Problem 21-38 (LO. 3, 6, 7, 9, 10)

Suzy contributed assets valued at $360,000 (basis of $200,000) in exchange for her 40% interest in Suz-Anna GP (a general partnership in which both partners are active owners). 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 qualified nonrecourse financing of $100,000, which was assumed by the partnership.

The partnership reports the following income and expenses for the current tax year:

Sales	$560,000
Utilities, salaries, depreciation, and other operating expenses	360,000
Short-term capital gain	10,000
Tax-exempt interest income	4,000
Charitable contributions (cash)	8,000
Distribution to Suzy	10,000
Distribution to Anna	20,000

During the current tax year, Suz-Anna refinanced the land and building (i.e., the original $100,000 debt was repaid and replaced with new debt). At the end of the year, Suz-Anna held recourse debt of $100,000 for partnership accounts payable (recourse to the partnership but not personally guaranteed by either of the partners) and qualified nonrecourse financing of $200,000.

a. What is Suzy's basis in Suz-Anna after formation of the partnership? Anna's basis? Suzy's beginning basis in her partnership interest is $fill in the blank 525a0efbbfd005c_1, and Anna's basis is $fill in the blank 525a0efbbfd005c_2.

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A partner's adjusted basis is affected by the partner's share of partnership debt. Partnership debt includes any partnership obligation that creates an asset; results in an expense to the partnership; or results in a nondeductible, noncapitalizable item at the partnership level. This definition includes certain contingent liabilities. The definition also includes most debt that is considered a liability under financial accounting rules except for accounts payable of a cash basis partnership.

b. Enter the amounts for the following items that will appear on Suzy's Schedule K-1.

Item	Amount
Ordinary income	$fill in the blank ea6b5703e01fff0_1
Short-term capital gain	$fill in the blank ea6b5703e01fff0_2
Tax-exempt interest income	$fill in the blank ea6b5703e01fff0_3
Charitable contributions	$fill in the blank ea6b5703e01fff0_4
Distribution received by Suzy	$fill in the blank ea6b5703e01fff0_5

What income, deduction, and taxes does Suzy report on her tax return? On her tax return, Suzy reports the ordinary income on

Schedule ASchedule BSchedule DSchedule ESchedule E

. She reports the short-term capital gain on

Schedule ASchedule BSchedule DSchedule ESchedule D

. She reports the charitable contributions

Schedule ASchedule BSchedule DSchedule ESchedule A

with her personal charitable contributions. Suzy might also be eligible for the qualified business income deduction; the partnership needs to provide additional information regarding

W-2 wages and distributionsW-2 wages and depreciable propertydepreciable property and cost of goods solddepreciation expense and W-2 wagesW-2 wages and depreciable property

so that Suzy can calculate the deduction. Suzy

isis notis

subject to self-employment taxes.

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Correct

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?

Suzy's year-end basis in her partnership interest is $fill in the blank aad84c041047060_1, and Suzy's amount at risk is $fill in the blank aad84c041047060_2.

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Correct

d. Assume that Suz-Anna prepares the capital account rollforward on the partners' Schedules K1 on a tax basis. What are Suzy's capital account balances at the beginning and end of the tax year? What accounts for the difference between Suzy's ending capital account and her ending tax basis in the partnership interest?

Suzy's capital account balance at the beginning of the tax year is $fill in the blank 82a1e5fb1fca034_1 and at the end of the tax year is $fill in the blank 82a1e5fb1fca034_2 .

The capital account

doesdoes notdoes not

include the partner's share of liabilities.

In this situation, Suzy's ending capital account differs from her ending tax basis, because her $fill in the blank 82a1e5fb1fca034_4 share of partnership liabilities

isis notis not

included in her ending capital account.

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After the partner is admitted to the partnership, the partner's basis is adjusted for numerous items. The partner's basis is not the same as the partner's capital account. Think of the capital account as an accounting calculation of the partner's ownership in the entity.

e. What would happen if Suz-Anna was formed as an LLC instead of a general partnership. How would Suz-Anna's ending liabilities be treated? How would Suzy's basis and amount at risk be different?

All50%NoneNone

of the LLC members are personally liable for the accounts payable of the LLC. They are

excludedpartially includedincludedincluded

in the members' bases in their LLC interests and

excludedpartially includedincludedexcluded

in the amounts at risk.

AllNoneNone

of the LLC members are personally liable for the nonrecourse debt of the LLC. It is

excludedincludedincluded

in the LLC members' bases as a nonrecourse debt and

excludedincludedincluded

in the amount at risk.

Suzy's ending basis in the LLC interest is $fill in the blank 11a75106701602f_7, and the amount at risk in her LLC interest is $fill in the blank 11a75106701602f_8.