CHAPTER 1?UNDERSTANDING AND WORKING WITH THE FEDERAL TAX

 1117. CHAPTER 10—PARTNERSHIPS: FORMATION, OPERATION, AND BASIS Quest83

Greg and Justin are forming the GJ Partnership. Greg contributes $500,000 cash and Justin contributes nondepreciable property with an adjusted basis of $200,000 and a fair market value of $550,000. The property is subject to a $50,000 liability, which is also transferred into the partnership and is shared equally by the partners for basis purposes. Greg and Justin share in all partnership profits equally except for any precontribution gain, which must be allocated according to the statutory rules for built-in gain allocations.

a.	What is Justin’s adjusted tax basis for his partnership interest immediately after the partnership is formed?
b.	What is the partnership’s adjusted basis for the property contributed by Justin?
c.	If the partnership sells the property contributed by Justin for $600,000, how is the tax gain allocated between the partners?

1118. CHAPTER 10—PARTNERSHIPS: FORMATION, OPERATION, AND BASIS Quest84
Andrew contributes property with a fair market value of $6,000,000 and an adjusted basis of $2,000,000 to AP Partnership. Andrew shares in $3,000,000 of partnership debt under the liability sharing rules, giving him an initial adjusted basis for his partnership interest of $5,000,000. One month after the contribution, Andrew receives a cash distribution from the partnership of $3,000,000. Andrew would not have contributed the property if the partnership had not contractually obligated itself to make the distribution. Assume Andrew’s share of partnership liabilities will not change as a result of this distribution.

a.	Under the IRS’s likely treatment of this transaction, what is the amount of gain or loss that Andrew will recognize because of the $3,000,000 cash distribution?
b.	What is the partnership’s basis for the property after the distribution?
c.	If Andrew is unhappy with this result, can you suggest a possible alternative that may provide him with a better answer?

1119. CHAPTER 10—PARTNERSHIPS: FORMATION, OPERATION, AND BASIS Quest85
During the current year, MAC Partnership reported the following items of receipts and expenditures: $300,000 sales, $20,000 utilities, $30,000 rent, $100,000 salaries to employees, $40,000 guaranteed payment to partner Mitchell, investment interest income of $4,000, a charitable contribution of $6,000, and a distribution of $20,000 to partner Chad. Austin is a 40% partner. What items will be reflected on Austin’s Schedule K-1?

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1120. CHAPTER 10—PARTNERSHIPS: FORMATION, OPERATION, AND BASIS Quest86
The LN partnership reported the following items of income and deduction during the current tax year: revenues, $200,000; cost of goods sold, $80,000; tax-exempt interest income, $5,000; salaries to employees, $50,000; and long-term capital gain, $5,000. In addition, the partnership distributed $10,000 of cash to 50% partner Nina and $20,000 of cash to 50% partner Len. What is Nina’s share of ordinary partnership income and separately stated items?

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1121. CHAPTER 10—PARTNERSHIPS: FORMATION, OPERATION, AND BASIS Quest87
Crystal contributes land to the newly formed CD Partnership in exchange for a 40% interest. The land has an adjusted basis and fair market value of $200,000 and is subject to a liability of $50,000, which the partnership assumes. None of this liability is repaid at year-end. At the end of the year, the partnership has trade accounts payable of $60,000. Assume all liabilities are allocated proportionately to the partners. Total partnership income for the year is $300,000. What is Crystal’s basis in her partnership interest at the end of the year?

1122. CHAPTER 10—PARTNERSHIPS: FORMATION, OPERATION, AND BASIS Quest88
An examination of the RB Partnership’s tax books provides the following information for the current year:

Operating (ordinary) income before guaranteed payments	$225,000
Long-term capital gain	4,000
Guaranteed payment to Barry	25,000
Cash distributions to each partner	30,000
Interest on Georgia state bonds (exempt interest income)	2,000
Interest paid on funds used to purchase Georgia state bonds	500
Charitable contributions made by partnership	4,000
Increase in partnership liabilities from 1/1-12/31	30,000

Barry is a 30% partner in partnership capital, profits, and losses. Assume the adjusted basis of his partnership interest is $50,000 at the beginning of the year, and he shares in 30% of the partnership liabilities for basis purposes.

a.	What is Barry’s adjusted basis for the partnership interest at the end of the year?
b.	How much income must Barry report on his tax return for the current year? What is the character of income?