Introduction to Taxation of Business

ACCT 5236
Roger Conlon
March 2022
Partnerships

Definition of a Partnership

1. Executives at SpaceX, Inc. and the National Aeronautics and Space Administration (NASA)
have agreed to a contract to develop a more advanced second generation re-flight rocket.
SpaceX, Inc. will commit a team of 100 engineers and its manufacturing facility to develop
the initial prototype for the rocket. It will receive $300 million provided the rocket meets the
design specifications formulated by NASA and its final acceptance by the Agency. NASA
will provide ongoing consultations and direction.

 State if the contract constitutes a partnership between SpaceX, Inc. and NASA.

2. Management at Pfizer, Inc. has agreed to form a joint venture with BioNTech SE to develop
and manufacture a covid vaccine. As part of the agreement, BioNTech Se will transfer the
unrestricted rights to its patented mRNA technology in exchange for 50% of the interest in /
Pfizer / BioNTech LLC. Pfizer, Inc. will transfer its technology and manufacturing facility
located outside Boston, Massachusetts in exchange for 50 % of the interest in Pfizer /
BioNTech LLC.

 State if the joint venture, Pfizer / BioNTech LLC constitutes a partnership.

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Transfers of Property & Services to a Partnership

1. Amazon.com Inc. is negotiating with Simon Property Group, Inc., America’s largest mall
owner, to convert the property owner’s anchor department stores into distribution hubs. The
companies intend to form Hub Center Partnership. Amazon.com, Inc. will transfer cash of
$70 million in exchange for a 70% interest. Simon Property Group, Inc. will transfer real
estate valued at $30 million for a 30% interest. It has basis of $12 million in the properties..

 State the basis Simon Property Group, Inc. obtains in its 30% interest in Hub Center
Partnership immediately after its transfer of the real estate.

 State the entry to the capital account of Simon Property Group, Inc. for its real estate
contribution to the Partnership.

2. Olympic skiers Tracy Miller and Lucas Jensen have decided to start a ski school at Beaver
Creek, Colorado. Tracy and Lucas ask your advice regarding the tax consequences of the
following transactions relating to the formation of Ski Adventures LLC.

 Assuming no entity classification election is filed for Ski Adventures LLC, state the
entity’s classification for tax purposes.

3. Continuing

Tracy and Lucas each will receive a 15% general partnership interest in Ski Adventures LLC
each valued at $150,000, in exchange for their ski instructions and marketing activities for
the first year of operation.

Investors Group, Inc. has agreed to contribute cash of $700,000 in exchange for the
remaining 70% general partnership interest of Ski Adventures LLC.

 Determine Tracy’s basis in her general partnership interest.

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3. Continuing.

Colorado Outdoors LLC agrees to contribute its Beaver Creek retail facility, to include the
store and a complete inventory of skis and snowboards, in exchange for an 80% general
partnership interest in Ski Adventures LLC. The value of the assets contributed by Colorado
Outdoors LLC is $4 million, and the combined basis for all the assets is $3.2 million.
At the close of these transactions, the partners’ percentage interests in Ski Adventure LLC are
as follows:

Tracy Miller 3%
Lucas Jensen 3%
Investors Group, Inc. 14%
Colorado Outdoors LLC 80%

 Determine the taxable income, if any, to Colorado Outdoors LLC on the receipt of its
partnership interest exchanged for its retail properties.

 Determine the taxable loss, if any, Investors Group, Inc. may claim for the diminution
of its partnership interest in Ski Adventure LLC (from 70% to 14%).

 Determine the basis in the partnership interest received by Colorado Outdoors LLC.

 State the capital account recorded for Colorado Outdoors LLC.

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4. Security Technologies Corporation (STC) has developed highly advanced encryption devices
designed to protect the information of online and mobile phone users. In response to the
demand from world leaders for greater online security, STC is forming the Data Guard
Security Partnership.

STC will contribute its patented encryption technology valued at $60 million in exchange for
a 60% partnership interest. STC has basis of $10 million in the technology.

Alexa Martin, CEO and founder of STC, will serve as Managing Partner of Data Guard
Partnership. She contributes cash of $2 million in exchange for a 2% capital interest. Also,
she receives a 1% capital interest in the Partnership valued at $1 million as compensation for
services she will render for the Partnership.

 State the basis STC will have in its partnership interest.

 State the value of the capital account that STC will have in its interest of the
Partnership.

 State the basis Data Guard Security Partnership has in the patented technology.

 State the basis Alexa Martin will have in her partnership interest.

 Based on the information provided, state the distribution STC would receive if Data
Guard Security Partnership were to liquidate.

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5. Foxconn Technology Group, Inc. (“Foxconn) and Fiat Chrysler Automobiles, Inc. (“Fiat
Chrysler”) are establishing a joint venture to develop and produce electric vehicles as well as
operate internet connected vehicles.

In forming the Foxconn-Fiat Chrysler Partnership the parties have committed to the
following contributions:

Foxconn will transfer a division of operating assets located in New Taipei Taiwan valued
at $50 million. Basis in the assets is $10 million. Foxconn will obtain a 40% general
partnership interest.

Fiat Chrysler will transfer a division of operating assets located in Detroit valued at $62.5
million. Basis in the assets is $32 million. Fiat Chrysler will obtain a 50% general
partnership interest in the Foxconn-Fiat Chrysler Partnership.

In exchange to serve as managing partner of the Foxconn-Fiat Chrysler Partnership, Mr.

Terry Gou, the founder and general manager of Foxconn, will receive a 3% general
partnership interest in the Foxconn-Fiat Chrysler Partnership valued at $3,750,000.

Foxconn also will receive a 7% general partnership interest valued at $8.75 million in
exchange for the two-year use of its patented technology related to the design of
electronic components. The payment is to be treated as a royalty.

Assume the Partnership is formed in the United States and Mr. Gou is a U.S. resident.

 State the taxable income, if any, recognized by any of the partners on their transfers.

 State the total basis Foxconn will have in its general partnership interests.

 State the capital account Fiat Chrysler will have for its general partnership interest.

 What liquidating value does Foxconn have in the Foxconn-Fiat Chrysler Partnership.

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Basis

1. Lynn Barber acquires a 10% general partnership interest in the Charleston Realty
Partnership for $120,000 in cash. As a general partner she assumes $20,000 of the
Partnership’s liabilities. Finally, in a separate agreement with the Partnership, she
receives an additional 5% general partnership interest for services she is to render during
the current year valued at $60,000.

 State Ms. Barber’s basis in her interest in the Charleston Realty Partnership
immediately after completion of these transactions.

 State Ms. Barber’s taxable income, if any, from these transactions.

2. At the start of the current year, American Properties Corporation contributes 10 real
estate locations at various shopping malls in the Washington DC area in exchange for a
40% general partnership interest in Capitol Associates General Partnership. The real
estate is valued at $20 million. At the time of its transfer, American Properties
Corporation has basis of $18 million in the properties.

During the year Capitol Associates General Partnership obtains a recourse loan of $40
million to use for future property acquisitions.

 State the basis American Properties Corporation will have in its interest in Capitol
Associates General Partnership.

 State the entry to the capital account for American Properties Corporation to record
the transactions.

 State the amount of the built-in gain related to the contributed property.

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3. Amazon.com Inc. plans to open bookstores in shopping malls and urban centers as a
means to reach customers via showrooms and shops. Executives at Amazon have agreed
to form a joint venture partnership with American Properties Corporation to carry out its
plan.

To start, Amazon will contribute cash of $40 million in exchange for an 80% general
partnership interest.

American Properties Corporation will contribute 10 real estate locations at various shopping
malls in the Washington DC area in exchange for a 20% general partnership interest. The real
estate is valued at $30 million and carries a nonrecourse loan of $20 million that is being
transferred to the Partnership. American Properties has basis of $18 million in the properties.

 Determine the basis in the Partnership interest held by American Properties, Inc.
immediately after its formation and the contribution of assets and liabilities.

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4. Great Falls Associates, Inc. is a 50% general partner of Potomac Properties Partnership.
At year-end, the Partnership has the following balance sheet.

Potomac Properties Partnership

Balance Sheet

Basis Value

Bethesda Mall $75 million $140 million

Century Towers 60 million 130 million

Lee Highway Mall 12 million 80 million

Total Assets $147 million $350 million

Union Bank – Note 7% $70 million

Capital Accounts $280 million

Great Falls Associates, Inc. contributed the Bethesda Mall, which consisted of high-end retail
properties valued at $140 million and a basis of $75 million in exchange for its 50% general
partnership interest.

 State the basis Great Fall Associates, Inc. obtains in its interest as a general partner in
the Partnership.

 State the basis of Great Fall Associates, Inc. if Edward Murdstone of Copperfield
Associates LLC, a 10% general partner, personally guarantees the note.

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5. Thames River Corporation purchases a 25% general partnership interest in Potomac
Properties Partnership for $70 million. The Partnership has the following balance sheet

Potomac Properties Partnership

Balance Sheet

Basis Value

Bethesda Mall $75 million $140 million

Century Towers 60 million 130 million

Lee Highway Mall 12 million 80 million

Total Assets $147 million $350 million

Union Bank – Note 7% $70 million

Capital Accounts $280 million

 State the basis Thames River Corporation obtains in its general partnership interest.

6. Continued.

Ms. Bella Wilfer invests $28 million for a 10% limited partnership interest in Potomac
Properties Partnership.

 State Ms. Wilfer’s basis as a limited partner in the Partnership if the debt owed to
Union Bank provides recourse to all the Partnership’s assets.

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7. Minnesota Technologies Limited Partnership is owned by the following members:

Minnesota Technologies Limited Partnership

Partner Accounts

Capital Interest % Ownership

Rachel Sanders General 40%

Russ Michaels Limited 10%

Sheryl Braun Limited 10%

Robert Morrison Limited 30%

William Blake General 10%

Minnesota Technologies Limited Partnership has the following liabilities at the close of
the taxable year:
Minnesota Technologies Limited Partnership
Note Obligations

Bank Terms Principal Outstanding

Union Bank, Inc. 20-year 8% $40 million

Recourse

Merchant Bank, Inc. 5-year 5% $10 million

Nonrecourse

Investors Group, Inc. 3-year 4% $10 million

Nonrecourse

 For Rachel Sanders and Russ Michaels, state the basis each obtains for their share in
the Partnership’s liabilities.

Bank Terms Principal Rachel Russ

Outstanding General* Limited

Union Bank, Inc. 20-year 8% $40 million

Recourse

Merchant Bank, Inc. 5-year 5% $10 million

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 Nonrecourse

Investors Group, Inc. 3-year 4% $10 million

Nonrecourse

Total

8. McLean Property Investors, Inc., Great Falls Associates, Inc. and several individual
investors form Potomac Properties Partnership to own and operate commercial real estate
in the DC metropolitan area. Great Falls Associates, Inc. contributes the Bethesda Mall,
which consists of high-end retail properties valued at $200 million and having a basis of
$75 million in exchange for a 40% general partnership interest in the Potomac Properties
Partnership. The property is encumbered by a note of $20 million issued to Union Bank.

 Determine the basis Great Falls Associates, Inc. will have in its general partnership
interest.

9. Continuing.

McLean Property Investors, Inc. contributes to the Potomac Properties Partnership the
Century Towers, an office building on K Street in Washington, D.C. valued at $150 million
with a basis of $60 million in exchange for a 30% general partnership interest.

 Based on the result from the previous example, determine the basis McLean Property
Investors, Inc. has in the Potomac Properties Partnership.

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10. Metro Real Properties, Inc. and Holman Construction Company have agreed to form a
partnership to build “Manhattan Towers”, a hotel and residential complex in lower
Manhattan. The structure will reach 88 stories and rank as one of the tallest hotels in the
world. The Manhattan Towers Partnership will be structured as follows:

Metro Real Properties will contribute $40 million as start-up money in exchange for an 80%
general partner interest.

Holman Construction will contribute cash of $10 million for a 20% limited partnership
interest.

Conway & Cooper LLC, a prominent architectural firm, will contribute its proposed design
for the building in exchange for a 10% general partnership interest in The Manhattan Towers
Partnership, payable when the designs are completed and “accepted” by the Partnership.

On the date of its formation, The Manhattan Towers Partnership secures a $100 million
recourse loan from Union Bank.

 Determine the basis in the interest in The Manhattan Towers Partnership held by:

 Metro Real Properties, Inc.

 Holman Construction Company

 Conway & Cooper LLC

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11. Digital Asset Holdings LLC is a startup trying to develop mainstream uses for blockchain
technology. For having raised more than $50 million from investors, Digital paid
investment banker Blythe Masters cash of $500,000 as well as a 2% capital interest in
Digital Asset Holdings LLC valued at $100,000. You are informed that Digital Asset
Holdings LLC is classified as a partnership for US tax purposes.

Also, you are told Digital’s balance sheet includes liabilities of $120 million. The debt is
guaranteed by a consortium consisting of the founders and the major equity holders. This
excludes Ms. Blythe.

 Determine Ms. Masters basis in her interest as a partner of Digital Asset Holdings
LLC.

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Operations

1. Executives at Minnesota BioTech LLC, an entity classified as a partnership for tax

purposes, have questions regarding the preparation of Form 1065, US Return of
Partnership Income.

 State if the tax treatment of the following items should be decided by the Partnership
or by the Partners (as either a non-separately stated item, or as a separately stated
item).

 Decision to apply the LIFO or FIFO method of accounting for determining

beginning and ending inventories

 Depreciation of the Corporation’s clinical laboratory.

 Carryover of the Partnership’s Ordinary Business Loss against future taxable

income

 Determination of net capital gains (or losses)

 Determination of deductions for research and development costs

 Calculation of depreciation recapture on sale of the Watergate Condominiums

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 Determination of the Partnership’s Ordinary Business Income (or loss)

 Deductibility of interest paid to foreign partners

 Allocation of nonbusiness income to nonresident partners

 Determination of deductibility of Partnership’s Ordinary Business Loss as either

an active or passive investment loss

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2. Stacy, a biochemist, has a 10% interest in True Medical LLP, an entity classified as a
partnership and follows a June 30 year-end for U.S. tax purposes. During the current
calendar year, True Medical LLP incurs a loss $200, 000. It reports on its U.S. Return of
Partnership Income (Form 1065) an ordinary business loss of $300,000 for the year ended
June 30.

 State the ordinary business loss that Stacy will claim on her personal tax return for the
current year.

3. Minnesota BioTech LLC, an entity classified as a partnership for tax purposes, presents
the following financial information at the close of its taxable year.

Income
Revenue – Sales of medical devices $40 million
Less: Cost of Goods Sold 28 million

Revenue – Clinical Services 12 million

Dividends – Medtronic Corporation 5,000

Expenses
Depreciation – equipment 4 million
Rent expense 1 million
Salaries – Employees 8 million
Research & Development Expenses 6 million
Charitable contributions 200,000
Guaranteed payments – Partners 3 million
Long term capital gains 2 million
State income taxes 3 million
Foreign income taxes 1 million

 State the items excluded from the determination of Ordinary Business Income (loss),
(line 22) of Form 1065, US Return of Partnership Income.

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Partnership Income (Loss)

1. Minnesota Technologies, Inc. holds a 30% general partnership interest in the MedLab
Partnership. It has basis of $50,000 in its partnership interest and a capital account of $50,00.

To recognize it as the primary guarantor on its liabilities, the Partnership allocates the first
$20,000 of profits (or loss) to Minnesota Technologies, Inc. Any remaining profits (or loss)
are allocated in accordance with each partner’s percentage interest in the Partnership.

At the close of the current year, the Partnership reports net business loss of $200,000.

 Determine the taxable loss allocated to Minnesota Technologies, Inc. with respect to its
ownership interest in the Partnership.

 State the amount that Minnesota Technologies, Inc. may deduct in the current year.

 State the amount in the capital account of Minnesota Technologies, Inc. at the close of the
current year.

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2. Lisa Randall, a biochemist, on January 1 of the current year contributes her patented stent
design to True Medical LLP, in exchange for a 10% capital interest. True Medical LLP is an
entity classified as a partnership and follows a June 30 year-end for U.S. tax purposes. The
patented stent design has a fair market value at the date of contribution of $5 million. Ms.
Randall’s basis in the design is zero.

Ms. Randall is a calendar year taxpayer. During the current year, she receives a guaranteed
payment of $240,000 accrued and paid on a monthly basis. At June 30 of the current year,
True Medical LLP reports on its U.S. Return of Partnership Income (Form 1065) an ordinary
business loss of $300,000 and a guaranteed payment of $120,000 to Ms. Randall.

 Indicate how Ms. Randall must report the income on her individual tax
return the guaranteed payments she received from the Partnership.

 Determine the amount, if any, that Ms. Randall may deduct on her
individual income tax return for her share of the Partnership’s ordinary
business loss.

3. Effective January 1 of the current year, Gerald joins the law practice of Warner & Lexington
Partnership as a 10% general partner. He contributes $80,000 to the capital of the
Partnership. The Partnership has a calendar year-end. At December 31 of the current year, the
Partnership has loans owed to Federal Trust of $5 million. At December 31, the Partnership
reports ordinary business income of $4 million on line 22 of the Form 1065. Gerald’s
guaranteed payment from the Partnership recorded at December 31 is $600,000.

 Calculate the income items Gerald must report on his individual income tax return

 Calculate Gerald’s basis in his partnership interest at the close of the taxable year.

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4. William Harrington is a general partner in the law firm Price & Mailer LLC. The basis in his
Partnership interest at the start of the current year is $75,000. For the current year, the
Partnership reports his proportionate share of the following items:

Ordinary business income (line 22) $40,000

Reduction of Partnership’s recourse note $15,000

Guaranteed payment $300,000

 Determine the taxable income (loss) William will recognize for the current from
his ownership in Price & Mailer LLC.

 Determine William’s basis in the Partnership at year-end of the current year.

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5. Cassandra Daily as general partner owns a 25% interest in Minnesota Properties LLC. On
January of the current year she contributes her ownership in land valued at $70 million. Her
basis in the land is $40 million.

In year 3, Minnesota Properties sells the land for $120 million.

 Assuming Cassandra continues to own a 25% interest, determine her share of the
gain from the sale of the land.

6. Potomac Properties Partnership owns commercial real estate in the DC metropolitan area. On
January 1 of Year 1, Great Falls Associates, Inc. contributed the Bethesda Mall, which
consisted of high-end retail properties valued at $200 million and a basis of $75 million in
exchange for a 25% partnership interest in the Potomac Properties Partnership.

For 3 years the Partnership depreciated the property as follows:

Tax depreciation – Straight line over 25 years = $3 million per year
Book depreciation – Straight line over 25 years = $8 million per year

At the close of Year 3, Potomac Properties Partnership sold the Bethesda Mall for $250
million.
 Determine the taxable gain Great Falls Associates, Inc. will recognize on the sale of
the properties

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7. Potomac Properties Partnership owns commercial real estate in the DC metropolitan area.
During the current year, the Partnership sells Chrystal City Towers for $12 million. Several
years before, Great Falls Associates, Inc., a 40% general partner had contributed the property
and the Partnership established a section 704(c) account. At the date of the sale, the
Partnership had tax basis of $8 million and book basis of $9 million in the property.

 Determine the gain allocated to Great Falls from the sale of Chrystal City Towers.

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Non-Liquidating Distributions

1. Greg Fleming, the managing general partner of Rockefeller Associates LLP, each month
receives a guaranteed payment of $800,000. He also receives a quarterly distribution based
on the Partnership’s earnings from the previous year of $200,000 each quarter. At the start of
the current year, Mr. Fleming had basis of $10 million.

 State the taxable income Mr. Fleming recognizes during the taxable year.

 Determine Greg’s basis at the close of the current year.

2. Bill and Sandy each own 50% of the shares in Woodland Flowers LLC. The entity is
classified as a partnership for U.S. tax purposes. It follows a calendar taxable year. At the
start of the current year, Bill’s basis in his partnership interest is $40,000. The partnership
has no debt.

During the current year the Partnership incurs a business loss of $60,000. Instead of a
salary, the Partnership distributes $20,000 to Bill on December 10.

 Calculate Bill’s basis at the close of the year.

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3. Robert Mercer is CEO of Renaissance Technologies LLC that has incurred significant
investment losses during the current year. At the start of the year Mr. Mercer’s basis was
$6 million. At year-end the Partnership reports the following regarding Mr. Mercer’s
share in the Partnership:

Ordinary business loss $12 million

Capital gains 3 million
Distribution 4 million

 Determine Mr. Mercer’s taxable gain (loss) for the current year from his interest in
the Partnership

4. Art and Spencer each owns 50% of the shares in Oceans LLC, a seaside restaurant. The
entity is classified as a partnership for U.S. tax purposes. It follows a calendar taxable
year. At the start of the year, Spencer’s basis in his interest is $45,000.

During the year, Spencer recognizes a guaranteed payment of $100,000.

At year-end, Oceans LLC reports ordinary business income of $150,000.

 Calculate the income Spencer must report on his current year’s individual income
tax return with respect to Oceans LLC.

 Calculate the income Spencer would report on his return if in addition to the items
already stated, he had received a distribution of $200,000. Assume all other facts
remain the same.

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5. Olympic skier Tracy Miller owns a 20% general partnership interest in Ski Adventure
Partnership. At the start of the current year, Tracy has basis in her general Partnership
interest of $12,000. During the year her proportionate interest in the Partnership’s
ordinary business income is $18,000, and the Partnership pays down its liabilities.

 State the basis Tracy will have in her general partnership interest if:

 The Partnership reduces its liabilities by $20,000.

 The Partnership reduces its liabilities by $250,000.

6. Williams and Werner each own a 50% interest in Williams Pub Partnership. The
Partnership has a calendar year-end. Werner’s basis at the start of the current year is
$40,000. During the current year, Werner receives a series of cash distributions totaling
$50,000. At the close of the current year, the Partnership reports an ordinary business loss
of $50,000.

 Determine the gain, income or loss that Werner reports on his individual income
tax return.

 Determine Werner’s basis in his Partnership interest at the close of the year.

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7. Northern Financial LLC is a professional investment firm that is classified as a partnership
for federal tax purposes. At the start of the current year, Nate Wingate held a 10% general
partnership interest having a basis of $3 million. During the current year, Northern Financial
LLC purchased 5% of his general partnership interest for $2 million.

 State Nate’s taxable income from the purchase of his partnership interest.

8. Northern Financial LLC is a professional investment firm that is classified as a partnership

for federal tax purposes. At the start of the current year, Cathy Stewart has a 15% partnership
interest with basis of $3 million.

During the current year, Northern Financial LLC transfers Apple, Inc. stock valued at $3
million to Ms. Stewart in exchange for 5% of her Partnership interest. Northern Financial
LLC has basis of $1.2 million in the Apple stock.

 State the taxable income Ms. Stewart must recognize for transferring her Partnership
interest in exchange for the Apple, Inc. stock.

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9. Northern Financial LLC is a professional investment firm that is classified as a partnership
for federal tax purposes. At the start of the current year, Cathy Stewart has a 15% partnership
interest with basis of $500,000.

During the current year, Northern Financial LLC transfers Apple, Inc. stock valued at $3
million to Ms. Stewart in exchange for 5% of her Partnership interest. Northern Financial
LLC has basis of $1.2 million in the Apple stock.

 State the taxable income Ms. Stewart must recognize for transferring her Partnership
interest in exchange for the Apple, Inc. stock.

10. Greg Fleming, the managing general partner of Rockefeller Associates LLP, each month
receives a guaranteed payment of $800,000. He also receives a distribution based on the
Partnership’s earnings from the previous year of $1.2 million. At the start of the current year,
Mr. Fleming had basis of $2 million.

Mr. Fleming also receives from Rockefeller Associates LLP a distribution of Amazon.com,
Inc. stock valued at $1 million with basis of $100,000.

 State Mr. Fleming’s basis in his interest in Rockefeller Associates LLP at the close of the
current year.

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11. Greg Fleming, the managing general partner of Rockefeller Associates LLP receives a
distribution based on the Partnership’s earnings from the previous year of $1.2 million. At the
start of the current year, Mr. Fleming had basis of $1.5 million.

Mr. Fleming also receives from Rockefeller Associates LLP a distribution of Amazon.com,
Inc. stock valued at $1 million with basis of $500,000.

 State the taxable income Mr. Fleming must recognize for the current year.

 State the basis in his Partnership interest at the close of the taxable year.

12. David and Chelsea each owns a 50% interest in Soho Galleries LLP, an art gallery in
Greenwich Village. Soho Galleries is classified as a Partnership. At the close of the current
year, the Partnership distributes to David, a “Popeye Sculpture” by Jeff Koons valued at $10
million. The Partnership’s basis in the sculpture is $1 million. David’s outside basis in his
Partnership interest is $50,000.

 On receiving the property, determine David’s basis in the sculpture?

 Determine David’s basis in his partnership interest as of the close of business for the
current year.

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13. Great Falls Associates, Inc. (Great Falls) is a 40% general partner in the Potomac Properties
Partnership. At the start of the year, Great Falls had basis of $10 million in the Partnership.
During the year, Great Falls reports the following Partnership transactions:

Great Falls recognized ordinary business income of $3 million

During the current year Great Falls received total cash distributions of $2 million.

Great Falls share in the Partnership’s liabilities increased $4 million

Great Falls received a distribution of property valued at $6 million having a basis of $5

million.

 Determine the taxable income Great Falls must recognize for the current year

 State the basis Great Falls will have in its interest in the Partnership at the close of
business for the current year.

14. Great Falls Associates, Inc. (Great Falls) is a 40% general partner in the Potomac Properties
Partnership. At the start of the year, Great Falls had basis of $10 million in the Partnership.
During the year, Great Falls reports the following Partnership transactions:

Great Falls recognized ordinary business income of $3 million

During the current year Great Falls received total cash distributions of $8 million.

Great Falls share in the Partnership’s liabilities decreased by $3 million

Great Falls received a distribution of property valued at $6 million having a basis of $5

million.

 Determine the taxable income Great Falls must recognize for the current year

 State the basis Great Falls will have in its interest in the Partnership at the close of
business for the current year.

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15. Great Falls Associates, Inc. (Great Falls) is a 40% general partner in the Potomac Properties
Partnership. At the start of the year, Great Falls had basis of $10 million in the Partnership.
During the year, Great Falls reports the following Partnership transactions:

Great Falls was allocated an ordinary business loss of $13 million

During the current year Great Falls received total cash distributions of $2 million.

Great Falls share in the Partnership’s liabilities increased $4 million

Great Falls received a distribution of property valued at $6 million having a basis of $5

million.

 Determine the taxable income Great Falls must recognize for the current year

 State the basis Great Falls will have in its interest in the Partnership at the close of
business for the current year.

16. Kramer and Alexandra each own 50% of the shares in Arcadia LLC, an art gallery in Los
Angeles. The entity is classified as a partnership for U.S. tax purposes. It follows a
calendar taxable year. At the start of the year, Kramer’s basis in her partnership interest is
$1 million. Both partners have guaranteed all liabilities owed by Arcadia.

During the year, the following occurred affecting Kramer’s basis in her partnership interest:
Arcadia LLC paid down its debt from $4 million to $3.8 million.
Arcadia LLC reported ordinary business income of $400,000
Arcadia LLC distributed a sculpture by Damien Hurst valued at $20 million to
Kramer. Arcadia’s basis in the art was $2 million.
 Calculate Kramer’s basis in Arcadia LLC after she receives the distribution

 Calculate Kramer’s basis in the work by Damien Hurst

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17. Avatar Productions, Inc. owns a 50% general partnership interest in Magic Movies LLC.

During the current year, Magic Movies LLC reports the following transaction affecting
Avatar Productions, Inc.

Magic Movies LLC distributes to Avatar Productions, Inc., the rights to the movie
“Cinema Paradisio” valued at $20 million. The Partnership’s basis in the movie is $5
million.

At the close of the year, before taking into account this transaction, Avatar Productions,
Inc. has a basis in its Partnership interest of $3 million.

 Determine the gain, if any, that Avatar Productions, Inc. must recognize on its receipt
of the rights to the movie.

 Determine the basis that Avatar Productions, Inc. has in its rights to the movie.

 Determine the basis that Avatar Productions, Inc. has in its partnership interest in
Magic Movies LLC.

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18. Renaissance Investments LLC (“Renaissance”) is an investment banking company that is
classified as a partnership for federal tax purposes. Robert Mercer, CEO of Renaissance,
received guaranteed payments of $50,000 per month during calendar Yr. 5.

Mr. Mercer has basis in his partnership interest of $6 million at October 1, Yr. 4.

Renaissance files a fiscal year tax return ended September 30. At September 30, Yr. 5,
Renaissance incurred significant operating losses. However, the cash from several
substantial divestitures enabled it to repay its outstanding liabilities.

For the year ended September 30, Yr. 5, Mr. Mercer receives the schedule K-1 regarding
his 30% partnership interest:

Ordinary business loss $12 million

Guaranteed payment 400,000
Capital gains 3 million
Decrease in recourse liabilities 4 million

 Determine Mr. Mercer’s taxable income (loss) from his interest in the Partnership for
his Yr. 5 tax individual income tax return.

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Liquidating Distributions

1. Ray Sterling announced he was leaving Swift Sporting LLC. At December 31, he received a
liquidating distribution of $2 million. At the start of the year, Mr. Sterling had basis in Swift
Sporting of $500,000. For the year, Mr. Sterling’s share in the Partnership’s ordinary business
income was $60,000. Upon liquidating his interest, he was relieved of his share of the
Partnership’s liabilities of $80,000.

 Determine the taxable income Ray will recognize from receiving a liquidating
distribution from Swift Sporting LLC.

2. As part of his settlement with Washington Properties, LLC, Frank Spingler received a
liquidating distribution consisting of land valued at $200,000 with a basis to the Partnership
of $70,000. Also, he received a guaranteed payment of $100,000 for his services rendered to
the Partnership during the year. His proportionate share in the Partnership’s ordinary business
loss was $50,000. Upon liquidating his interest, Frank was relieved of his share of the
Partnership’s liabilities of $70,000. At the start of the year, Frank’s basis was $200,000.

 State Mr. Spingler’s taxable income for the taxable year.

 State the basis Mr. Spingler will have in the land.

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3. The quant-trading firm, Quatopian LLC, has failed to meet investor expectations causing its
leading trader, Jonathan Larkin, to leave the Partnership. As a liquidating distribution of his
interest, he will receive: $4 million in cash, relief of $10 million of the Partnership’s
liabilities, and Berkshire Hathaway, Inc. stock valued at $2 million with a basis to the
Partnership of $1.8 million.

 State the tax consequences to Mr. Larkin (taxable income and basis in the Berkshire
Hathaway stock) will recognize if his basis in the Partnership immediately prior to the
liquidation is:

 $20 million

 $11 million

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4. Management of the North Dakota Oil Partnership has determined to terminate the partnership
and distribute the assets to its partners.

As part of the termination, the Partnership will repay its loan owed to Union Bank of $20
million.

Texas Oil Company, a 40% general partner will receive the following assets as a liquidating
distribution:
Basis Fair Market Value
Cash $5 million $5 million
Drilling Equipment 4 million 3 million

 Prior to the liquidating distribution, Texas Oil Company had a basis in the Partnership of
$24 million. Determine the basis in the assets it receives from liquidating distribution.

 If management decided to continue operating, and simply distributed the properties to its
partners without liquidating their interests, determine the basis in the assets received by
Texas Oil Company as part of the current or non-liquidating distribution.

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5. The partners of Travel Ventures Partnership have decided to terminate their Partnership and
proceed to distribute its assets, and to pay off its liabilities. World Class Travel, Inc., a 50%
general partner will receive cash of $3 million, and the customer list that has been developed
by the Partnership, valued at $15 million. The Partnership has a zero basis in the customer
list.

The Partnership will pay off its debt to Union Bank of $12 million.

 Determine the taxable gain or loss World Class Travel, Inc. will recognize on the
liquidation of the Partnership, if its basis in the Partnership immediately prior to the
liquidation is:

 $5 million

 $20 million

 Determine the basis World Class Travel, Inc. will have in the customer list at the
termination of the Partnership if its basis in the Partnership immediately before the
liquidation is:

 $5 million

 $20 million

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6. Greg Fleming and management at Rockefeller Associates LLP have reached agreement to
terminate his association with the Partnership. Mr. Fleming will receive $30 million in
exchange for his entire interest. He has basis in the Partnership of $32 million.

 Determine the taxable income Mr. Fleming recognizes from the transaction.

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