in complete liquidation of Reeds partnership interest, what is the amount and character of Reeds recognized gain or loss? What is Reeds basis in the distributed assets?
j. Compare and contrast Reeds options for terminating his partnership interest. Assume that Reeds marginal tax rate is 35 percent and his capital gains rate is 15 percent.
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Step by Step Answer:
Essentials Of Federal Taxation 2019
ISBN: 9781260190045
10th Edition
Authors: Brian Spilker, Benjamin Ayers, John Robinson, Edmund Outslay, Ronald Worsham, John Barrick, Connie Weaver