Chapter 20 Forming and Operating Partnerships

1. [LO2] Mary and Scott formed a partnership that maintains its records on a calendar-year basis. The balance sheet of the MS Partnership at year-end is as follows:

Basis Fair Market Value

Cash $ 60 $ 60

Land 60 180

Inventory 72 60

$192 $300

Mary $ 96 $150

Scott 96 150

$192 $300

At the end of the current year, Kari will receive a one-third capital interest only in exchange for services rendered. Kari’s interest will not be subject to a substantial risk of forfeiture and the costs for the type of services she provided are typically not capitalized by the partnership. For the current year, the income and expenses from operations are equal. Consequently, the only tax consequences for the year are those relating to the admission of Kari to the partnership.

a. Compute and characterize any gain or loss Kari may have to recognize as a result of her admission to the partnership.

b. Compute Kari’s basis in her partnership interest.

c. Prepare a balance sheet of the partnership immediately after Kari’s admission showing the partners’ tax capital accounts and capital accounts stated at fair market value.

d. Calculate how much gain or loss Kari would have to recognize if, instead of a capital interest, she only received a profits interest.

2. [LO2] Dave LaCroix recently received a 10 percent capital and profits interest in Cirque Capital LLC in exchange for consulting services he provided. If Cirque Capital had paid an outsider to provide the advice, it would have deducted the payment as compensation expense. Cirque Capital’s balance sheet on the day Dave received his capital interest appears below:

Assets: Basis Fair Market Value

Cash $ 150,000 $ 150,000

Investments 200,000 700,000

Land 150,000 250,000

Totals $ 500,000 $1,100,000

Liabilities and capital:

Nonrecourse Debt 100,000 100,000

Lance* 200,000 500,000

Robert* 200,000 500,000

Totals $ 500,000 $ 1,100,000

*Assume that Lance’s basis and Robert’s basis in their LLC interests equal their tax basis capital accounts plus their respective shares of nonrecourse debt.

a. Compute and characterize any gain or loss Dave may have to recognize as a result of his admission to Cirque Capital.

b. Compute each member’s tax basis in his LLC interest immediately after Dave’s receipt of his interest.

c. Prepare a balance sheet for Cirque Capital immediately after Dave’s admission showing the members’ tax capital accounts and their capital accounts stated at fair market value.

d. Compute and characterize any gain or loss Dave may have to recognize as a result of his admission to Cirque Capital if he receives only a profits interest.

e. Compute each member’s tax basis in his LLC interest immediately after Dave’s receipt of his interest if Dave only receives a profits interest.

a.

3. [LO 2] Last December 31, Ramon sold the 10 percent interest in the Del Sol Partnership that he had held for two years to Garrett for $400,000. Prior to selling his interest, Ramon’s basis in Del Sol was $200,000 which included a $100,000 share of nonrecourse debt allocated to him.

a. What is Garrett’s tax basis in his partnership interest?

b. If Garrett sells his partnership interests three months after receiving it and recognizes a gain, what is the character of his gain?

a.

b. .

4. [LO 3] Broken Rock LLC was recently formed with the following members:

Name	Tax Year End	Capital/Profits %
George Allen	December 31	33.33%
Elanax Corp.	June 30	33.33%
Ray Kirk	December 31	33.34%

What is the required taxable year-end for Broken Rock LLC?

5. [LO 3] Granite Slab LLC was recently formed with the following members:

Name	Tax Year End	Capital/Profits %
Nelson Black	December 31	22.0%
Brittany Jones	December 31	24.0%
Lone Pine LLC	June 30	4.5%
Red Spot Inc.	October 31	4.5%
Pale Rock Inc.	September 30	4.5%
Thunder Ridge LLC	July 31	4.5%
Alpensee LLC	March 31	4.5%
Lakewood Inc.	June 30	4.5%
Streamside LLC	October 31	4.5%
Burnt Fork Inc.	October 31	4.5%
Snowy Ridge LP	June 30	4.5%
Whitewater LP	October 31	4.5%
Straw Hat LLC	January 31	4.5%
Wildfire Inc.	September 30	4.5%

What is the required taxable year-end for Granite Slab LLC?

6. [LO 3] Tall Tree LLC was recently formed with the following members:

Name	Tax Year End	Capital/Profits %
Eddie Robinson	December 31	40%
Pitcher Lenders LLC	June 30	25%
Perry Homes Inc.	October 31	35%

What is the required taxable year-end for Tall Tree LLC?

7. [LO 3] Rock Creek LLC was recently formed with the following members:

Name	Tax Year End	Capital/Profits %
Mark Banks	December 31	35%
Highball PropertiesLLC	March 31	25%
Chavez BuildersInc.	November 30	40%

What is the required taxable year-end for Rock Creek LLC?