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Nick Johnson

Numerade educator

The partnership pays its rent for 2020 in June of 2019. What are the tax consequences to the partnership and Merchant?

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ANSWERED

Nick Johnson

Numerade educator

Owen is entitled to a flat salary of $50,000 per year. The partnership pays owen Halsey for his services for 2019 in January 2020. What are the tax consequences to the partner and the partnership?

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INSTANT ANSWER

(b) Pursuant to the written partnership agreement, the partnership pays Ivana $100,000 a year for six years, regardless of its income, as a guaranteed payment for capital. Alternatively, pursuant to the partnership agreement, the partnership allocates and distributes the first $100,000 of income exclusively to Ivana for six years. Assume that the highest applicable federal rate for all years equals 8%. Does Ivana recognize any gain?

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Problem 5. Four years ago, Leona, Harry, and Jeremiah formed an equal partnership to which Leona contributed Blackacre (value = $1000, basis = $600), Harry contributed nonmarketable securities (value = $1000, basis = $200), and Jermiah contributed $1000 cash. The partnership used the cash to buy Greenacre. All three assets are capital assets in the partnership’s hands. On January 1 of this year, the partnership’s balance sheet is as follows: Asset Basis Book FMV Blackacre $600 $1000 $1500 Greenacre 1000 1000 1500 Securities 200 1000 1500 Capital Accounts Tax Book Leona $600 $1000 Harry 200 1000 Jeremiah 1000 1000 On the current date, the following alternative distributions take place. What are the tax consequences to all parties of each of distribution? (a) Jeremiah receives Blackacre in complete liquidation of his interest in the partnership. How would your answer change, if at all, if Blackacre were worth only $800 on the date of distribution? (b) Harry receives Greenacre in complete liquidation of his interest in the partnership. (c) Harry receives Blackacre in complete distribution of his interest in the partnership.

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Problem 4. Scott and Merchant are partners in an accrual-method, calendar-year partnership. The partnership leases office space from Merchant, a cash-method, calendar¬ year taxpayer, for $10,000 per year (fair rental value). • • (a) The partnership pays its rent for 2020 in June of 2019. What are the tax consequences to the partnership and Merchant? • • (b) The partnership pays its rent for 2019 in June of 2020. What are the tax consequences to the partnership and Merchant?

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Problem 2. In the alternative to Problem 1, assume that Andy is to receive one third of partnership profits (regardless of character) but not less than $10,000 (this minimum guarantee to be financed from Barney's and Otis' accounts). Determine partnership taxable income and Andy’s distributable share of the same if partnership income for 2020 consisted of: (a) Ordinary income of $15,000 and long-term capital gains of $15,000, (b) Ordinary income of $15,000, or (c) Ordinary income of $6,000.

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INSTANT ANSWER

Section 704(c) of the Internal Revenue Code provides a solution to this potential issue. It allows for the allocation of pre-contribution gain to the contributing partners. This means that Alice and Bob could be allocated a larger share of the gain, reflecting the increase in value of the property while they owned it. The last sentence of § 1.704-1(b)(2)(iv)(f) provides that the partnership agreement may provide for the allocation of income, gain, loss, deduction, or credit among the partners in a manner that takes into account the variation between the book value of the property and its fair market value at the time of contribution. Section 1.704-1(b)(1)(iii) and (iv) further explain how these allocations should be made. They should be consistent with the underlying economic arrangement of the partners, and they should be substantial, meaning they have economic effect. In conclusion, the partnership has the option to allocate the gain in a way that reflects the partners' economic contributions and interests, rather than simply dividing it equally. This could involve allocating a larger share of the gain to Alice and Bob, who contributed the property to the partnership.

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Reverse §704(c) Transactions. No Revaluation. Assume that the partnership did not choose to revalue, or “book up” its capital accounts to fair market value upon admission of Floyd. Determine how the partnership should allocate its $80 of tax and book gain if the property were sold for $120. If your answer is an equal one third division of the gain, might any of the partners object to that result? Why? What other alternative does the partnership have? See § 704(c), the last sentence of § 1.704-1(b)(2)(iv)(f) and § 1.704-1(b)(1)(iii) and (iv).

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INSTANT ANSWER

Problem 8- Reverse §704(c) Transactions-Revaluation. Assume that the partnership revalues its capital accounts as permitted by § 1.704-1(b)(2)(iv)(f) to reflect fair market value of the building as of Floyd's admission, and elects to use the traditional method for allocations with respect to the revalued property. Reconstruct the partnership’s balance sheet. (a) Gain allocation. If the building is subsequently sold at a time that its basis is still $40, how would the partnership allocate the resulting book and tax gain or loss if the building is sold, in the alternative, for: (i) $120 (ii) $90 (iii) $15

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AWAITING AN EDUCATOR

Contributions of Non-Depreciable Property. Built-In Losses. For purposes of this Problem 2, assume that the land has a basis in Andy’s hands at the time of contribution of $140 and its fair market value is $100. Under the “traditional method”, how will the partnership allocate its gain or loss for book and tax purposes if the partnership sells the land for: (a) $70 (b) $120 (c) $160

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Daisy C.