a) How are Ethyl, Fred, and the partnership taxed on the formation of the partnership?
b) If Ethyl were to sell her interest six months later for $150,000, how much would she be taxed?
c) If the partnership were to sell Blackacre six months after the formation of the partnership for $150,000, how would the partnership measure and characterize any recognized gain or loss?
d) How should the gain be allocated between Ethyl and Fred?
a) Darryl, Darrell, and David form a 1/3d-1/3d-1/3d partnership. Darryl contributes land worth $100,000 with a basis of $100,000. Darrell contributes supplies worth $100,000 with a basis $90,000. David receives his 1/3d interest for his services in putting the deal together and for the future services. Thus if the partnership were to liquidate, David would get 1/3d of the partnership’s assets. Does the deal make sense? How is the partnership formation taxed? (Note that Section 709 requires 60-month amortization for costs incurred in organizing a partnership, analogously to Section 248’s rule for corporations, and disallows any deduction – ever – for costs of selling interest in a partnership).
b) What if David gets only 1/3d of future profits, which are speculative but gets no interest in the partnership's existing assets?
c) What if David gets only 1/3d of future profits, but Darryl and Darrell also contributed high quality corporate bonds to the partnership?
3) A and B, unmarried individuals, form the AB general partnership. All partnership items are shared equally. The partnership has a $50,000 section 1231 gain and no section 1231 losses. The partnership has no other relevant tax items. B has a $30,000 section 1231loss incurred directly. A and B also have large amounts of long-term capital gains from stock trading and no other items that are relevant to determining the impact of the special tax rules applicable to gains and losses. What is the tax effect on A and B of their participation in AB?
4) Sally and Ann form a 50-50 partnership, each contributing $75,000. The partnership buys as an investment a portfolio of non-dividend paying corporate stock. After 10 years, during which the partnership continues the original portfolio, the portfolio is worth $1 million. The partnership sells portfolio (assume no commissions) and liquidates, distributing the sales proceeds, which are the partnership's only assets. How are Sally and Ann taxed over the years with regards to their involvement in this partnership?
5) Beth is a partner in two partnerships. She is capital (general) partner in a law firm. For 2014, her share of this partnership's profits is $450,000. Also, Beth has invested as a limited partner in a debt-free limited partnership that owns and operates an office building. At the beginning 2014, her outside basis was $25,000. Her 2014 share of the partnership loss (attributable to accelerated depreciation) is $30,000. How does Beth's participation in these 2 partnerships affect her 2014 taxable income?
a) Olivia, Paula and Quincy are 1/3d-1/3d-1/3d partners. Their partnership net leases equipment. It assets are as follows:
Cash 10,000 10,000
Equipment 1,550,000 650,000
Leases 240,000 -0-
Olivia sells her interest, which has a basis of $220,000 to roberta for $600,000. All gain on the equipment would be subject to Section 1245. How is Olivia taxed?
b) If the partnership above makes a timely Section 754 election with respect to Olivia’s sale, how does that affect the partnership and the partners in the future?
7) All of the 5 equal members of an LLC that is taxed as a partnership are individuals. The LLC uses June 30 fiscal year for financial accounting purposes. When may it use that year for tax purposes?
8) A general partnership has 2 equal partners: Alex and ALEXCO INC. ALEXCO is owned 100% by Alex and uses a June 30 fiscal year for financial accounting purposes. What tax years are available to the partnership?
9) ABLE, inc. and The CAPITAL Corporation form a general partnership. Capital provides 90% of the cash. Able provides 100% or the partnerships management. Their deal is that all profits and losses are allocated 10% to ABLE & 90% to CAPITAL until the partnership has earned a 10% cumulative annual return on original capital. Thereafter, all profits and losses are shared 50-50. ABLE uses a calendar year tax year. CAPITAL uses a June 30 tax year. What tax years are available to the partnership?
10) The REALTY partnership rents realty profitably. Thus, it earns profit pretty evenly throughout the ear. It has a calendar year tax year. The partnership has has 9 partners for years. Now on July 1, it admits Barnie as a 10% partner. How much of the partnership's income is Barnie taxed on this year? Does it matter whether the partnership is cash or accrual basis?
11) The FUEL partnership does wildcat oil exploration. It has a calendar year tax year and uses the cash method of accounting. This year, it pays all of its deductible drilling costs (under Section 263(c) of the Code) on December 1. How much of the deduction for drilling costs may be allocated to Mary?
12) Larry, Mo, and Curly were equal partners in a calendar year partnership. On September 30, 2013, Curly sold his entire interest to Larry. The partnership's only tax item for 2013 was a $120,000 long-term capital gain from a sale of real property on June 30, 2013. How are the partners taxed on the partnership's 2013 taxable income?
13) Sue and Sally are the original equal partners in a partnership that owns (i) inventory with a value of $50,000 and a basis of $100,000 and (ii) investment real estate with a value of $150,000 and a basis of $100,000. Each has a $100,000 outside basis. Sue buys Sally's entire interest for $100,000 in cash. What are the tax consequences to Sue and Sally (including Sue's basis in the former partnership assets)?
14) A wealthy, high tax bracket client of your law firm has heard about family partnership at the health club. She wants to form an investment partnership with her low tax bracket adult son. He will put up $10,000 that she will give him. She will put up $10 million. Profits will be allocated proportionately to capital. Each year, she will give him some of her share of the partnership, including controlling distributions. She plans on distributing just enough cash to cover their respective income taxes on partnership income. If the son marries a nice girl, your client will have the partnership distribute all profits (not including capital gains). If the son marries then divorces, your client will have the partnership stop making any cash distributions. Your client is certain that her tennis partner has just such a family partnership and wants you to set one up.
a) What do you tell her about the income tax consequences?
b) Are there ways to change the basic structure so that it is more advantageous from an income tax point of view?