form 1065 schedule k & k-1 analysis – cases · and recourse debt for k-1 presentation...

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Form 1065 Schedule K & K-1

Analysis – Cases

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TableofContents

Case1–PartnershipFormation&InitialBasis.......................................................................................................3Case2-RecourseDebt–GuaranteebyLimitedPartner.....................................................................................4Case3–PartnerInitialContribution&Non-RecourseDebt.............................................................................5Case4–AllocationPartnershipLiabilities................................................................................................................6Case5–PartnerOutsideBasisCalculation...............................................................................................................8Case6–MemberOutsideBasisCalculation...........................................................................................................10Case7–PartnershipDistributions............................................................................................................................12Case8–PartnershipLiquidatingDistribution.....................................................................................................13Case9-SaleofaPartnershipInterest......................................................................................................................14Case10-SaleofPartnershipInterest&§754Election.....................................................................................15Case11–RedemptionofPartner’sInterest...........................................................................................................18Case12–Partner&LLCMemberBasis&AtRiskLimitations......................................................................20

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Case 1 – Partnership Formation & Initial Basis

Facts• Oliver,Sue&UmaformTheOSU,LLConJuly1,currentyear.• OlivertransferredpropertytotheLLC,inexchangefora25%membershipinterest,havingan

adjustedtaxbasisof$150,000andfairmarketvalue(FMV)of$250,000.Thepropertywasencumberedwitha$100,000recourseliabilitythatwasassumedbytheLLCmembersbaseduponownershippercentages.

• Suecontributed$300,000cashinexchangefora50%membershipinterest.• Umacontributedpropertywithanadjustedtaxbasisof$300,000andFMVof$150,000fora25%

membershipinterest.

Required1. WhatgainorlossisrecognizedbyeachofthecontributingmembersandtheLLC?2. Whatiseachmember’s“outside”taxbasisintheLLCafterthecontributionsofproperty?3. Preparea“tax”and“book”balancesheet.

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Case 2 - Recourse Debt – Guarantee by Limited Partner

Facts• FredandBarneyformalimitedpartnership.• Fred,thegeneralpartner,contributes$20,000andBarney,thelimitedpartner,contributes

$80,000incashtothepartnership.• Thepartnershipagreementallocateslosses20%toFredand80%toBarneyuntilBarney's

capitalaccountisreducedtozero,afterwhichalllossesareallocatedtoFred.• Thepartnershippurchasesdepreciablepropertyfor$250,000usingits$100,000cashanda

$150,000recourseloanfromabank.• Barneyguaranteepaymentofthe$150,000loantotheextenttheloanremainsunpaidafterthe

bankhasexhausteditsremediesagainstthepartnership.

RequiredCalculatetheamountofrecoursedebtthatwillgetallocatedtobothFredandBarney.

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Case 3 – Partner Initial Contribution & Non-Recourse Debt

FactsBuckeye,LLCisrentalrealestateLLCthatisowned50/50byBrutusandSparky.Brutuscontributed$100,000cash.SparkycontributedabuildingwithaFMVof$175,000,adjustedbasisof$60,000andsubjecttoanon-recourseloanof$75,000.DuringYear1Buckeye,LLCreportedthefollowingitemsontheForm1065,ScheduleK: Line2–Rentalrealestateloss ($40,000) Line4–Interestincome $4,000 Line16a–Tax-freeinterestincome $2,000 Line16c–Non-deductibleexpenses $6,000

RequiredAssumethatnoneofthenon-recoursedebtwaspaidoffduringtheyear.CalculatetheYear1endingoutsidebasisforbothBrutusandSparky.

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Case 4 – Allocation Partnership Liabilities

FactsTomandJerryformedtheTJPartnershipeachcontributingthesamedollaramounts.Thetaxbalancesheetisasfollow: Assets: Cash $25,000 Asset#1 $20,000 Asset#2 $45,000 $90,000 Liabilities: Non-RecourseDebt(securedbyAsset#1) $30,000 RecourseDebt $50,000 Capital–Jack $5,000 Capital–Daniel $5,000 $90,000

RequiredForeachoftheindependentfactpatterns,usethebalancesheetabove,toallocatethenon-recourseandrecoursedebtforK-1presentationpurposestoTomandJerry.1. AssumethatTJisageneralpartnershipandthepartnershipagreementallocatesallincome,

loss,deductionsandcredits50%toTomand50%toJerry.Alsoassumethatthepartnershipagreementhasan“unlimiteddeficitrestorationclause”thatrequiresthepartnerstorestorenegativecapitalaccounts.

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2. AssumethatTJisageneralpartnershipandthepartnershipagreementallocatesallincome,loss,deductionsandcredits90%toTomand10%toJerry.Alsoassumethatthepartnershipagreementhasan“unlimiteddeficitrestorationclause”thatrequiresthepartnerstorestorenegativecapitalaccounts.

3. AssumethatTJisalimitedpartnershipandthepartnershipagreementallocatesallincome,

loss,deductionsandcredits90%toTom(thelimitedpartner)and10%toJerry(thegeneralpartner).Alsoassumethatthepartnershipagreementhasan“unlimiteddeficitrestorationclause”thatrequiresthepartnerstorestorenegativecapitalaccounts.However,TomasalimitedpartnerdoesNOThaveanobligationtorestoreanegativecapitalaccount.

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Case 5 – Partner Outside Basis Calculation

Facts–Year1Sheilacontributedlandwithandadjustedbasisof$20,000andfairmarketvalueof$50,000fora25%ownershipinterestinapartnership.Shemateriallyparticipatesinthemanagementofthebusinessandmakesdecisionswithrespecttotherentalproperty.Duringthecurrentyear,SheilawasallocatedthefollowingitemsonthepartnershipScheduleK-1: Line1–Ordinarytradeorbusinessincome $10,000 Line2–Rentalrealestateloss ($28,000) Line4–Guaranteedpayments $50,000 Line6a–Dividendincome $3,000 Line8–Short-termcapitalgain(loss) $6,000 Line18A–Tax-freeinterestincome $1,000 Line18C–Non-deductibleexpenses $2,000 SectionK–Nonrecourseliabilities $0 SectionK–Qualifiednonrecoursefinancing $40,000 SectionK–Recourseliabilities $0

NOTE–AssumeSheilaisat-riskforalloftheliabilitiesallocatedtoher.

Required–Year11. CalculateSheila’sendingoutsidebasisinthepartnership.Alsodiscusshowtheincome,losses

anddeductionsgetreportedonherincometaxreturn.

2. IfSheilahadsamodifiedAGIof$538,000,nootherpassiveincomeorlosses,howmuchifanyoftherentalrealestatelosswouldbedeductibleonhertaxreturn?

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Facts–Year2DuringYear2,Sheilamateriallyparticipatesinthemanagementofthebusinessandmakesdecisionswithrespecttotherentalproperty.SheisallocatedthefollowingonthepartnershipScheduleK-1: Line1–Ordinarytradeorbusinessincome $2,000 Line2–Rentalrealestateloss ($50,000) Line4–Guaranteedpayments $60,000 Line6a–Dividendincome $1,000 Line9a–Long-termcapitalgain(loss) $7,000 SectionK–Nonrecourseliabilities $0 SectionK–Qualifiednonrecoursefinancing $5,000 SectionK–Recourseliabilities $15,000

NOTE–AssumeSheilaisat-riskforalloftheliabilitiesallocatedtoher.

Required–Year23. CalculateSheila’sendingoutsidebasisinthepartnership.Alsodiscusshowtheincome,losses

anddeductionsgetreportedonherincometaxreturn.

4. IfSheilahadamodifiedAGIof$118,000,nootherpassiveincomeorlosses,howmuchifanyoftherentalrealestatelosswouldbedeductibleonhertaxreturn?

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Case 6 – Member Outside Basis Calculation

Facts–Year1OnJanuary1,Year1FabulousFreddiecontributedtoaLLC$1,000andloanedthecompany$9,000inexchangefora50%membershipinterest.DuringthefirstyearofoperationstheLLCreportedthefollowinginformationonFreddie’sScheduleK-1: Line1-Tradeorbusinessloss ($18,000) Line5-Interestincome $1,000 Line6a-Dividendincome $3,500 Line18A-Tax-exemptinterestincome $1,500 Line18C-Non-deductibleexpenses $6,000 LineK-RecourseLoan $9,000

Required–Year11. CalculateFreddie’sendingbasisintheLLCafteryear1.

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Facts–Year2InYear2,theLLCrepaid$7,000oftheloanowedtoFreddie.Inaddition,theLLCreportedthefollowinginformationonFreddie’sScheduleK-1: Line1-Tradeorbusinessincome $27,000 Line8-Short-termcapital(loss) ($12,000) Line19A–Cashdistribution $10,000 LineK-RecourseLoan $2,000

Required–Year22. CalculateFreddie’sendingbasisintheLLCafteryear1.

3. WhatisthetaxramificationoftheloanrepaymentanddistributiontoFreddie?

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Case 7 – Partnership Distributions

FactsPaddyCakeshasanoutsidebasisinhispartnershipinterestof$100,000.Heisgoingtoreceiveacurrentdistributionof:

• Cashof$40,000• Inventorywitha$25,000insidebasis• Landwitha$40,000insidebasis

RequiredWithrespecttothefollowingquestions,ignoreanypotentialcomplicationscausedby§751(hotassets).1. Calculatethegainorloss(ifany)recognizedbythepartnership.

2. CalculatePaddy’soutsidebasisandanygainorlossrecognizedonthedistribution?3. WhatwillbePaddy’staxbasisinlandandinventory?

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Case 8 – Partnership Liquidating Distribution

FactsTheTPC,LLCliquidatedanddistributedallofitsassetsequallytoeachmember.Justpriortothedistributionthebalancesheetwasasfollows: TaxBasis FMV_ Cash $120,000 $120,000 Accountsreceivable 0 90,000 Inventory 90,000 120,000 Land 120,000 210,000 $330,000 $540,000 Tim,capital $180,000 $180,000 Pat,capital $120,000 $180,000 Cal,capital $30,000 $180,000 $330,000 $540,000

Required1. Calculatethegainorloss(ifany)recognizedbytheLLC.

2. Calculateanygainorlossrecognizedbythemembersonthedistributionandholdingperiod

willthememberstakeinassetsdistributed?

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Case 9 - Sale of a Partnership Interest

FactsTenyearsago,Archiepurchased50%ofBuckeye,LLCfor$1,000.OnJanuary1,ofthecurrentyearArchieallsoldhisentireinteresttoBettyfor$750,000.OnJanuary1,Archiehadanoutsidebasisof$50,000andBuckeye(cashbasistaxpayer)hadthefollowingassetsonthebalancesheet:

Assets A/B FMV Cash $300,000 $300,000AccountsReceivable 0 100,000Collectibles–held>1year 50,000 250,000 Equipment 100,000 50,000Less:AccumulatedDepreciation (100,000) Building–Cost 150,000 400,000 Less:AccumulatedS/LDepreciation (40,000) ____________

$460,000$1,100,000

RequiredAssumethatArchiesoldhisentireinterest.CalculateArchie’sgainonthesaleandthetaxonthegainassumingArchieisinthehighestindividualincometaxbracket.

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Case 10 - Sale of Partnership Interest & §754 Election

FactsThwirs,LLCisacashbasisservicebusinessthatownsanon-residentialbuilding.Thwirshasfourmemberswhoeachowna25%capitalandprofitsinterest.OnDecember31,currentyear,Thwirs,LLChadthefollowingbalance: Basis FMV_ Cash $320,000 $320,000 Accountsreceivable 0 200,000 Land 40,000 100,000 Building 280,000 580,000 $640,000 $1,200,000 Liabilities $80,000 $80,000 Al,capital $140,000 $280,000 Bill,capital $140,000 $280,000 Charlie,capital $140,000 $280,000 Doug,capital $140,000 $280,000 $640,000 $1,200,000 AssumethatDougsellshisentireinteresttoOliverfor$280,000,theLLChasmadethe§754electionandthestraight-lineaccumulateddepreciationonthebuildingwas$110,000.

Required1. CalculatetheamountandcharacterofgainthatDougwillrecognize.

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2. Calculatethe§743(b)adjustmentthatisapplicabletoOliverandhowtheadjustmentgetsallocatedtotheLLCassets.

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3. PreparethejournalentriestorecordOliverasamemberandtorecordthe§743(b)adjustmentonthebooks.

4. PrepareanendingbalanceforThwirs,LLCafterOliverbecomesapartner. 5. HowlongdoesOliverdepreciatethe§743(b)adjustmentmadetothebuilding?

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Case 11 – Redemption of Partner’s Interest

FactsAssumethattheFROGpartnershiphasthefollowingbalancesheetpriortothecompleteliquidationofGina'sentirepartnershipinterest:

Basis FMVCash $180,000 $180,000AccountsReceivable $0 $180,000Land $120,000 $240,000 $300,000 $600,000 Frank,capital $75,000 $150,000Ross,capital $75,000 $150,000Oliver,capital $75,000 $150,000Gina,capital $75,000 $150,000 $300,000 $600,000

Required1. AssumeGinareceives$150,000cashincompleteliquidationofherinterestinthepartnership.

ComputethegainorlossrecognizedandthecharacterofthegainorlossrecognizedbybothGinaandthepartnershipasaresultofthistransaction(ignore§736implications).

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2. AssumeGinareceives$150,000oftheaccountsreceivableincompleteliquidationofherpartnershipinterest.CalculatethegainorlossrecognizedandthecharacterofthegainorlossrecognizedbybothGinaandthepartnershipasaresultofthistransaction(ignore§736implications).

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Case 12 – Partner & LLC Member Basis & At Risk Limitations

FactsOnJanuary1ofthecurrentyear,Kathleencontributed$1,000andloaned$8,000toGradyEnterprises.Kathleenowns50%ofGradyEnterprises.Inaddition,shepersonallyguaranteed100%ofa$20,000loanGradyEnterprisesreceivedfromthelocalbank.TheloanissecuredsolelybyassetsownedbyGradyEnterprises.DuringthecurrentyearGradyEnterprisesallocatedKathleenonherScheduleK-1thefollowing: Tradeorbusinessloss ($16,000) Non-deductibleexpenses ($4,000)

Required#1AssumingKathleenisoneoftwogeneralpartnersinGradyEnterprises,determinetheamountandcharacteroflossesshecandeductonhercurrentyeartaxreturn.

Required#2AssumingKathleenisalimitedliabilitycompany(taxedasapartnership)memberinGradyEnterprises,determinetheamountandcharacteroflossesshecandeductonhercurrentyeartaxreturn.

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form 1065 schedule k & k-1 analysis – cases · and recourse debt for k-1 presentation...

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