568 MODULE 38 TAXES: PARTNERSHIPS

~o. (b) The requirement is to determine the net ef-

< . f ~ect(s) of the $16,000 guaranteed payment made to Peters by
the Spano Partnership who reported an operating loss of

$70,000 before deducting the guaranteed payment. A guar-

anteed payment is a partnership payment made to a partner
for services or for the use of capital if the payment is deter-
mined without regard to the amount of partnership income.
A guaranteed payment is deductible by a partnership in
computing its ordinary income or loss from trade or business
activities and must be reported as self-employment income
by the partner receiving the payment, thereby increasing
Peters' ordinary income by $16,000. However, since Peters
has only a one-third interest in the Spano Partnership, the
$16,000 of guaranteed payment deducted by Spano would
have the effect of reducing Peters' tax basis in Spano by
only one-third of $16,000.
E. Partner's Basis in Partnership
31. (c) The requirement is to determine the basis for
Dean's 25% partnership interest at December 31,2010 .: A
partner's basis for a partnership interest is increased or de-
creased by the partner's distributive share of all partnership
items. Basis is increased by the partner's distributive share
of all income items (including tax-exempt income) and is
decreased by all loss and deduction items (including nonde-
ductible items) and distributions received from the partner-
ship. In this case, Dean's beginning oasis of $20,000 would
be increased by the pass-through of his distributive share of
the partnership's ordinary income ($40,000 x 25% =
$10,000) and municipal bond interest income ($12,000 x
25% = $3,000), and would be decreased by the $8,000 cash
nonliquidating distribution that he received.
R
2. (a) The requirement is to determine the effect of a
YJ,••
~ e$40,000 increase in partnership liabilities on the basis for
Smith's 40% partnership interest. Since partners are indi-
vidually liable for their share of partnership liabilities, a
change in the amount of partnership liabilities affects a
part-
ner's basis for a partnership interest. When partnership li-
abilities increase, it is effectively treated as if each partner
individually borrowed money and then made a capital con-
tribution of the borrowed amount. As a result, an increase
in
partnership liabilities increases each partner's basis in the
partnership by each partner's share of the increase. Here,
Smith's basis is increased by his 40% share of the
mortgage
(40% x $40,000 = $16,000).
33. (a) The requirement is to determine Gray's tax basis
for a 50% interest in the Fabco Partnership. The basis for a
partner's partnership interest is increased by the partner's
distributive share of all partnership items of income and is
decreased by the partner's distributive share of all loss and
deduction items. Here, Gray's beginning basis of $5,000
would be increased by Gray's 50% distributive share of or-
dinary income ($10,000), tax-exempt income ($4,000), and
portfolio income ($2,000), resulting in an ending basis of
$21,000 for Gray's Fabco partnership interest.
34. (b) The requirement is to determine the net effect of
the two transactions on Kane's tax basis for his Maze part-
nership interest. A partner's basis for a partnership interest
consists of the partner's capital account plus the partner's
hare of partnership liabilities. A decrease in a partner's
share of partnership liabilities is considered to be a deemed
distribution of money and reduces a partner's basis for the
partnership interest. Here, Kane's partnership interest was
reduced from 25% to 20% on January 2, resulting in a re-
duction in Kane's share of,liabilities of 5% x $300,000 =
$15,000. Subsequently, on Aprill, when there was a
$100,000 repayment of partnership loans, there was a further
reduction in Kane's share of partnership liabilities of 20% x
$100,000 = $20,000. Thus, the net effect of the reduction of
Kane's partnership interest to 20% from 25%, and the re-
payment of $100,000 of partnership liabilities would be to
reduce Kane's basis for the partnership 'interest by $15,000 +
$20,000 = $35,000. .
35. (a) The requirement is to determine the original
basis of Lee's partnership interest that was received as an
inheritance from Dale. The basis of property received from
a decedent is generally its fair market value as of date of
death. Since fair market value on the date of Dale's death
was used for estate tax purposes, Lee's original basis is
$70,000.
36. (d) The requirement is to determine whether cash
paid by a transferee, and the transferee's share of partnership
liabilities are to be included in computing the basis of a
partner's interest acquired from another partner. When an
existing partner sells a partnership interest, the consideration
received by the transferor partner, and the basis of the trans-
feree's partnership interest includes both the cash actually
paid by the transferee to the transferor, as well as the trans-
feree's assumption of the transferor's share of partnership
liabilities.
37. (c) The requirement is to determine the basis of
each partner's interest in Arosa at December 31, 2010.
Since there are two equal partners, each partner's adjusted
basis in Arosa of $40,000 on January 1,2010, would be
increased by 50% of the $60,000 loan and would be de-
creased by 50% of the $10,000 operating loss. Thus, each
partner's basis in Arosa at December 31,2010, would be
$40,000 + $30,000 liability - $5,000 loss = $65,000.
F. Transactions with Controlled Partnerships
38. (d) The requirement is to determine the amount of
long-term capital loss recognized by Lydia from the sale of
stock to Agee & Nolan. A loss is disallowed if incurred in a
transaction between a partnership and a person owning (di-
rectly or constructively) more than a 50% capital or profits
interest. Although Lydia directly owns only a 50% partner-
ship interest, she constructively owns her sister's 50% part-
nership interest. Since Lydia directly and constructively has
a 100% partnership interest, her $5,000 loss is disallowed.
39. (a) The requirement is to determine the amount to
be reported as short-term capital gain on Cole's sale of stock
to the partnership. If a person engages in a transaction with
a partnership other than as a partner of such partnership, any
resulting gain is generally recognized just as if the transac-
tion had occurred with a non partner. Here, Cole's gain of
$16,000 - $10,000 = $6,000 is fully recognized. Since the
stock was not held for more than twelve months, Cole's
$6,000 gain is treated as a short-term capital gain.
40. (b) The requirement is to determine the amount and
nature of Kay' s gain from the sale of the lamp to Admor. A
gain that is recognized on a sale of property between a part-
nership and a person owning a more than 50% partnership
interest will be treated as ordinary income if the property is