Tax issue identification: Explain the issue involved
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TAX "ISSUE" IDENTIFICATION QUESTIONS (Try to answer two questions from each chapter). No solutions, please. Just answer without having to actually solve a problem.
C9-19 Bob and Kate form the BK Partnership, a general partnership, as equal partners. Bob contributes an office building with a $130,000 FMV and a $95,000 adjusted basis to the partnership along with a $60,000 mortgage, which the partnership assumes. Kate contributes the land on which the building sits with a $50,000 FMV and a $75,000 adjusted basis. Kate will manage the partnership for the first five years of operations but will not receive a guaranteed payment for her work in the first year of partnership operations.
Starting with the second year of partnership operations, Kate will receive a $10,000 guaranteed payment for each year she manages the partnership. What tax issues should Bob, Kate, and the BK Partnership consider with respect to the formation and operation of the partnership?
C9-20 Suzanne and Laura form a partnership to market local crafts. In April, the two women spent $1,600 searching for a retail outlet, $1,200 to have a partnership agreement drawn up, and $2,000 to have an accounting system established. During April, they signed contracts with a number of local crafters to feature their products in the retail outlet. The outlet was fitted and merchandise organized during May. In June, the store opened and sold its first crafts. The partnership paid $500 to an accountant to prepare an income statement for the month of June. What tax issues should the partnership consider with regard to beginning this business?
C9-21 Cara, a CPA, established an accounting system for the ABC Partnership and, in return for her services, received a 10% profits interest (but no capital interest) in the partnership. Her usual fee for the services would be approximately $20,000. No sales of profits interests in the ABC Partnership occurred during the current year. What tax issues should Cara and the ABC Partnership consider with respect to the payment made for the services?
Chapter 10
C10-18 When Kayla's basis in her interest in the JKL Partnership is $30,000, she receives a current distribution of office equipment. The equipment has an FMV of $40,000 and basis of $35,000. Kayla will not use the office equipment in a business activity. What tax issues should Kayla consider with respect to the distribution?
C10-19 Joel receives a $40,000 cash distribution from the JM Partnership, which reduces his partnership interest from one-third to one-fourth. The JM Partnership is a general partnership that uses the cash method of accounting and has substantial liabilities. JM's inventory has appreciated substantially since it was purchased. What issues should Joel consider with regard to the distribution?
C10-20 Scott sells his one-third partnership interest to Sally for $43,000 when his basis in the partnership interest is $33,000. On the date of sale, the partnership has no liabilities and the following assets:
Asset Basis FMV
Cash 30,000 30,000
Inventory 12,000 21,000
Building 45,000 60,000
Land 12,000 18,000
The partnership has claimed $5,400 of straight-line depreciation on the building. What tax issues should Scott and Sally consider with respect to the sale transaction?
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Solution Summary
The 682 word solution discusses the tax issue involved in each scenario. There are examples to further explain the issues in each of the questions.
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C9-19 A guaranteed payment will skew the amounts that will be taxable for each partner. If they were otherwise 50-50 partners, Kate will always report her $10,000 first and then 50% of the remaining net income or loss. The guaranteed payment is structured as an expense of the partnership. The same guaranteed payment will also affect the capital account balances going forward and possibly to the determent of some of the partners.
The second problem with a guaranteed payment is that it is subject to self employment (FICA, Medicare) taxes to Kate even if the partnership itself is a passive activity, such as a building rental partnership. The $10,000 is presumed to have been earned for services.
Third, the guaranteed payment should be paid in cash to Kate, and that could hamper the cash flow of an entity.
Still guaranteed payments are a good way to compensate a working owner when other partners are inactive in management. See Section 707(c).
C9-20 As a new business, certain elections and decisions will have to ...
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