Use the following information: Talley, Elmer, and Molly will each be equal owners for purposes of profits and capital of a newly formed business. They contribute the following properties to the business:

Property Adj. Basis Book Value (Fair market value at contribution)

Talley Cash 100,000 100,000

Elmer Equipment 75,000 90,000**

Molly Inventory 60,000 75,000

**Elmers equipment is subject to a $15,000 liability that the business assumes.

Unless otherwise stated, assume this business is a partnership.

The partnership agreement provides for the following provisions:

1) Liquidations are made strictly in accordance with the book value of the partners capital account.

2) Although Talley has 40% of the initial value of partnership capital, Talley is a limited partner and will not be allocated any partnership liabilities. Liabilities will be allocated equally to Elmer and Molly.

3) Talley will be allocated 20% of the partnership profits and losses after any optional (by partnership agreement) or required special allocations.

4) Elmer and Molly are each entitled to 40% of partnership profits and losses after any optional or required special allocations.

If the business is run as a partnership, what is Elmers basis in the partnership at formation?

a. $67,500

b. $60,000

c. $75,000

d. $80,000

If the business is run as an S corporation, what is Elmers basis in stock at formation?

a. $67,500

b. $60,000

c. $75,000

d. $80,000

If the business is run as a C corporation, what is Elmers basis in stock at formation?

a. $67,500

b. $60,000

c. $75,000

d. $80,000

If the business is a partnership, what is Mollys outside basis at formation?

a. $75,000

b. $60,000

c. $67,500

d. $65,000

If the business is run as a partnership, and the rules of Section 704(c) are respected, what will be the relationship of the partnership book depreciation deductions vs. tax depreciations on the equipment that are allocated to Elmer by the partnership?

a. allocations of book depreciation to Elmer will be greater than allocations of tax depreciation to him.

b. allocations of tax depreciation to Elmer will be greater than allocations of book depreciation to him.

c. allocations of book depreciation to Elmer will be the same as the allocations of tax depreciation to him.

d. any of the above alternatives are acceptable

If the business sells the inventory for $80,000, how much tax gain is allocated to Molly if the business is a partnership?

a. $2,000

b. $17,000

c. $8,000

d. $6,667

If the business had been formed as an S corporation with the value of the capital contributions representing percentage of stock ownership, which of the following statement is false?

a. The split of profits referred to in the agreement would not have been allowed.

b. The gain on the sale of the inventory would have been allocated 40%, 20%, and 20% to Talley, Elmer, and Molly respectively.

c. The built-in gain would still have to be allocated to Molly.

d. No liabilities would be added to the basis of any owner.

Suppose the business is run as a partnership and, within one year, the partnership sells the inventory for $80,000, depreciates the equipment for one year of a straight line basis of five years ($18,000 per year for book purposes and $15,000 per year for tax purposes), pays $6,000 on the equipment liability, has other revenues of $90,000, other expenses of $30,000 (other revenues and expenses are the same for both book and tax purposes) and distributes $5,000 to each owner. All transactions except depreciation are in cash. What is the ending value of Talleys capital account?

a. $104,400

b. $101,400

c. $109,400

d. some other amount

Same facts as Question #38, but the question is: What is the value of Mollys outside basis after all of these events?

a. $93,300

b. $101,300

c. $96,300

d. some other amount

What is the taxable amount reported by Talley on her individual tax return as a result of her partnership interest?

$5,000 of ordinary income

$9,400 of ordinary income

$13,000 of ordinary income

$9,400 of capital gain