tax problems - questin and answer ,.,. ch 21

Ch21DISCUSSION QUESTIONS

1. LO.1 How is a partnership defined for Federal income tax purposes? What parties can own an interest in a partnership?

2. LO.1 What is a partnership agreement? What types of provisions does it include?

3. LO.1 What is the difference between a general partnership and a limited liability company?
When might each type of entity be used? Why?

4. LO.2 In what ways does partnership taxation follow the aggregate concept? Provide several examples.

5. LO.2 What are separately stated items? Why are they important?

6. LO.2 What is “inside” basis? “Outside” basis?

7. LO.2 Describe how a partnership reports its income for tax purposes. Who makes most elections related to partnership income and deductions? What theory underlies this treatment?

8. LO.3 Compare the provision for the nonrecognition of gain or loss on contributions to a partnership (i.e., § 721) with the similar provision related to corporate formation (i.e., § 351). What are the major differences and similarities?

9. LO.2, 8, 13 The PRS LLC was formed when Redbird, Inc., contributed cash of $2 million;
Peacock, Inc., contributed land (adjusted basis of $600,000 and a fair market value of $2 million); and Sam contributed $1 million of cash and agreed to provide management services of 2,000 hours per year. Both Redbird and Peacock will have 40% capital and profits interests, and Sam will have a 20% interest. How can special allocations and guaranteed payments be used to ensure that each partner receives adequate consideration for the property and expertise contributed?

10. LO.3, 13 Janda and Kelsey contributed $1 million each to JKL LLC in exchange for

45% capital and profits interests in the entity. Lilli will contribute no cash, but has agreed to manage the LLC’s business operations in exchange for an $80,000 annual salary and a 10% interest in the LLC’s capital and profits (valued at $200,000). What are the consequences of the entity formation and Lilli’s compensation arrangement to the LLC members and the LLC itself?

11. LO.3 If appreciated property is contributed to a partnership in exchange for a partnership interest, what basis will the partnership have in the property? What basis will the partner have in the partnership interest?

12. LO.3 Jonathan owns property (basis of $200,000, value of $300,000). He plans to contribute the property to the JJG Partnership in exchange for a 25% interest.

a. What issues arise if the partnership distributes $150,000 of cash to Jonathan three months after the property contribution?
b. How can the risk of adverse tax consequences be minimized?

13. LO.3, 4 How does a partnership calculate depreciation on property that is contributed by a partner? If the partnership incurs additional costs that must be capitalized (i.e., transfer taxes related to changing the title), how are those costs treated?

14. LO.4 What types of expenditures might a new partnership incur? How are those costs treated for Federal tax purposes? Create a chart describing the expenditure, the treatment, and the Code section requiring this treatment.

15. LO.4 Tina and Rex plan to form the TR Partnership to acquire, own, and manage a certain rental real estate property. The financial information has been accumulated into an
Offering Memorandum that is currently being brokered to investors (for a 6% commission).
What types of costs is the partnership likely to incur? How will those costs be treated?