C:9-5 An existing partner wants to contribute property having a basis less than its FMV for an additional interest in a partnership. a. Should he contribute the property to the partnership? b. What are his other options? c. Explain the tax implications for the partner of these other options. C:9-7 Which of the following items can be deducted (up to $5,000) and amortized as part of a partnerships organizational expenditures? a. Legal fees for drawing up the partnership agreement b. Accounting fees for establishing an accounting system c. Fees for securing an initial working capital loan d. Filing fees required under state law in initial year to conduct business in the state e. Accounting fees for preparation of initial short-period tax return f. Transportation costs for acquiring machinery essential to the partnerships business g. Syndication expenses C:9-9 How will a partners distributive share be determined if the partner sells one-half of his or her beginning-of-the-year partnership interest at the beginning of the tenth month of the partnerships tax year? 2. (Chapter 9) Problems C:9-25; C:9-27; C9-32 C:9-25 Formation of a Partnership. Suzanne and Bob form the SB General Partnership as equal partners. They make the following contributions: Individual Asset Basis to Partner FMV Suzanne Cash $45,000 $45,000 Inventory (securities) 14,000 15,000 Bob Land 45,000 40,000 Building 50,000 100,000 The SB Partnership assumes the $80,000 recourse mortgage on the building that Bob contributes and the partners share the economic risk of loss on the mortgage equally. Bob has claimed $40,000 in straight-line depreciation under the MACRS rules on the building. Suzanne is a stockbroker and contributed securities from her inventory. The partnership will hold them as an investment. a. What amount and character of gain or loss must each partner recognize on the formation of the partnership? b. What is each partners basis in his or her partnership interest? c. What is the partnerships basis in each asset? d. What is the partnerships initial book value of each asset? e. The partnership holds the securities for two years and then sells them for $20,000. What amount and character of gain must the partnership and each partner report? C:9-27 Formation of a Partnership. On January 1, Julie, Kay, and Susan form a partnership. The contributions of the three individuals are listed below. Julie received a 30% partnership interest, Kay received a 60% partnership interest, and Susan received a 10% partnership interest. They share the economic risk of loss from recourse liabilities according to their partnership interests. Individual Asset Basis to Partner FMV Julie Accounts receivable $ 0 $ 60,000 Kay Land 30,000 58,000 Building 45,000 116,000 Susan Services ? 20,000 Kay has claimed $15,000 of straight-line MACRS depreciation on the building. The land and building are subject to a $54,000 mortgage, of which $18,000 is allocable to the land and $36,000 is allocable to the building. The partnership assumes the mortgage. Susan an attorney, and the services she contributes are the drawing-up of all partnership agreements. a. What amount and character of gain, loss, or income must each partner recognize on the formation of the partnership? b. What is each partners basis in her partnership interest? c. What is the partnerships basis in each of its assets? d. What is the partnerships initial book value of each asset? e. To raise some immediate cash after the formation, the partnership decides to sell the land and building to a third party and lease it back. The buyer pays $40,000 cash for the land and $80,000 cash for the building in addition to assuming the $54,000 mortgage. Assume the partnership claim no additional depreciation on the building before the sale. What is each partners distributive share of the gains, and what is the character of the gains? C:9-32 Partnership Income and Basis Adjustments. Mark and Pamela are equal partners in MP Partnership. The partnership, Mark, and Pamela are calendar year taxpayers. The partnership incurred the following items in the current year: Sales $450,000 Cost of goods sold 210,000 Dividends on corporate investments 15,000 Tax-exempt interest income 4,000 Section 1245 gain (recapture) on equipment sale 33,000 Section 1231 gain on equipment sale 18,000 Long-term capital gain on stock sale 12,000 Long-term capital loss on stock sale 10,000 Short-term capital loss on stock sale 9,000 Depreciation (no Sec. 179 or bonus depreciation components) 27,000 Guaranteed payment to Pamela 30,000 Meals and entertainment expenses 11,600 Interest expense on loans allocable to: Business debt 42,000 Stock investments 9,200 Tax-exempt bonds 2,800 Principal payment on business loan 14,000 Charitable contributions 5,000 Distributions to partners ($40,000 each) 80,000 a. Compute the partnerships ordinary income and separately stated items. b. Show Marks and Pamelas shares of the items in Part a. c. Compute Marks and Pamelas ending basis in their partnership interests assuming their beginning balances are $150,000 each. 3. (Chapter 11 22) Discussion Questions C:11-2, C:11-4 C:11-2 Julio, age 50, is a U.S. citizen who has a 28% marginal tax rate. He has operated the A&B Automotive Parts Company for a number of years as a C corporation. Last year, A&B reported $200,000 of pre-tax profits, from which it paid $50,000 in salary and $25,000 in dividends to Julio. The corporation expects this years pre-tax profits to be $300,000. To date, the corporation has created no fringe benefits or pension plans for Julio. Julio asks you to explain whether an S corporation election would reduce his taxes. How do you respond to Julios inquiry? C:11-4 Lance and Rodney are contemplating starting a new business to manufacture computer software games. They expect to encounter losses in the initial years. Lances CPA has talked to them about using an S corporation. Rodney, while reading a business publication, encounters a discussion on limited liability companies (LLCs). The article talks about the advantages of using an LLC instead of an S corporation. How would you respond to their inquiry? 4. (Chapter 11 22) Problems C:11-29, C:11-37 C:11-29 Comparison of Entity Forms. Carl Carson, a single taxpayer, owns 100% of Delta Corporation. During 2010, Delta reports $150,000 of taxable income. Carl reports no income other than that earned from Delta, and Carl claims the standard deduction. a. What is Deltas income tax liability assuming Carl withdraws none of the earnings from the C corporation? What is Carls income tax liability? What is the total tax liability for the corporation and its shareholder? b. Assume that Delta instead distributes $80,000 of its after-tax earnings to Carl as a dividend in the current year. What is the total income tax liability for the C corporation and its shareholder? c. How would your answer to Part a change if Carl withdrew $80,000 from the business in salary? Assume the corporation pays $6,000 of Social Security taxes on the salary, which it can deduct from the $150,000 taxable income amount in Part a. Carl also pays $6,000 of Social Security taxes on the salary, which he cannot deduct. d. How would your answers to Parts ac change if Delta were instead an S corporation? C:11-37 Determination of Pass-Throughs and Stock Basis Adjustments. Mike and Nancy are equal shareholders in MN Corporation, an S corporation. The corporation, Mike, and Nancy are calendar year taxpayers. The corporation has been an S corporation during its entire existence and thus has no accumulated E&P. The shareholders have no loans to the corporation. The corporation incurred the following items in the current year: Sales $300,000 Cost of goods sold 140,000 Dividends on corporate investments 10,000 Tax-exempt interest income 3,000 Section 1245 gain (recapture) on equipment sale 22,000 Section 1231 gain on equipment sale 12,000 Long-term capital gain on stock sale 8,000 Long-term capital loss on stock sale 7,000 Short-term capital loss on stock sale 6,000 Depreciation 18,000 Salary to Nancy 20,000 Meals and entertainment expenses 7,800 Interest expense on loans allocable to: Business debt 32,000 Stock investments 6,400 Tax-exempt bonds 1,800 Principal payment on business loan 9,000 Charitable contributions 2,000 Distributions to shareholders ($15,000 each) 30,000 a. Compute the partnerships ordinary income and separately stated items. b. Show Mikes and Nancys shares of the items in Part a. c. Compute Mikes and Nancys ending stock bases assuming their beginning balances are $100,000 each. When making basis adjustments, apply the adjustments in the order outlined on pages C:11-24 and C:11-25 of the text