Partnership Tax Return Answers
Partnership Tax Return Answers AC471
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This 9 page Class Notes was uploaded by Samantha on Sunday December 6, 2015. The Class Notes belongs to AC471 at University of Alabama - Tuscaloosa taught by Lisa McKinney in Fall 2015. Since its upload, it has received 224 views.
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Date Created: 12/06/15
Carrie D Lake Reed A Green and Doug A Divot share a passion for golf and decide to go into the golf club manufacturing business together On January 2 2011 D Lake Green and Divot form the Slicenhook Partnership a general partnership Slicenhook s main product will be a perimeterweighted titanium driver with a patented graphite shaft All three partners plan to actively participate in the business The partners contribute the following property to form Slicenhook Partner Contribution Carrie D Lake Land FMV 460000 Basis 460000 Mortgage 60000 Reed A Green 400000 Doug A Divot 400000 Carrie had recently acquired the land with the idea that she would contribute it to the newly formed partnership The partners agree to share in profits and losses equally Slicenhook elects a calendar year end and the accrual method of accounting In addition Slicenhook borrows 1500000 from BigBank at the time the contributions were made Slicenhook uses the proceeds from the loan and the cash contributions to build a stateoftheart manufacturing facility 1200000 purchase equipment 600000 and produce inventory 400000 With the remaining cash Slicenhook invests 45000 in the stock of a privately owned graphite research company and retains 55000 as working cash Slicenhook operates on a justintime inventory system so it sells all inventory and collects all sales immediately That means that at the end of the year Slicenhook does not carry any inventory or accounts receivable balances During 2011 Slicenhook has the following operating results Sales 1126000 Cost of goods sold 400000 Interest income from taxexempt bonds 900 Qualified dividend income from stock 1500 Operating expenses 126000 Depreciation tax 179 on equipment 39000 Equipment 81000 Building 24000 144000 Interest expense on debt 120000 The partnership is very successful in its first year The success allows Slicenhook to use excess cash from operations to purchase 15000 of tax exempt bonds you can see the interest income already re ected in the operating results The partnership also makes a principal payment on its loan in the amount of 300000 and a distribution of 100000 to each of the partners on December 31 2011 The partnership continues its success in 2012 with the following operating results Sales 1200000 Cost of goods sold 420000 Interest income from taxexempt bonds 900 Qualified dividend income from stock 1500 Operating expenses 132000 Depreciation tax Equipment 147000 Building 30000 177000 Interest expense on debt 96000 The operating expenses include a 1800 trucking fine that one of their drivers incurred for reckless driving and speeding and meals and entertainment expense of 6000 By the end of 2012 Reed has had a falling out with Carrie and Doug and has decided to leave the partnership He has located a potential buyer for his partnership interest Indie Ruff Indie has agreed to purchase Reed s interest in Slicenhook for 730000 in cash and the assumption of Reed s share of Slicenhook s debt Carrie and Doug however are not certain that admitting Indie to the partnership is such a good idea They want at least to consider having Slicenhook liquidate Reed s interest on January 1 2013 As of January 1 2013 Slicenhook has the following assets Tax Basis M Cash 876800 876800 Investment Tax Exempts 15000 18000 Investment Stock 45000 45000 Equipment net of depr 333000 600000 Building net of depr 1146000 1440000 Land 460000 510000 Total 2875800 3489800 Carrie and Doug propose that Slicenhook distribute the following to Reed in complete liquidation of his partnership interest Tax Basis M Cash 485000 485000 Investment Stock 45000 45000 Equipment net of depr 111000 200000 Total 641000 730000 Slicenhook has not purchased or sold any equipment since its original purchase just after formation a Determine each partner s recognized gain or loss upon formation of Slicenhook What is each partner s initial tax basis in Slicenhook on January 2 2011 Prepare Slicenhook s opening tax basis balance sheet as of January 2 201 1 Using the operating results what are Slicenhook s ordinary income and separately stated items for 2011 and 2012 What amount of Slicenhook s income for each period would each of the partner s receive Using the information provided prepare Slicenhook s page 1 and Schedule K to be included with its Form 1065 for 2012 Also prepare a schedule K1 for Carrie What are Carrie s Reed s and Doug s bases in their partnership interest at the end of 2011 and 2012 If Reed sells his interest in Slicenhook to Indie Ruff what is the amount and character of his recognized gain or loss What is Indie s basis in the partnership interest What is Indie s inside basis in Slicenhook What effect would a 754 election have on Indie s inside basis If Slicenhook distributes the assets proposed by Carrie and Doug in complete liquidation of Reed s partnership interest what is the amount and character of Reed s recognized gain or loss What is Reed s basis in the distributed assets Partnership Tax Return a Determine each partner s recognized gain or loss upon formation of Slicenhook 721 neither the partner nor the partnership recognizes any gain or loss on exchange No gain or loss for any partner Gain or Loss Carrie D Lake 0 Reed A Green 0 Doug A Divot 0 b What is each partner s initial tax basis in Slicenhook on January 2 2012 Carrie D Lake Reed A Green Doug A Divot Basis of cash 0 400000 400000 contribution Basis of property 460000 0 0 contribution Debt relief 60000 0 0 mortgage Share of Debt 20000 20000 20000 mortgage Share of Big Bank 500000 500000 500000 Loan Total initial basis 920000 920000 920000 c Prepare Slicenhook s opening tax basis balance sheet as of January 2 2012 Basis FMV Assets Cash 2300000 2300000 Land 460000 460000 Total Assets 2760000 2760000 Liabilities amp Equity Debt 1560000 1560000 Carrie D Lake Capital 400000 400000 Reed A Green Capital 400000 400000 Doug A Divot 400000 400000 Total Liabilities amp Equity 2760000 2760000 d Using the operating results what are Slicenhook s ordinary income and separately stated items for 2012 and 2013 What amount of Slicenhook s income for each period would each of the partner s receive Slicenhook Partner Share Ordinary 2012 2013 2012 2013 Income Sales 1126000 1200000 375333 400000 Cost of goods 400000 420000 133333 140000 sold Operating 126000 124200 42000 41400 Expenses Depreciation 105000 177000 35000 59000 Expense Interest 120000 96000 40000 32000 Expense Total ordinary 375000 382800 125000 127600 income Separately Stated items Interest income 900 900 300 300 from taxexempt bonds Qualified 1500 1500 500 500 dividends 179 39000 0 13000 0 depreciation expense Trucking fine 0 1800 0 600 Meals and 0 3000 0 1000 entertainment deductible Meals and 0 3000 1000 entertainment nondeductible e Using the information provided prepare Slicenhook s page 1 and Schedule K to be included with its Form 1065 for 2012 Also prepare a Schedule K1 for Carrie See attached f What are Carrie s Reed s and Doug s bases in their partnership interest at the end ofthe 2012 and 2013 Outside Basis Carrie D Lake Reed A Green Doug A Divot Initial basis 920000 920000 920000 Ordinary income 125000 125000 125000 2012 Taxexempt 300 300 300 interest Dividends 500 500 500 179 depreciation 13000 13000 13000 expense Debt payment 100000 100000 100000 Cash distribution 100000 100000 100000 Basis at 123112 832800 832800 832800 Ordinary income 127600 127600 127600 2013 Taxexempt 300 300 300 interest Dividends 500 500 500 Trucking Fine 600 600 600 Meals and 2000 2000 2000 entertainment Basis at 123113 958600 958600 958600 g If Reed sells his interest in Slicenhook to Indie Ruff what is the amount and character of his recognized gain or loss What is Indie s basis in the partnership interest Cash Rec d Debt relief Total Basis in partnership interest GainLoss 730000 420000 520000 original 100000 paid off 1150000 958600 191400 Assets that will trigger ordinary gain Equipment FMV Basis 600000 333000 Builtin gain 267000 Reed s share ofbuilt in gain 2670003 89000 Therefore Gain on sale of interest Portion that is ordinary treatment 191400 89000 Portion that is capital gain treatment 102400 Indie s outside basis in the partnership interest 752 the purchaser of a partnership interest takes a cost basis in the interest 0 This includes the amount of cash and the value of any noncash property paid to the seller plus the amount of any partnership liabilities assumed by the purchaser in his or her role as a new partner 730000 420000 share ofliabilities 1150000 h What is Indie s inside basis in Slicenhook What effect would 754 election have on indie s inside basis Indie s inside basis in the partnership interest Must equal Reed s basis before the sale Total tax basis in Slicenhook at the end of 2012 is 2875800 Reed s portion of this would have been 958600 13 of 2875800 If 754 election made Take difference between Indie s inside basis and outside basis is computed as follows Outside basis 1150000 Inside basis 958600 Difference 191400 Since Indie s outside basis is greater than his inside basis a positive adjustment can be made if the 754 election is in place This adjustment will be allocated to assets with depreciation which will in turn increase his inside basis so that when the depreciable assets are disposed of less gain will be triggered i If Slicenhook distributes the assets proposed by Carrie and Doug in complete liquidation of Reed s partnership interest what is the amount and character of Reed s recognized gain or loss What is Reed s basis in the distributed assets Reed does not recognize any gain or loss on the liquidating distribution because he did not receive cash in excess of his basis instead the bases of the distributed assets are adjusted When a partner leaves a partnership in a liquidation it complete extinguishes that partner s interest including their share of partnership debt Reed s basis excluding debt is 538600 958600420000 Sum of distributed assets Cash 485000 Investment stock 45000 Equipment net of depr 111000 Total 641000 Since the sum of the bases of the distributed assets exceeds the distributee partner s outside basis remaining after reduction for any cash received and basis allocated to any unrealized receivables or inventory category 1 assets the basis decrease formula is used The amount of the required decrease is calculated by taking the difference between the sum of the bases of the distributed assets and Reed s basis excluding debt Sum ofbases 641000 Reed s basis 538600 Reduction 102400 The basis of the investment stock is decreased from 45000 to zero Reduction 102400 Investment stock reduction 45000 Remaining decrease 57400 Next the equipment basis is reduced by the remaining decrease available Equipment basis 111000 Basis reduction 57000 New basis 53600 Reeds basis in the distributed assets Cash 485000 Investment Stock 0 Equipment net of depr 53600
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