CHAPTER 21 PARTNERSHIPS

1. An examination of the RB Partnership’s tax books provides the following information for the current year:

Operating (ordinary) income before guaranteed payments	$300,000
Long-term capital gain	6,000
Guaranteed payment to Rachel for services	30,000
Cash distributions to each partner	20,000
Interest on Colorado state bonds (exempt interest income)	2,000
Charitable contributions made by partnership	10,000
Decrease in partnership liabilities from 1/1-12/31	(20,000)

Rachel is a 30% general partner in partnership capital, profits, and losses. Assume the adjusted basis of her partnership interest is $60,000 at the beginning of the year, and she shares in 30% of the partnership’s liabilities for basis purposes.

a. What is Rachel’s adjusted basis for the partnership interest at the end of the year?

b. How much income must Rachel report on her tax return for the current year? What is thecharacter of the income and what types of tax might apply to it?

2. Katherine invested $80,000 this year to purchase a 30% interest in the KLM Partnership. The partnership reported

$200,000 of net income from operations, a $2,000 short-term capital loss, and a $10,000 charitable contribution. In addition, the partnership distributed $20,000 to Katherine and $10,000 each to partners Lauren and Missy.

Assuming the partnership has no beginning or ending liabilities, what is Katherine’s basis in her partnership interest

at the end of the year?

3. Sarah contributed fully depreciated ($0 basis) property valued at $50,000 to the RSTU Partnership in exchange for a 25% interest in partnership capital and profits. During the first year of partnership operations, RSTU had net taxable income of $200,000 and tax-exempt income of $4,000. The partnership distributed $10,000 cash to Sarah. Her share of partnership recourse liabilities on the last day of the partnership year was $20,000. What is Sarah’s adjusted basis (outside basis) for her partnership interest at the end of the tax year?

4. In the current year, the DOE LLC received revenues of $200,000 and paid the following amounts: $50,000 in rent and utilities, a $40,000 guaranteed payment to 50% member Dave, $10,000 to member Ethan for consulting services, and $10,000 as a distribution to member Olivia. In addition, the LLC earned $2,000 of tax-exempt interest income during the year. Dave is the managing member of the LLC. Dave’s basis in his LLC interest was $50,000 at the beginning of the year, and includes a $12,000 share of LLC liabilities. At the end of the year, his share of the LLC’s liabilities was $20,000.

a. How much income must Dave report for the tax year and what is the character of the income?

b. What is Dave’s basis in his LLC interest at the end of the tax year?

c. On what income will Dave’s self­employment tax be calculated?

5. Sharon and Sue are equal partners in the S&S Partnership. On January 1 of the current year, each partner’s adjusted basis in S&S was $80,000 (including each partner’s $20,000 share of the partnership’s $40,000 of liabilities). During the current year, S&S repaid $30,000 of the debt and borrowed $20,000 for which Sharon and Sue are equally liable. In the current year ended December 31, S&S also sustained a net operating loss of $40,000 and earned $10,000 of interest income from investments. If liabilities are shared equally by the partners, on January 1 of the next year how much is each partner’s basis in her interest in S&S?

6. In the current year, the CAR Partnership received revenues of $400,000 and paid the following amounts: $160,000 in rent, utilities, and salaries; a $40,000 guaranteed payment to partner Ryan; $20,000 to partner Amy for consulting services; and a $40,000 distribution to 25% partner Cameron. In addition, the partnership realized a $12,000 net long­term capital gain. Cameron’s basis in his partnership interest was $60,000 at the beginning of the year, and included his $25,000 share of partnership liabilities. At the end of the year, his share of partnership liabilities was $15,000.

a. How much income must Cameron report for the tax year?

b. What is Cameron’s basis in the partnership interest at the end of the year?