Chapter 20 Forming and Operating Partnerships

79. [LO 2, 4, 5] Aaron, Deanne, and Keon formed the Blue Bell General Partnership at the beginning of the current year. Aaron and Deanne each contributed $110,000 and Keon transferred an acre of undeveloped land to the partnership. The land had a tax basis of $70,000 and was appraised at $180,000. The land was also encumbered with a $70,000 nonrecourse mortgage for which no one was personally liable. All three partners agreed to split profits and losses equally. At the end of the first year Blue Bell made a $7,000 principal payment on the mortgage. For the first year of operations, the partnership records disclosed the following information:

Sales revenue $470,000

Cost of goods sold $410,000

Operating expenses $70,000

Long-term capital gains $2,400

§1231 gains $900

Charitable contributions $300

Municipal bond interest $300

Salary paid as a guaranteed payment to Deanne (not included in expenses) $3,000

a. Compute the adjusted basis of each partner’s interest in the partnership immediately after the formation of the partnership.

b. List the separate items of partnership income, gains, losses, and deductions that the partners must show on their individual income tax returns that include the results of the partnership’s first year of operations.

c. Using the information generated in answering parts a. and b., prepare Blue Bells’ page 1 and Schedule K to be included with its Form 1065 for its first year of operations along with Schedule K-1 for Deanne.

d. What are the partners’ adjusted bases in their partnership interests at the end of the first year of operations?

80. [LO 4, 5, 6] The TimpRiders LP has operated a motorcycle dealership for a number of years. Lance is the limited partner, Francesca is the general partner, and they share capital and profits equally. Francesca works full-time managing the partnership. Both the partnership and the partners report on a calendar-year basis. At the start of the current year, Lance and Francesca had bases of $10,000 and $3,000 respectively, and the partnership did not carry any debt. During the current year, the partnership reported the following results from operations:

Net sales $650,000

Cost of goods sold $500,000

Operating expenses $160,000

Short-term capital loss $2,000

Tax-exempt interest $2,000

§1231 gain $6,000

On the last day of the year, the partnership distributed $3,000 each to Lance and Francesca.

a. What outside basis do Lance and Francesca have in their partnership interests at the end of the year?

b. How much of their losses are currently not deductible by Lance and Francesca because of the tax basis limitation?

c. To what extent does the passive activity loss limitation apply in restricting their deductible losses for the year?

d. Using the information provided, prepare TimpRiders’ page 1 and Schedule K to be included with its Form 1065 for the current year. Also, prepare a Schedule K-1 for Lance and Francesca.

a.

81. [LO 2, 4, 5] LeBron, Dennis, and Susan formed the Bar T LLC at the beginning of the current year. LeBron and Dennis each contributed $200,000 and Susan transferred several acres of agricultural land she had purchased two years earlier to the LLC. The land had a tax basis of $50,000 and was appraised at $300,000. The land was also encumbered with a $100,000 nonrecourse mortgage (i.e., qualified nonrecourse financing) for which no one was personally liable. The members plan to use the land and cash to begin a cattle-feeding operation. Susan will work full-time operating the business, but LeBron and Dennis will devote less than two days per year to the operation. All three members agree to split profits and losses equally. At the end of the first year, Bar T had accumulated $40,000 of accounts payable jointly guaranteed by LeBron and Dennis and had made a $9,000 principal payment on the mortgage. None of the members have passive income from other sources.

For the first year of operations, the partnership records disclosed the following information:

Sales revenue $620,000

Cost of goods sold $380,000

Operating expenses $670,000

Dividends $1,200

Municipal bond interest $300

Salary paid as a guaranteed payment to Susan (not included in expenses) $10,000

Cash distributions split equally among the members at year-end $3,000

a. Compute the adjusted basis of each member’s interest immediately after the formation of the LLC.

b. When does each member’s holding period for his or her LLC interests begin?

c. What is Bar T’s tax basis and holding period in its land?

d. What is Bar T’s required tax year-end?

e. What overall methods of accounting were initially available to Bar T?

f. List the separate items of partnership income, gains, losses, deductions and other items that will be included in each member’s Schedule K-1 for the first year of operations. Use the proposed self-employment tax regulations to determine each member’s self-employment income or loss.

g. What are the members’ adjusted bases in their LLC interests at the end of the first year of operations?

h. What are the members’ at-risk amounts in their LLC interests at the end of the first year of operations?

i. How much loss from Bar T, if any, will the members be able to deduct on their individual returns from the first year of operations?

a.