Ques 1 a) The partnership firm will be required to file return (Form 1065) along with the Schedule..

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Ques 1

a) The partnership firm will be required to file return (Form 1065) along with the Schedule K-1. Generally, tax is not paid by partnership firm on the income earned, since, the income or loss passes through its partners, then the partners are required to include such partnership items in its own return.

b) Capital Gain to Ethyl = ($ 150,000 – $ 100,000 ) – $ 10000 = $40,000

c) The partnership would recognise a Gain of $ 50,000 that will be allocated equally between the partners.

d) The Gain will be allocated equally among the partners, in the absence of any other information.

Ques 2

a) Statement showing contribution made by partners:

Partner

Contribution

FMV

Basis

Darryl

Land

$ 100,000

$ 100,000

Darrell

Supplies

$ 100,000

$ 90,000

David

Provides Services

Yes, the deal makes sense as each and every partner is making contribution in one way or the other for the 1/3rd share.

Taxation of Partnership:

The partnership firm will be required to file return (Form 1065) along with the Schedule K-1. Generally, tax is not paid by partnership firm on the income earned, since, the income or loss passes through its partners, then the partners are required to include such partnership items in its own return.

b) Unable to provide exact solution

c) Unable to provide exact solution

Ques 3

In the given case, A and B are unmarried partners, and have formed a partnership AB. The profit and loss sharing ratio is equal among the partners. The partnership has earned a Section 1231 gain of $ 50,000 and there are no section 1231 Loss to set off such gains. Such total gain of section 1231 will be equally shared among the partners. The Section 1231 Loss of Partner B (earned directly) cannot be used to reduce the gain of partnership firm.

Ques 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

As per Section 741, the sale of partnership interest treated in the same way as a sale or exchange of capital asset.

Hence, Total Gain on Sale = $ 1,000,000 – $ 150,000 = $ 850,000

As per Section 731 (a)(1) provides that the partners will not recognise any gain on the receipt of the distribution money or property, except to the extent that such distribution amount received exceeds the Adjusted Basis of the partner’s interest in the partnership.

Hence, both the partners will recognise a gain of $ 425,000 each.

Reference:Daniel L. Simsons (2013), “The Tax Consequences of Partnership Break-Ups: A Primer on Partnership Sales and Liquidations”, Avaialable at:http://isites.harvard.edu/fs/docs/icb.topic1321119.files/November%206%202013/Partnership%20Sales%20and%20Liquidations.pdf

Ques 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.

Statement showing taxable income of Beth:

FMV

Share of Profits in Law Firm

$ 450,000

Share in loss in the debt-free limited partnership

$ (30,000)

Net Taxable Income

$ 420,000

Ques 6

Olivia, Paula and Quincy are partners with 1/3rd Share each. The partnership assets are as under:

FMV

Basis

Cash

10,000

10,000

Equipment

1,550,000

650,000

Leases

240,000

-0-

1,800,000

660,000

a) Olivia sold her share in interest with a basis of $ 220,000 is sold to Roberta for $ 600,000. Considering it is a Section 1245 Gain, the $ 380,000 ($ 600,000 – 220,000) will be treated as ordinary income and taxed accordingly.

Reference: 26 U.S. Code Section 1245 – Gain from dispositions of certain depreciable property, Available at:http://www.law.cornell.edu/uscode/text/26/1245

b) In case the partnership makes the section 754 election, with respect to the Olivia’s Sale, the gain of $ 380,000 will be allocated to Roberta and any related depreciation / amortization will be specially allocated to R in future. The $ 380,000 will be reflected in Partner Roberta’s outside basis and hence, to entry will be passed to record the $ 380,000 754 asset.

Reference: Kathy Shubert, (2013) Partnership’s and LLC’s: The Basics of Making a 754 Election, Available at:http://www.marcumllp.com/news-and-events/partnerships-and-llcs-the-basics-of-making-a-754-election

Ques 7

An LLC consists of 5 individual equal members. The LLC uses June 30 as the fiscal year for financial accounting purposes. The LLC can use this year as the fiscal year if:

· If one or more member of the LLC, owning majority interest (more than 50%) in the LLC also follows this fiscal year; or

· In case of absence of majority interest tax year, if the principal member (owning 5% or more) uses this fiscal year; or

· If tax year cannot be determined by above, than the tax year which leads to the least aggregate deferral of income to the partners will be used. If June 30 provides the least aggregate deferral income than LLC can use it.

Reference:Choosing Your LLC’s Fiscal Year, Available at:http://www.nolo.com/legal-encyclopedia/choosing-your-llcs-fiscal-year.html

Ques 8:

A Partnership firm has two partner’s Alex and ALEXCO Inc. Alex owns 100% shares of ALEXCO Inc. As provided by the Publication 538, “Accounting periods and Methods”, the tax year will be the tax year of those one or more partners who owns majority interests in the profits of partnership. In the given case, Alex is the partner in partnership as well as holds 100% of ALEXCO Inc. and hence, can be said to be a majority partner. Hence, the tax year of Alex will be the Tax year of the partnership firm i.e. June 30 ending fiscal year.

Reference:

Publication 538: Accounting periods and methods; Available at:http://www.irs.gov/publications/p538/ar02.html#en_US_201212_publink1000270599

Ques 9

In the given case, ABLE Inc. and The Capital Corporation have formed a general partnership. 90% of the cash is provided by Capital Corporation and ABLE provides 100% for the management of partnership. The Profit sharing ratio decided is 10% and 90% for ABLE and Capital respectively. It is decided that the profit sharing ratio will be 50-50, after the firm had earned 10% cumulative annual return on original capital.

· Before achieving the 10% cumulative annual return, the Tax year of the partnership firm will be the tax year of The Capital Corporation as it is the partner with majority interest. Hence, Calendar year will be the tax year of Partnership firm

· After the achievement of the 10% cumulative annual return, the partnership interest will be equal and hence, tax year used will be the one that leads to the least aggregate deferral income to the partners. Year End

12/31

Year End

Profits Interest

Months of Deferral

Interest x Deferral

A

12/31

0.5

0

0

B

06/30

0.5

6

0.3

Total Deferral

0.3

Year End

06/30

Year End

Profits Interest

Months of Deferral

Interest x Deferral

A

12/31

0.5

6

0.3

B

06/30

0.5

0

0

Total Deferral

0.3

Since, deferral come out to be equal for both the cases, the partnership may choose any of the tax year among the two, i.e. calendar tax year or ending June 30.

Reference:

Publication 538: Accounting periods and methods; Available at:http://www.irs.gov/publications/p538/ar02.html#en_US_201212_publink1000270599

Ques 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 9 partners for years. Now on July 1, it admits Barnie as a 10% partner. Barnie will be taxed for 10% of the income earned after July 1. Yes, it matters whether the partnership is on Cash or Accrual Basis. In case of Cash Basis, the income is taxed in the year it is actually received and the expenses are can be deducted in the tax year in which it is actually paid, however, in case of Accrual Basis, which is based on Matching Concept, the income is reported in the year in which it is earned and the expenses can be deducted in the tax year in which it is incurred.

Reference:

· Publication 541: Partnerships, Available at:http://www.irs.gov/pub/irs-pdf/p541.pdf

· Publication 538: Accounting Periods and Methods, Available at:http://www.irs.gov/publications/p538/ar02.html#en_US_201212_publink1000270640

Ques 11

Section 263(c), “Intangible Drilling and Development Costs in the case of oil and gas wells and geothermal wells” of the code:

The partnership can claim for deduction of the drilling costs under this subtitle as prescribed by the Secretary corresponding to the regulations that have granted the option for deduction and which were recognised and approved by the Congress in House Concurrent Resolution 50, Seventy-ninth Congress. Deductions will be allowed for the expense paid or incurred except if the same is allowed as deduction under section 59 (e) or 291.

Mary will be entitled to 10% deduction of the cost.

Reference:U.S. Code Section 263 – Capital Expenditures, Available at:http://www.law.cornell.edu/uscode/text/26/263

Ques 12

Larry, Mo and Curly were equal partners in a calendar year partnership. On September 30,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. The Tax on the long term capital gain will be distributed among the partners Larry and Mo in their revised partnership ratio and Curly will not be taxable for this gain. Curly will be taxed for the Capital gain on sale of her interest to Larry.

Reference: Publication 541: Partnerships (2014), Available at:http://www.irs.gov/pub/irs-pdf/p541.pdf

Ques 13

Sue and Sally are the original equal partners in a partnership that owns:

Amount Realized = $ 100,000

Less: Outside Basis = $ 100,000

Capital Gain / (Loss) = -0-

There is no capital gain or loss and no tax is payable with respect to such gains.

Ques 14

a) Forming a family Partnership can help in paying lower Gift and Estate Taxes. As the family members will be able reduce the taxes by gifting the partnership equity to its family members within the gift tax limits. In case one is married, than there are more opportunities. (Chapter 14- Sections 2701-2704)

b) The Main Reasons why a Family partnership should be formed are as under:

· Control

· Management Continuity

· Asset protection – both inside and outside the LLP

· Valuation Discount

· Wealth Accumulation

· Asset Consolidation

· Flexibility in Income Tax and State Tax, etc.

Planning options:

· The application of Section 2701 can be avoided by having a single or one class of partnership interest. However, if FLP is formed with two classes of partnership interest it helps better in serving as a beneficial tool in estate planning.

· In order to avoid application of the rules laid down by Section 2703(a), structuring should be done of the restrictions on transfer or use of partnership interest, so as to make it consistent with the third-party arrangements.

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