South Western Federal Taxation 2019 Corporations Partnerships Estates and Trusts 42Nd Edition Raabe Solutions Manual Full Chapter PDF

South-Western Federal Taxation 2019
Corporations Partnerships Estates and

Trusts 42nd Edition Raabe Solutions
Manual
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SWFT 2019 Corporations, Partnerships, Estates and Trusts
Chapter 10: Partnerships: Formation, Operation, and Basis
End-of-Chapter Question, Exercise, and Problem Correlations
Corporations, Corporations, Corporations,

Partnerships, Partnerships, Partnerships,
Estates & Estates & Estates & Trusts
Trusts 41e Trusts 42e 42e (2019)
(2018) (2019) Learning Objectives Exact Same Revised Brand New
Discussion Questions (DQ)
DQ.10.01 DQ.10.01 LO1 x
DQ.10.02 DQ.10.02 LO1 x
DQ.10.03 DQ.10.03 LO2, 4, 7, 8 x
DQ.10.04 DQ.10.04 LO3 x
DQ.10.05 DQ.10.05 LO3, 4 x
DQ.10.06 DQ.10.06 LO4 x
DQ.10.07 DQ.10.07 LO5 x
DQ.10.08 DQ.10.08 LO7, 8 x
DQ.10.09 LO7, 8 x
DQ.10.09 DQ.10.10 LO8 x
DQ.10.10 DQ.10.11 LO9, 10 x
DQ.10.11 DQ.10.12 LO11 x
DQ.10.12 DQ.10.13 LO12 x
DQ.10.13 DQ.10.14 LO13 x
DQ.10.14 DQ.10.15 LO10, 12, 14 x
Computational Exercises (EX)
EX.10.15 EX.10.16 LO2 x
EX.10.16 EX.10.17 LO3 x
EX.10.17 EX.10.18 LO3 x
EX.10.18 EX.10.19 LO3 x
EX.10.19 EX.10.20 LO4 x
EX.10.20 EX.10.21 LO7 x
EX.10.21 EX.10.22 LO7 x
EX.10.22 EX.10.23 LO8 x
EX.10.23 EX.10.24 LO9 x
EX.10.24 EX.10.25 LO10 x
EX.10.25 EX.10.26 LO10 x
EX.10.26 EX.10.27 LO12 x
EX.10.27 EX.10.28 LO13 x
EOC 10-1
© 2019 Cengage®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
South-Western Federal Taxation 2019 Edition Series End-of-Chapter Question, Exercise, and Problem Correlations:
Corporations, Partnerships, Estates and Trusts

Problems (PR)
PR.10.28 PR.10.29 LO3 x
PR.10.29 PR.10.30 LO3, 14 x
PR.10.30 PR.10.31 LO3 x
PR.10.31 PR.10.32 LO3 x
PR.10.32 PR.10.33 LO3, 9 x
PR.10.33 PR.10.34 LO3, 9, 14 x
PR.10.34 PR.10.35 LO3, 14 x
PR.10.35 PR.10.36 LO3, 14 x
PR.10.36 PR.10.37 LO3 x
PR.10.37 PR.10.38 LO4 x
PR.10.38 PR.10.39 LO4 x
PR.10.39 PR.10.40 LO5 x
PR.10.40 PR.10.41 LO3, 4, 5 x
PR.10.41 PR.10.42 LO6 x
PR.10.43 LO7 x
PR.10.42 PR.10.44 LO3, 7, 8 x
PR.10.43 PR.10.45 LO7, 8, 11 x
PR.10.44 PR.10.46 LO7, 9, 10 x
PR.10.45 PR.10.47 LO7, 8 x
PR.10.46 PR.10.48 LO11 x
PR.10.47 PR.10.49 LO8, 10, 11 x
PR.10.50 LO7, 8, 9, 11 x
PR.10.48 PR.10.51 LO7, 8, 9 x
PR.10.49 PR.10.52 LO7, 8, 9, 12 x
PR.10.50 PR.10.53 LO3, 7, 9, 10 x
PR.10.51 PR.10.54 LO11 x
PR.10.52 PR.10.55 LO3, 7, 9, 10 x
PR.10.53 PR.10.56 LO7 x
PR.10.54 PR.10.57 LO7 x
PR.10.55 PR.10.58 LO3, 7, 9, 12 x
PR.10.56 PR.10.59 LO7, 9, 12 x
PR.10.57 PR.10.60 LO10 x
PR.10.58 PR.10.61 LO3, 9, 10 x
PR.10.59 PR.10.62 LO9, 10, 12, 14 x
EOC 10-2
South-Western Federal Taxation 2019 Edition Series End-of-Chapter Question, Exercise, and Problem Correlations:
Corporations, Partnerships, Estates and Trusts

PR.10.60 PR.10.63 LO10, 12 x
PR.10.61 PR.10.64 LO13 x
Cumulative (Tax Return) Problems (CP)
CP.10.01 CP.10.01 x
Research Problems (RP)
RP.10.01 RP.10.01 x
RP.10.02 RP.10.02 x
RP.10.03 RP.10.03 x
RP.10.04 RP.10.04 x
RP.10.05 RP.10.05 x
RP.10.06 RP.10.06 x
Becker CPA Review Questions (BCPA)
RCPA BCPA.10.01 x
RCPA BCPA.10.02 x
RCPA BCPA.10.03 x
RCPA BCPA.10.04 x
RCPA BCPA.10.05 x
RCPA BCPA.10.06 x
RCPA BCPA.10.07 x
EOC 10-3
CHAPTER 10
PARTNERSHIPS: FORMATION, OPERATION, AND BASIS
SOLUTIONS TO PROBLEM MATERIALS
DISCUSSION QUESTIONS
1. (LO 1) A partnership agreement (or an operating agreement for an LLC) is an agreement among the
partners regarding the rights and obligations of the partners, the allocation of partnership income
and deductions, allocation and distribution of partnership cash flows, requirements for current and
future capital contributions, conditions under which the partnership is terminated, and other matters.
2. (LO 1) In a general partnership (GP), each owner is a general partner and may participate in
managing the entity; however, these partners also have unlimited liability for the entity’s debts.
In a limited liability company (LLC), each member may also participate in management;
however, absent a personal guarantee, the members have no liability for the entity’s debts. Because
the owners of both a GP and an LLC may run the business, there are few situations in which a general
partnership provides an equivalent benefit to an LLC. GPs are usually used only for arrangements
such as corporate joint ventures where the corporate partners are established with limited assets, or
where the general partner itself is an LLC. LLCs, on the other hand, should be the entity form of
choice for an operating partnership.
3. (LO 2, 4, 7, 8) A partnership is not a taxpaying entity; however, it must still file a tax return. The
partnership reports its income and expenses on Form 1065. Partnership income consists of income
from operations and separately stated income and expenses. The income and expenses from
operating activities are reported on page 1 of Form 1065. A separately stated item is any item
(income or expense) that could differently affect the tax liabilities of different partners. Separately
stated items are reported in the partnership return on Schedule K.
Under the “entity” theory, the partnership files a return and makes most elections regarding the
treatment of partnership items. However, under the “aggregate” theory, the partnership does not
generally calculate or pay any tax with the return.
The partnership allocates its interest expense to its various activities. For business interest expense,
the partnership determines whether the 30% deduction limitation under § 163(j) applies, and then it
allocates any excess business expense carryover to the partners. In years in which there is no
deduction limitation, the partnership calculates and allocates its excess taxable income to the partners
so they can deduct some or all of any carryover. Applying the deduction limitation at the partnership
level is consistent with the entity theory, in that the partnership is better equipped to make the initial
calculation. Treatment of the carryover at the partner level is consistent with the aggregate theory, in
that this treatment ensures the partners in the partnership at the time the carryover arose are the
partners who are able to claim the deduction.
10-1
10-2 2019 Corporations Volume/Solutions Manual
In contrast, the partner calculates the § 199A qualified business income deduction. The partnership
calculates and reports the information the partners need to calculate any limitation on the deduction
(e.g., W–2 wages and property basis), but the partner makes the actual calculation. This treatment is
consistent with the aggregate theory, because each partner might have QBI from other sources that
should be taken into account in determining the allowable deduction.
4. (LO 3) As a general rule, both §§ 721 and 351 provide that no gain or loss is recognized when
property is transferred on the formation of a partnership or corporation. However, § 351 applies
only if those persons transferring property to a corporation are in control of the corporation
immediately after the exchange, whereas § 721 does not include a control requirement. Section 721
defers gain or loss recognition whether the transfer is to form the partnership or on a later contribution
to capital.
Under § 721, the contributor must receive an interest in the partnership, while under § 351, the
transferor must receive stock in the corporation. Under both §§ 721 and 351, if the transfer of property
involves the receipt of money or other consideration, the transaction may be deemed a sale or
exchange rather than a tax-free transfer.
5. (LO 3, 4) For property contributed by a partner to a partnership, the partnership “steps into the
shoes” of the contributing partner and continues to use the depreciation schedule used by the partner.
For example, say that at the midpoint of year 4, a calendar year partner contributes nonresidential
real property that was purchased in August of year 1. The current year’s cost recovery will be
calculated using the 39-year MACRS table for the “eighth month,” fourth recovery year. One-half of
the cost recovery would be allocated to the partner, and the remainder would be allocated to the
partnership. The following year would be the fifth recovery year, and the cost recovery would be
allocated completely to the partnership.
If newly capitalized costs arise on a contribution of assets to the partnership (e.g., transfer taxes or
legal fees), the partnership treats these costs as newly acquired MACRS property and commences
depreciation at the date the partnership places the property in service.
6. (LO 4) Expenditures might include the following and would be treated as indicated.
Type of Expenditure Treatment Reference
Acquisition of property Capitalized and depreciated; potential bonus § 167, § 168,

depreciation or § 179 deduction § 179
Startup expenses $5,000 expensed (subject to phaseout); § 195
remainder capitalized and amortized over 180
months
Organization costs $5,000 expensed (subject to phaseout); § 709
remainder capitalized and amortized over 180
months
Syndication costs Capitalized; no amortization permitted § 709
Section 197 intangible Amortized over 15 years § 197
Other intangibles Amortized over useful life if it is determinable; Reg. § 1.167–3
no amortization if life is not determinable
Ordinary and necessary post- Deductible currently § 162
operating business expense
Partnerships: Formation, Operation, and Basis 10-3
7. (LO 5) A partnership can generally use the cash method if it is engaged in the business of farming, or
if it does not have any partners that are C corporations (other than personal service corporations). In
addition, if the partnership has a partner that is a C corporation, it can still use the cash method if
the partnership has not had more than $25 million of average annual gross receipts in any three-
year period prior to the current tax year. If the partnership is classified as a tax shelter, it cannot use
the cash method regardless of whether it is eligible under one of the other provisions.
8. (LO 7, 8) A guaranteed payment is an amount paid to a partner for the performance of services
or for the partnership’s use of the partner’s capital. These payments are conceptually similar to
the salary or interest payments made by other entities. Guaranteed payments generally are
deductible by the partnership and can result in a loss to the entity. (Note that guaranteed payments
for services are not subject to tax withholding requirements.)
Guaranteed payments are deducted on Form 1065, page 1. These amounts are also shown on Schedule
K as an item that must be allocated to the partners for them to report as ordinary income. On the
partnership’s Analysis of Income (Loss) on page 5, guaranteed payments have effectively been
deducted and restored. Therefore, in the partnership’s “book-tax reconciliation” on Schedules
M–1 or M–3, the guaranteed payments are added to book income so the two measures of the
partnership’s income can be equal.
The amount received by a partner as a guaranteed payment is shown on that partner’s Schedule K–1
and is reported by the partner as ordinary income. A guaranteed payment the partner receives for
services rendered to the partnership (i.e., the equivalent of wages) is treated as self-employment
income by the recipient partner and also might be subject to the additional Medicare tax; it is not
eligible for the § 199A QBI deduction and it is not subject to the net investment income tax. A
guaranteed payment the partner receives for contributing capital to the partnership (i.e., the equivalent
of interest income) is eligible for the § 199A deduction, and is potentially subject to the net
investment income tax, but generally it is not subject to self-employment tax.
9. (LO 7, 8) The qualified business income (QBI) deduction under § 199A is designed to yield a lower
effective tax rate on QBI to taxpayers in certain pass-through operating businesses (i.e., businesses
other than professional service businesses). The deduction does not require a corresponding cash
payment.
The partner calculates the QBI amount for each trade or business. This amount is 20% of qualified
income (generally operating or rental income, plus guaranteed payments a partner receives for capital
provided to the partnership) from qualified businesses (as described above). This amount is limited to
the greater of (1) 50% of W–2 wages paid by the business, or (2) 25% of W–2 wages plus 2.5% of the
unadjusted basis of the partnership’s depreciable property.
The partner’s deduction is the “combined QBI amount” which is the sum of the QBI amounts from
each trade or business. The deduction is limited, in general, to 20% of the partner’s taxable income
excluding capital gains.
A partnership must report information the partner needs to calculate the deduction limitation,
including W–2 wages and the unadjusted (e.g., cost) basis of the partnership’s depreciable property.
10. (LO 8) The three rules of the economic effect test are designed to ensure that a partner bears the
economic burden of a loss or deduction allocation and receives the economic benefit of an
income or gain allocation. By increasing the partner’s capital account by the gain or income
allocated to the partner, the rule ensures that a positive capital account partner will receive an
allocation of assets equal to the balance in the partner’s capital account when the partner’s interest
is eventually liquidated. If the partner has a negative capital account, an allocation of gain or
income to the partner reduces the amount of the negative capital account and, therefore, the
amount of the deficit capital contribution that is required from the partner upon liquidation.
In short, a dollar of income or gain increases the partner’s capital account by a dollar and,
everything being equal, the partner should receive a dollar more upon liquidation (or contribute a
dollar less to restore a deficit in the capital account).
Allocations of losses and deductions affect the partner in the opposite manner as income or gain.
Therefore, the allocation of a dollar of loss or deduction reduces the partner’s capital account by a
dollar and, everything being equal, reduces the amount the partner will receive upon liquidation (or
increases by a dollar the partner’s deficit capital restoration requirement).
11. (LO 9, 10) Under § 722, a partner’s initial basis is determined by reference to the amount of money
and the basis of other property contributed to the partnership. This basis is increased by any
gain recognized under § 721(b) and the partner’s share of any partnership liabilities. Basis is
decreased by any partner liabilities assumed by the partnership.
Basis is also adjusted to reflect the effect of partnership operations: it is increased by the partner’s
share of taxable and nontaxable income and is decreased by the partner’s share of separately stated
deductions (including the partnership’s basis of property contributed to charity), foreign taxes, losses,
and nondeductible/noncapitalizable expenses. Certain adjustments for depletion are also made.
Finally, a partner’s basis is increased by additional contributions to the partnership and by increases in
the partner’s share of partnership debt. Basis is decreased by distributions from the partnership and
decreases in the partner’s share of partnership debt.
A partner’s basis is adjusted any time it may be necessary to determine the basis for the partnership
interest (e.g., when a distribution was made during the taxable year or at the end of a year in which a
loss arises). A partner’s basis may never be reduced below zero (i.e., no negative basis). Ordering
rules (Exhibit 10.2) detail the sequence of basis adjustments for purposes of determining whether loss
allocations can be deducted.
Basis adjustments preserve the partnership’s single level of taxation: if basis is increased by
partnership income, that income would not be taxed again when the partner sells the partnership
interest at its fair market value.
12. (LO 11) A partner’s capital account is a mechanical determination of the partner’s financial
interest in the partnership, as determined using one of several possible accounting methods,
including tax basis, GAAP, § 704(b) book basis, or some other method defined by the partnership.
The capital account reflects contributions and distributions of cash or other property to or from the
partner. In addition, it accumulates the partner’s share of increases and decreases from operations,
including amounts that are otherwise tax-exempt or nondeductible. Even if capital accounts are
determined on a tax basis, a partner’s capital account usually will differ from the partner’s basis in the
partnership interest because (among other reasons) the capital account does not include the partner’s
share of partnership liabilities.
13. (LO 12) Losses may be limited by the partner’s basis in the partnership [§ 704(d)], the at-risk
limitations (§ 465), the passive activity loss limitations (§ 469), or the excess business loss limitation
[§ 461(l)], in that order. The basis limitations prevent a partner from claiming a loss for amounts in
excess of the investment in the partnership (including obligations for partnership liabilities). The at-
risk limitations further limit the losses to the amounts the partner could actually (theoretically)
lose if the partnership were to liquidate in bankruptcy. (The major exception to this premise is
the inclusion of “qualified nonrecourse financing” in the amount at risk.) The passive activity loss
rules limit deduction of losses in a passive activity. Passive losses from an activity are only deductible
to the extent of passive activity income from the taxpayer’s other activities. The excess business loss
rule applies to any losses allowed to a noncorporate taxpayer under the first three sets of rules. Any
business loss that exceeds $250,000 (or $500,000 for married taxpayers filing jointly) is carried
forward as part of the taxpayer’s net operating loss.
The loss limitation rules exist to provide some assurance that a partner cannot claim a loss or
deduction for which the partner bears no economic risk of loss.
14. (LO 13) An individual partner who is a general partner must pay self-employment tax on his or her
distributive share of partnership income. Any partner (general or limited) must also pay self-
employment tax on any guaranteed payments for services. Proposed Regulations outline situations
in which a partner will be treated as a general partner.
The net investment income tax could apply to investment-related income from the entity (e.g.,
interest, dividends, gains) or to guaranteed payments for use of an individual partner’s capital.
15. (LO 10, 12, 14) A sample e-mail follows:
To: Liang Industries
From: Shelly Nunez
Date: February 1, 2019
Subject: Advantages and disadvantages of a partnership compared to a C corporation
You have asked when a partnership might be more or less advantageous than a C corporation.
Partnership advantages. A partnership might be more advantageous than a C corporation under any
of the following conditions.
• The entity plans to distribute its excess cash flow to the owners on a regular basis. In such a case,
if the entity operates as a C corporation, its taxable income could be subject to a total tax of
39.8% of its income. [Say the C corporation has $100 of taxable income and cash flow. It pays
$21 of tax and distributes the remaining $79 to shareholders. Assuming this is a qualified
dividend, individual shareholders in the highest bracket would pay tax of 23.8% (including the
3.8% net investment income tax) on the $79 distribution, or $18.80. The shareholder receives a
net of $60.20 ($79 – $18.80), and the combined tax burden is $39.80 ($21 + $18.80, or $100 –
$60.20), or 39.8%.] If the entity operates as a partnership, the highest individual tax rate would be
37%, with lower rates on qualified business income, capital gains, or qualified dividends passed
through from the entity. (The net investment income tax might apply to some income, but would
not apply to operating income.) The partnership advantage is even more pronounced if the owners
are in lower tax brackets. Note: If cash flow is substantially different from taxable income, or if
cash-flow distributions are delayed, more detailed analysis or time value of money calculations
should be made.
• The entity owners are individuals and the income will be eligible for the qualified business
income deduction under § 199A.
• The entity owners want to be able to make special allocations of income, expenses, cash flows, etc.
• The entity has taxable losses the owners can utilize on their individual tax returns.
• The entity owners are limited owners who would not be subject to self-employment tax on their
distributive shares of income, or they have wages from other sources and SE tax would be
minimized. The partnership generates net passive activity income that offsets passive activity
losses of the owners.
• The entity will exist for only a short period of time, and if a corporation, its liquidation would
result in a large tax due to the appreciation in its assets.
Partnership disadvantages. A partnership might be less advantageous than a Subchapter
C corporation when:
• The entity currently operates as a C corporation and has substantial built-in gains on its assets. In
such a case, the cost of converting to a partnership (i.e., the cost of liquidating the C corporation
and re-forming as a partnership) could be prohibitive.
• The entity will retain its income for expansion and the income will be taxed at lower corporate
rates than if it flowed through to owners in higher tax brackets.
• The entity can reduce or eliminate its income by paying salaries to the owners (although the cost
of employment taxes should be considered), leasing property from the owners (rent expense
would be deducted), or loaning funds to the entity (assuming the business interest expense
limitation would not be triggered).
• The entity is in a high-risk business, and the owners require protection from personal liability for
claims against the entity or the other partners. An LLC or LLP may be useful in such situations.
Several other advantages and disadvantages may exist. If you have further questions or if you have a
specific scenario in mind, please let me know.
COMPUTATIONAL EXERCISES
16. (LO 2) Enercio is allocated 40% of the $80,000 of partnership income, or $32,000. This is the income
on which tax will be paid. In this situation, the distribution is not separately taxed.
17. (LO 3)
a. Henrietta has a realized gain of $15,000 [$100,000 value of interest − $85,000 basis in
contributed property ($75,000 cash + $10,000 equipment basis)]. None of this gain is
recognized.
b. Henrietta takes a substituted basis of $85,000 in the partnership interest.
c. The partnership takes a carryover basis of $10,000 in the equipment.
18. (LO 3)
a. Wozniacki recognizes ordinary compensation income equal to the $50,000 value of the
interest.
b. The $50,000 becomes the amount of his basis in the partnership interest. The LLC will deduct
this amount if it relates to ordinary and necessary tax planning services or the LLC will
capitalize/expense/amortize it (most likely) if it would be classified as an organizational or
startup expenditure.
19. (LO 3) FM recognizes $90,000 of ordinary income upon collection of the cash basis accounts
receivable and $35,000 of ordinary income upon sale of the inventory. This rule exists to ensure
that a partner and partnership cannot transfer property between themselves and alter the inherent
character of the underlying deferred income, gain, loss, or deduction.
20. (LO 4) Candlewood may deduct $5,100 of organizational costs and $1,700 of startup expenditures.
The first $5,000 of the $9,500 organizational costs is deducted and the remaining $4,500 is amortized
over 180 months, with 4 months of amortization in the current year ($4,500 × 4/180 = $100), for a
total of $5,100 ($5,000 current expense + $100 amortization).
The first $500 of the $54,500 startup costs is deducted [$5,000 maximum – ($54,500 – $50,000)
excess over $50,000]. The remaining $54,000 ($54,500 – $500) is amortized over 180 months, with 4
months of amortization in the current year ($54,000 × 4/180 = $1,200), for a total of $1,700 ($500
current expense + $1,200 amortization).
21. (LO 7) On its Schedule K, Penguin would report some or all of the following.
• Ordinary business income (line 1).
• Guaranteed payments to the LLC members (line 4).
• If the business interest expense limitation applies, the partnership will report any excess interest
expense so the partners can carry it over to future years; otherwise, the partnership will report
excess taxable income to the partners. (Floor plan financing interest expense is not discussed in
this chapter but might allow the interest expense to be excluded from the business interest
expense limitation.)
• Various types of investment income, such as dividends and taxable and tax-exempt interest (lines
5, 6, and 18, Code A).
• Possibly gains or losses (line 8 or 9) if there are any security sales or capital gains distributions
during the year.
• Net earnings (loss) from self-employment (line 14, Code A).
• Possibly information related to foreign tax credit (line 16, Codes A to N).
• Information related to alternative minimum tax (line 17a).
• Investment income and expenses for purposes of the investment interest expense limitation
(line 20, Codes A and B).
• Information the LLC members need to calculate their qualified business income deduction under
§ 199A, including W–2 wages and the unadjusted basis of the partnership’s depreciable property.
• If any items of net investment income are not otherwise apparent from the Schedule K–1, Penguin
would also report those items so the LLC members can calculate their net investment income tax
(line 20, Code Y).
22. (LO 7)
a. Tastee paid $72,000 of guaranteed payments for services ($6,000 × 12). These are the
payments to Stella.
b. Tastee deducts the $72,000 to arrive at ordinary income of $20,000 ($92,000 − $72,000
guaranteed payments).
c. Stella will report $90,000 of ordinary income, including her guaranteed payment ($72,000)
and 90% of the partnership’s $20,000 ordinary income.
d. Euclid will report only 10% of the partnership’s ordinary income, or $2,000 ($20,000 ×
10%). The $10,000 payment to Euclid did not exceed his basis and is neither deductible by
the partnership nor taxable to Euclid.
23. (LO 8)
a. Padgett records the land at its $200,000 value for § 704(b) book capital account purposes.
b. Padgett takes a carryover tax basis of $50,000.
c. If the land is sold for $300,000, Nova reports a $200,000 gain and Oscar’s gain is $50,000.
The precontribution gain of $150,000 ($200,000 value at the contribution date − $50,000
basis) is allocated to Nova. The $100,000 postcontribution gain is allocated equally between
the partners according to their 50/50% profit sharing ratios.
24. (LO 9) Barnaby’s basis in the partnership was $62,000 at the end of the tax year. Barnaby’s initial
$50,000 basis was increased by the $3,000 increase in his share of partnership debt ($8,000 ending −
$5,000 beginning), his $20,000 share of partnership income, and his $1,000 share of the partnership’s
tax-exempt income. His basis was reduced by the $12,000 cash distribution he received.
25. (LO 10) Both Elisha’s and Ezra’s bases in the partnership interests are $299,100 at the end of the year.
Elisha’s initial basis of $200,000 (cash contribution) is increased by a $70,000 share of the liability on
the contributed land, a $10,000 share of the construction debt, and a $4,100 share of the accounts
payable debt. In addition, Elisha’s basis is increased by the $15,000 share of the partnership’s taxable
income.
Ezra’s initial basis of $340,000 (building and land basis) is reduced by the $140,000 debt assumed by
the partnership, and then increased by a $70,000 share of the liability on the contributed land, a
$10,000 share of the construction debt, and a $4,100 share of the accounts payable debt. In addition,
Ezra’s basis is also increased by the $15,000 share of the partnership’s taxable income. The bases are
the same because the fair market value of Ezra’s contributed property was the same as its tax basis.
26. (LO 10) Jokan has a $10,000 share of the debt and a $30,000 basis in the LLC interest following the
contribution. Jokan’s $60,000 basis is first reduced by the $40,000 of debt assumed by the LLC. Then
Jokan is allocated 25%, or $10,000 of the debt, resulting in a $30,000 basis in the LLC interest.
27. (LO 12) Tobias may deduct $90,000 of losses from Solomon LLC. Tobias is limited to a $130,000
loss under the basis limitation [$20,000 is suspended under § 704(d)], but only a $105,000 loss under
the at-risk limitation ($25,000 suspended under § 465). Because the loss from Solomon is passive
(and not a real estate loss), Tobias’s loss is further limited to his $90,000 of passive activity income
from other sources ($15,000 suspended under § 469). Because the loss is less than $250,000 (the
threshold for a single taxpayer), it is not further limited by the excess business loss limitation.
28. (LO 13)

a. Heather incurs no deductible loss. At the original sale date, Heather has a realized loss of
$25,000 ($75,000 basis − $50,000 selling price), but because the sale is to a related
partnership, none of the loss is deductible.
b. The partnership later has a $5,000 taxable gain. When the partnership sells the land to an
unrelated party for $80,000, it reports a gain of $30,000 ($80,000 selling price − $50,000 cost
basis). At that time, the partnership can offset the gain by the $25,000 loss that Heather was
not permitted to deduct. This results in a net taxable gain to the partnership of $5,000
($30,000 − $25,000).
PROBLEMS
29. (LO 3)
a. Under § 721, neither the partnership nor the partners recognizes any gain on formation of the
entity.
b. Emma will take a cash basis of $100,000 in her partnership interest.
c. Laine will take a substituted basis of $40,000 in her partnership interest ($40,000 basis in the
property contributed to the entity).
d. The partnership will take a carryover basis in the assets it receives ($100,000 basis in cash
and $40,000 basis in property).
30. (LO 3, 14)

a. Shawna has a realized loss of $20,000. However, § 721 contains the general rule that no
gain or loss is recognized to a partnership (LLC) or any of its partners (members)
upon the contribution of money or other property in exchange for a capital interest. Because
Shawna is subject to this rule, she does not recognize the loss.
b. $360,000. Section 722 provides that the basis of a partner’s (member’s) interest acquired by a
contribution of property, including money, is the amount of such money plus the adjusted
basis of such property to the contributing partner (member) at the time of the contribution.
c. $380,000. The adjusted basis of the contributed property (§ 722).
d. $380,000. Under § 723, the basis of property to the entity is the adjusted basis of such
property to the contributing partner (member) at the time of the contribution, increased by any
§ 721(b) gain recognized by such member. Because no such gain (and no loss) was recognized
by Shawna on the contribution, the LLC takes a carryover basis in the property.
e. A more efficient tax result may arise if Shawna sells the property to an unrelated party for
$360,000, recognizes the $20,000 loss on the property, and contributes $360,000 cash to the
LLC. The LLC could then use the $360,000 to acquire similar property, in which it would take
a $360,000 basis. Transaction costs would need to be considered.
31. (LO 3)
a. Liz realizes a gain of $15,000 on contribution of the land. John realizes a gain of $150,000 on
contribution of the equipment. The partnership realizes a gain equal to the value of the
property it receives (it has a $0 basis in the partnership interests it issues).
b. Under § 721, neither the partnership nor either of the partners recognizes any gain on
formation of the entity.
c. Liz will take a substituted basis of $155,000 in her partnership interest ($80,000 cash plus
$75,000 basis in land). John will take a substituted basis of $20,000 in his partnership interest
($20,000 basis in the equipment).
d. The partnership will take a carryover basis in all the assets it receives ($80,000 basis in cash,
$75,000 basis in land, and $20,000 basis in equipment).
e. The partners’ outside bases in their partnership interests total $175,000: Liz’s basis of
$155,000 plus John’s basis of $20,000. This is the same as the partnership’s inside basis in
assets of $175,000 ($80,000 cash plus $75,000 land plus $20,000 equipment).
f. The partnership will “step into John’s shoes” in determining its depreciation expense. It will
use the remaining depreciable life and the same depreciation rates John would have used.
32. (LO 3) Both partners are contributing assets valued at $140,000. One property has a built-in gain;
the other has a built-in loss. Mike and Melissa recognize no gain or loss on contribution of their
respective properties to the partnership. Mike takes a substituted basis of $176,000 in his
partnership interest ($40,000 cash plus $136,000 basis in land). However, the partnership interest is
only valued at $140,000. The partnership takes a $136,000 carryover basis in the contributed land.
Melissa takes a $115,000 basis in a partnership interest worth $140,000. Similarly, the partnership
will have a $115,000 basis in assets valued at $140,000. The partnership will “step into Melissa’s
shoes” in determining depreciation deductions. The assets contributed by Melissa have a built-in gain
that must be tracked and allocated to Melissa if the property is ever sold at a gain.
The land contributed by Mike has a built-in loss that must be tracked and allocated to Mike if the
property is ever sold at a loss [§ 704(c)].
33. (LO 3, 9)
a. In Alternative 1, MM would recognize the $36,000 loss in year 6. Because the LLC will have
held the property for more than five years, the LLC’s use of the property determines the
character of the loss. The loss is treated as a § 1231 loss (currently deductible as an ordinary
loss). Because this is a precontribution loss, the loss is allocated to Mike. Therefore, Mike
would deduct a $36,000 § 1231 loss in year 6.
In Alternative 2, the $36,000 loss would be recognized immediately by Mike as a long-term

capital loss. Because the deduction for an individual taxpayer’s long-term capital losses is
limited, Mike would deduct $3,000 of the loss each year for the next 12 years.
b. In Alternative 1, Mike would have tax savings in year 6 of $12,600 ($36,000 loss deducted
against ordinary income × 35% tax savings). This is a tax savings in a single year, six years
down the road. Using the Present Value of $1 table, a six-year horizon, and a 3% annual
discount rate, the present value of the tax savings is $10,553 (PV factor of 0.8375 × $12,600
tax savings).
In Alternative 2, Mike would have tax savings of $1,050 each year for 12 years ($3,000
capital loss deducted against ordinary income × 35% tax savings each year until the $36,000
loss is fully utilized). This is a 12-year annuity of $1,050. Using the Present Value of an
Annuity table and a 3% annual discount rate, the present value of the tax savings is $10,452
(PV factor of 9.9540 × $1,050 per year).
As Mike’s tax adviser, considering only the tax savings, Alternative 1 is preferred because
the present value of the tax savings is slightly higher than under Alternative 2. However, in
both situations, there is substantial uncertainty. In Alternative 1, the actual future selling price
cannot be known until the property is sold. In both situations, the tax rules could change in
the future, which could change the potential tax benefits and timing.
[Note: In Microsoft Excel, net present value (NPV) calculations yield the same present
values of the “income” (tax savings) streams. The student would create a chart with 2
columns (Alternatives 1 and 2) and 12 rows (one for each year). The annual tax savings is
shown in each cell, and the formula for the NPV calculation for each alternative is
NPV(discount rate, tax savings period 1… tax savings period 12).]
c. If MM planned, instead, to sell the property in year 4, Alternative 2 would be preferable for
Mike. On sale of the property in year 4, the loss would be treated as a long-term capital loss,
because the loss would have been a long-term capital loss in Mike’s hands. MM must use the
land as a § 1231 asset for five years before its use of the land (rather than Mike’s) governs the
treatment of the precontribution loss.
On a sale in year 4, Alternative 1 yields a $36,000 long-term capital loss, except Mike’s
$3,000 annual loss deduction would begin in year 4 (Alternative 1) instead of year 1
(Alternative 2). In present value terms, earlier is better than later, so Alternative 2 would be
preferred, with its immediate annual $3,000 long-term capital loss deductions.
34. (LO 3, 9, 14)

a. None. Under § 721, neither the LLC nor any of the members recognize gain on contribution of
property to an LLC in exchange for an interest in the LLC.
b. $100,000. Sam’s basis in his LLC interest will equal the basis he held in the property he
inherited from his uncle. The basis a beneficiary takes in property received from an estate
generally equals the fair market value of the asset at the date of death or at the alternate
valuation date (six months later) if available and elected.
c. Drew will recognize $50,000 of ordinary income. The fair market value of Drew’s 50% LLC
interest is $200,000. Because Drew will contribute only $150,000 of property, the difference
between the amount contributed and the value of the interest will be treated as being for
services rendered to the LLC. Services do not constitute “property” for purposes of § 721
nonrecognition treatment. Drew does not have a carried interest because (1) it is a capital
interest, and (2) Drew “paid” for the interest by recognizing income equal to the value of the
interest.
d. Drew’s basis in his LLC interest will be $200,000 [$150,000 (cash contributed) + $50,000 (the
amount of ordinary income recognized for services rendered to the partnership)].
35. (LO 3, 14) SD’s balance sheet is as follows immediately after formation. (The column totals are
calculated using the “sum” command.)
a. Assets Basis FMV
Cash $150,000 $150,000
Land 100,000 200,000
Land improvements 50,000 50,000
Total assets $300,000 $400,000
Partnersʼ capital
Sam’s capital $100,000 $200,000
Drew’s capital 200,000 200,000
Total capital $300,000 $400,000
SD LLC will capitalize the $50,000 deemed payment for Drew’s services, because the
services relate to a capitalizable expenditure. The LLC will reflect this $50,000 in “cost of
lots sold” as the development lots are sold.
b. Drew could prepare a development plan and secure zoning permits before the LLC is formed.
He could then contribute these plans and permits to SD in addition to the $150,000 cash.
Because a completed plan would be considered “property,” no portion of his LLC interest
would be received in exchange for services if this were done. The entire transaction would be
considered under § 721.
36. (LO 3, 14)
a. Under general guidelines, the $100,000 would be treated as a distribution, which, as it does
not exceed Sam’s basis in his interest, would not be taxable. The distribution would reduce
Sam’s basis in his LLC interest by $100,000.
b. None.
c. The LLC would take a basis of $100,000 in the land, Sam’s basis in the property at the time of
the contribution.
d. The IRS might assert that the contribution and distribution transactions were in effect
a disguised sale of one-half ($100,000 distribution ÷ $200,000 fair market value) of the
property contributed by Sam to the LLC.
e. $50,000. Under disguised sale treatment, Sam will recognize gain on a sale of one-half of his
interest in the land. He will be deemed to have received $100,000 in exchange for one-half of
the land, with a basis of $50,000 ($100,000 basis × ½). Total gain recognized, then, is
$50,000.
f. $150,000. The LLC will be deemed to have paid $100,000 for one-half of the land. The
remaining one-half is deemed to be contributed to the LLC, and the LLC will take a carryover
basis of $50,000 in this parcel. The LLC’s total basis is $150,000 ($100,000 + $50,000).
g. The distribution is less likely to be treated as a disguised sale if (1) Sam is subject
to “entrepreneurial risk” with respect to the distribution (e.g., the amount will not be paid
unless the LLC achieves a specified earnings level) and/or (2) there is an extended amount
of time between the date of the formation and the distribution.
Regulations have adopted a two-year rebuttable presumption that a distribution made after that
time period is not part of a disguised sale transaction.
37. (LO 3)
a. The partners’ initial bases in their partnership interests are the same amounts as their bases in
the contributed property (§ 722).
Jessica’s basis $420,000
Matt’s basis 720,000
b. The 2019 sale results in ordinary income of $200,000 to the partnership.
Selling price $620,000
Basis (420,000)
Gain $200,000
The gain is ordinary income because the land is held as inventory by the partnership. The land
was a capital asset to Jessica, but no Code provision allows treatment of the gain based
on Jessica’s use rather than the partnership’s use.
c. The 2020 sale results in a $140,000 loss (including a $120,000 capital loss and a $20,000
ordinary loss).
Basis (720,000)
Loss ($140,000)
As a sale of inventory (determined at the partnership level), the sale in 2020 of the land
contributed by Matt would normally result in an ordinary loss. However, § 724
overrides the usual treatment. The character of the precontribution loss, instead, is determined
based on the character of the property in Matt’s hands. This sale was within five years of the
capital contribution date, so the loss is capital in nature to the extent of the built-in loss at the
contribution date, which is:
FMV at contribution $600,000

Basis (720,000)
Capital loss ($120,000)
The remaining $20,000 loss in 2020 is an ordinary loss because the character of the post-
contribution loss is based on the partnership’s ownership and use of the property as inventory.
d. If the property Matt contributed was sold by the partnership in 2025, the entire $140,000 loss
would be treated as an ordinary loss. A sale in 2025 would not be within five years of the
contribution date, so the character of the loss would be determined solely by reference to the
character of the asset to the partnership. Because the land is inventory to the partnership,
the loss in 2025 would be ordinary.
38. (LO 4) TM Partnership, Ltd., has incurred costs for organizing ($30,000), starting the business
($60,000), transferring property ($5,000), and securing investors ($600,000) for the partnership.
The organizational costs are treated under § 709. Under this section, the first $5,000 of such expenses
are deducted (provided the total is less than $50,000); the remainder is amortized over 180 months.
The startup costs are treated under § 195. Under this section, also, the first $5,000 of such expenses
are deducted, provided the total is less than $50,000. If costs exceed $50,000, the $5,000
deduction is phased out, dollar for dollar, by the amount of costs in excess of $50,000. When total
costs equal or exceed $55,000, no portion of the expense is currently deductible. Instead, the full
amount is amortized over 180 months. Under these rules, TM deducts $5,278 [$5,000 + ($25,000
× 2/180)] of organizational costs and $667 ($60,000 × 2/180) of startup expenses.
The $5,000 transfer tax is treated as a cost of acquiring the land and is added to the partnership’s basis
in the land. The $600,000 of brokerage commissions is treated as a syndication cost of the partnership.
Under § 709, these costs cannot be deducted.
39. (LO 4)
a. The legal and accounting fees totaling $8,000 are organizational costs. The $10,000 to secure
limited partnership investments are nonamortizable, nondeductible syndication costs. The
$51,500 for advertising and the preopening event are startup expenses.
b. The partnership may deduct $5,000 of the organizational costs plus $50 amortization [($8,000
total – $5,000 deducted) × 3/180], for a total of $5,050. None of the syndication costs is
deductible. The partnership may deduct $3,500 of the startup costs [$5,000 maximum
permitted – ($51,500 total – $50,000 phaseout)] plus $800 amortization [($51,500 total –
$3,500 deducted) × 3/180], for a total deduction in its initial year of operation of $4,300.
c. The organizational and startup costs that are not deducted currently are amortized and
deducted over 180 months, beginning with the month in which the partnership begins
business. The syndication costs are not deductible.
40. (LO 5) In 2018, 2019, and 2020, BR can use its choice of the cash, accrual, or a hybrid method of
accounting. BR has at least one Subchapter C corporation as a partner, but BR’s average annual
gross receipts did not exceed $25 million in either 2018 or 2019. (BR’s average annual gross
receipts were $22 million for 2018 and $23.5 million for 2019.)
In 2021, BR must change to the accrual method of accounting. BR has at least one
C corporation as a partner during that year, and BR’s average annual gross receipts for the
preceding year exceeded $25 million. (Average annual gross receipts for the period ending in 2020
were $26 million.) [Test average annual gross receipts for the three-year period ending before the
current tax year (e.g., three-year period ending in 2020 for the 2021 tax year).]
41. (LO 3, 4, 5) Section 709 organizational cost; immediate deduction ($5,000) and amortization over ≥
180 months beginning with the month the trade or business begins ($3,000 × 3/180 = $50); total
initial year deduction = $5,050:
Legal fees to form partnership. $8,000
Section 195 “startup cost” immediate deduction ($5,000) and amortization over ≥ 180 months
beginning with the month the trade or business begins ($39,000 × 3/180 = $650); total initial year
deduction = $5,650:
Advertising for “Grand Opening” $18,000
Consulting fees to establish accounting system 20,000
Preopening rent (2 months @ $2,000) 4,000
Preopening utilities (2 months @ $1,000) 2,000
Total startup costs $44,000
Section 162 ordinary and necessary business expense:

Advertising after opening $ 30,000
Rent after opening (3 months @ $2,000) 6,000
Utilities (3 months @ $1,000) 3,000
Salaries to clerks (after opening) 50,000
Tax return preparation expense 12,000
Total § 162 expenses $101,000
Section 197 intangible asset, 15-year amortization beginning with the month in which the intangible
was acquired:
Trade name and logo of Granny Newcombs, Inc. amortization: $200,000 ÷ 15 yrs. × 3/12 =
$3,333
Deductible guaranteed payment for services: $36,000
Payments to Morlan and Merriman ($6,000/month each for three months). (Note that
this amount would be capitalized if the expenses were for services during the preopening
period or for capitalizable services such as architectural consulting.)
42. (LO 6) A partnership’s required taxable year is determined based on the first of three rules to apply.
Three Cs cannot use the “majority partner” rule because there are no partner interests with the same
tax year-end that can be combined for more than 50% ownership of the entity. Cerulean owns exactly
50% (not more than 50%), and neither of the other partners has the same year-end as Cerulean.
Similarly, the “principal partner” test can only be used if all partners who own more than a 5%
interest have the same year-end. In this case, all three partners own more than 5%, but all three
year-ends are different.
Therefore, the required taxable year is based on the least aggregate deferral calculation outlined in
Regulations. While the calculation is not required, it yields a taxable year-end of October 31.
If the partners do not want to use the required taxable year, they can appeal to the IRS to use a natural
business year or they can select July, August, or September under § 444 because those three years
would result in less than a three-month deferral of income relative to the required taxable year.
(Under § 444, a tax deposit would be required to “prepay” the IRS for the tax on the deferred
income.)
In addition, Three Cs might have business reasons for wanting to use a 52- to 53-week year that ends
on or near October 31.
43. (LO 7)
a. CL can deduct $12 million of its business interest expense on Form 1065, page 1 ($40 million
tax EBITDA × 30%). The remaining $2 million is allocated to the LLC members and carried
forward.
b. On its Schedule K, CL reports the $1 million of portfolio interest expense as a separately
stated deduction. In addition, it reports the $2 million of excess business interest as a
separately stated item so the LLC members can claim a deduction in future years.
c. In the current year, the LLC members will deduct their distributive shares of the $1 million
investment interest expense to the extent permitted. In future years, the LLC members can
deduct their distributive shares of the $2 million excess business interest carryover against
excess taxable income the LLC allocates to the members in those future years.
d. If average annual gross receipts is less than $25 million for all prior tax years, the business
interest expense limitation does not apply, so all business interest expense is currently
deductible by the LLC on Form 1065, page 1. The $100,000 of portfolio interest expense is
still treated as a separately stated item.
44. (LO 3, 7, 8)
a. Reece’s basis is $75,000. Under § 722, the basis of an LLC member’s interest equals the
adjusted basis of contributed property at the time of contribution. Because Reece paid $75,000
for the property, her basis in her LLC interest is $75,000.
b. The LLC’s holding period includes the period during which Reece owned the investment
property; thus, Phoenix’s holding period began five years ago.
c. $15,000 gain. Under § 704(c), all unrealized gain or loss at the contribution date (i.e.,
precontribution gain or loss) on property contributed for an LLC interest is allocated to the
contributing LLC member. On the land sale, the LLC realized a gain of $15,000 ($90,000
selling price minus $75,000 adjusted basis). This gain is allocated entirely to Reece, because
this was the amount of the unrealized gain on the land at the contribution date.
d. The balance sheet for Phoenix Investors LLC is as follows immediately after sale of the
property contributed by Reece. (In Excel, the column totals are calculated using the “sum”
command.)
Assets Basis FMV Partnersʼ Capital Basis FMV
Cash $ 90,000 $ 90,000 Interest, Phoebe $ 15,000 $ 90,000
Land 30,000 180,000 Interest, Parker 15,000 90,000
Interest, Reece 90,000* 90,000
$120,000 $270,000 $120,000* $270,000
*$75,000 LLC interest plus $15,000 gain.
45. (LO 7, 8, 11)

a. $36,000 loss. Under § 704(c), all unrealized gain or loss at the contribution date (i.e.,
precontribution gain or loss) on property contributed for an LLC interest belongs to the
contributing LLC member.
Gain or loss in excess of that amount on the subsequent sale or exchange of the property is
divided among the LLC members according to their profit and loss sharing ratios. On the land
sale, the LLC has a loss of $36,000 ($120,000 adjusted basis minus $84,000 selling price),
$30,000 of which is allocated to Reece under § 704(c) (Reece’s basis of $120,000 in the land
at the contribution date minus the land’s FMV of $90,000 at that date). The remaining loss of
$6,000 is allocated equally among the LLC members.
b. Assets Basis FMV Partnersʼ Capital Basis FMV
Cash $ 84,000 $ 84,000 Interest, Phoebe $ 13,000 $ 88,000
Land 30,000 180,000 Interest, Parker 13,000 88,000
Interest, Reece 88,000 88,000
$114,000 $264,000 $114,000 $264,000
c. Each memberʼs tax-basis capital account is rolled forward from before the sale to after the
sale as follows.
Total Phoebe Parker Reece
Before sale $150,000 $15,000 $15,000 $120,000
Built-in loss on land (30,000) (30,000)
Loss on land after
contribution date (6,000) (2,000) (2,000) (2,000)
After sale $114,000 $13,000 $13,000 $ 88,000
Each memberʼs § “704(b) book” capital account (FMV) is rolled forward from before the sale
to after the sale as follows.
Total Phoebe Parker Reece
Before sale $270,000* $90,000 $90,000 $90,000
Loss on land after
contribution date (6,000) (2,000) (2,000) (2,000)
After sale $264,000 $88,000 $88,000 $88,000
*$180,000 FMV of existing land plus $90,000 FMV of Reeceʼs contribution.
46. (LO 7, 9, 10)
a. Because AM Products is an LLC and the LLC members have not guaranteed the debt, it is
treated as nonrecourse debt. Amyʼs share of that debt is included in her basis in the LLC
interest. Assuming that Amyʼs capital account (given) reflects an accurate number for basis
purposes, her beginning basis is determined as follows.
Capital account balance, beginning of year $300,000

Share of AM’s debt ($200,000 × 1/2) 100,000
Amy’s basis, beginning of year $400,000
b. Using the ordering rules shown in Exhibit 10.2, Amy’s basis at the end of the year is
determined as follows. (Students should prepare a Microsoft Excel spreadsheet for these
calculations.)
Capital account balance, beginning of year $300,000
Plus Amy’s share of AM’s debt at the end of the year ($140,000 × 1/2) 70,000
Add Amy’s share of:
Ordinary business income (see calculation below) $200,000
Interest income 2,000
Net long-term capital gain [1/2 × ($12,000 − $6,000)] 3,000
205,000
$575,000
Less
Charitable contribution $ 2,000
Cash distribution to Amy 20,000
(22,000)
Amy’s basis, end of year $553,000
Amy’s share of the LLC’s ordinary income is calculated as follows.

Income $900,000
Less: W–2 wages (200,000)
Less: Depreciation (300,000)
AM LLC’s ordinary business income (Schedule K, line 1) $400,000*
Amy’s 50% share of AM’s ordinary business income $200,000*
Amy’s 50% share of AM’s W–2 wages is $100,000. Amy’s 50% share of AM’s unadjusted
basis of partnership depreciable property is $800,000. These amounts do not affect her basis
or capital account, and they are not amounts Amy reports on her tax return. This information
is needed to help Amy calculate her qualified business income deduction under § 199A.
47. (LO 7, 8) Amy will report her $200,000 share of the LLC’s ordinary income, her $2,000 share of
the LLC’s interest income, and her $3,000 share of the LLC’s net long-term capital gain. She
may deduct her $2,000 share of the LLC’s charitable contribution on her Schedule A if she itemizes
deductions. The cash distribution Amy received would not be taxable, nor would the decrease in
Amy’s share of the LLC liabilities.
Amy may be eligible to deduct up to 20% of the ordinary income as qualified business income under
§ 199A, and will make that calculation on her return. This deduction does not require a cash outflow
by Amy or the LLC, and it does not affect her basis or capital account. As someone treated as a
general partner, Amy’s distributive share of the LLC’s ordinary business income is subject to self-
employment tax and possibly the additional Medicare tax (.9%). Her net investment income from
the LLC (e.g., interest and gains) may be subject to the net investment income tax (3.8%) under
§ 1411.
48. (LO 11) Although this will not always be the case, Amy’s tax-basis capital account differs from her
basis only by the amount of her share of the LLC’s liabilities. Amy’s beginning capital account
balance of $300,000 is increased and decreased by Amy’s 50% share of LLC items as follows, to
arrive at an ending capital account of $483,000.
Capital account balance, beginning year $300,000

Ordinary income (see calculation in solution for Problem 46) $200,000
Interest income 2,000
Net long-term capital gain 3,000
205,000
$505,000
Less:
Charitable contribution $ 2,000
Cash distribution to Amy 20,000
(22,000)
Capital account balance, end of year $483,000
Amy’s capital account appropriately does not include her $70,000 share of the LLC’s debt ($140,000
× 50%). This amount is, however, included in Amy’s basis in her LLC interest.
Instructor note: Situations where this result would not hold true might be where, for example, Amy
purchased or inherited the LLC interest and the value (excluding liabilities) differed from the capital
account balance or when capital accounts are not determined on the tax basis.
49. (LO 8, 10, 11) Amy’s Schedule K–1 follows. Part II indicates that Amy is an individual taxpayer and
a domestic LLC member-manager. Beginning and ending profit, loss, and capital shares are each
50%.
Amy’s liability share is nonrecourse, as she is an LLC member who did not guarantee the debt.
Her capital account analysis is shown as described in Problem 48, except that most of the items are
combined into the “current year increase (decrease)” line. The analysis is prepared on a tax basis, and
she did not contribute any built-in gain or loss property.
In Part III, her ordinary income and interest income are reported on lines 1 and 5. The capital gains
and losses are netted at the partnership level and reported as a net long-term amount on line 9a. The
charitable contribution is reported on line 13. We use the Codes on Schedule K–1, page 2, to
determine that this cash contribution should be marked with Code A.
Amy is a managing member of the LLC, so her income is shown as self-employment earnings on
line 14, Code A. The $20,000 cash distribution reduces her basis and capital account and is shown on
line 19, Code A. Her interest income is investment income for purposes of the investment interest
expense deduction limitation and is shown on line 20, Code A. We do not show an amount on line 20,
Code Y (net investment income), because all investment income amounts can be determined from the
information provided in lines 1 to 12. Nevertheless, Amy might be subject to net investment income
on her interest income and long-term capital gain.
At this writing, the Schedule K–1 for 2018 has not been released, so it is not known where the
information should be reported related to Amy’s qualified business income § 199A deduction. For our
purposes, this information is shown in the sample Schedule K–1 as additional information on line 20.
The IRS, however, might decide it should be reported elsewhere on the K–1. Amy’s 50% share of
AM’s W–2 wages is $100,000. Amy’s 50% share of AM’s unadjusted basis of partnership
depreciable property is $800,000.
50. (LO 7, 8, 9, 11)
a. Amy’s QBI deduction is $40,000. Amy has qualified income from the AM LLC trade or
business of $200,000. Amy’s tentative qualified business income (QBI) from this business is
20% of this amount, or $40,000.
The tentative QBI for this trade or business is subject to the greater of two limitations. The
first limitation is 50% of Amy’s share of the LLC’s W–2 wages, or $50,000 ($100,000
allocable share × 50%). The second limitation is 25% of Amy’s share of the LLC’s W–2
wages ($25,000, or $100,000 × 25%) plus 2.5% of Amy’s share of the LLC’s unadjusted
basis of partnership property, or $20,000 ($800,000 × 2.5%), for a total limitation of $45,000.
The 50% of wages limitation of $50,000 is the higher amount, so this is the maximum QBI
for this business. The tentative QBI is only $40,000, so the deduction for this business is not
limited.
This $40,000 also is Amy’s combined QBI amount because she has no QBI from other trades
or businesses, REITs, or publicly traded partnerships. The combined QBI amount is limited
to 20% of Amy’s taxable income excluding capital gains, or $100,000 ($500,000 × 20%).
Therefore, Amy can deduct the full $40,000 combined QBI amount.
b. The QBI deduction does not require a corresponding outflow of cash. The deduction does not
affect Amy’s basis or capital account.
51. (LO 7, 8, 9)
a. to c. The following illustration shows a sample spreadsheet for KL Partnership.
a. As shown in cells D20 to D22, the partnershipʼs ordinary taxable income is $18,000. KL has
a separately stated long-term capital gain of $6,000 and distributions that total $27,000
(Schedule K, line 20). The distribution to Lisa is not deductible by the partnership. The
payment to Mercy Hospital for Kayla’s medical expenses is treated as a distribution to
Kayla in the amount of $12,000. Kayla may be able to claim a deduction for medical
expenses on her personal tax return.
b. Form 1065, pages 1 and 4, are shown beginning on the next page and include all the
information in the KL Partnership column (Column D) of the spreadsheet. In addition,
because each partnerʼs distributive share of the partnershipʼs income is subject to self-
employment tax, the amount on Schedule K, line 1 (18,000) is also shown on line 14a.
c. Kayla’s and Lisa’s Schedules K–1 will each show a $9,000 share of partnership income
(line 1) and a $3,000 share of the partnership’s long-term capital gain (line 9a). In addition,
Kayla’s K–1 will show a $12,000 distribution and Lisaʼs K–1 will show a $15,000
distribution (both on line 20). (See spreadsheet cells E20–E22 and F20–F22.)
Kayla and Lisa will each report $9,000 of ordinary income on their Schedule E, page 2. They
will also report a $3,000 long-term capital gain on their personal Schedule D. As determined
in part d., the distribution does not exceed their basis, so it is not taxable.
d. Kayla’s basis in her partnership interest at the end of the tax year is $20,000. As calculated on
the spreadsheet, her beginning basis of $20,000 is increased by her $9,000 income allocation
and $3,000 long-term capital gain distribution. It is decreased by the $12,000 payment for
medical expenses treated as a distribution. Her ending basis is $20,000.
Lisa’s basis in her partnership interest at the end of the tax year is $13,000. As calculated on
the spreadsheet, her beginning basis of $16,000 is increased by her $9,000 income allocation
and $3,000 long-term capital gain distribution. It is decreased by the $15,000 distribution.
Her ending basis is $13,000.
52. (LO 7, 8, 9, 12) The following illustration shows the updated sample spreadsheet for KL Partnership.
a. The spreadsheet shows correct amounts for information reported by the partnership: Form
1065, Schedule K, and Schedules K–1. At the partner level, though, limitations arise. The
spreadsheet indicates that partners would have a negative basis, which is not permitted.
As shown on the spreadsheet, the partnership would report an ordinary loss from
operations of $32,000 rather than income of $18,000. (Originally reported receipts were
$150,000; revised receipts were $100,000, for a net profit/(loss) reduction of $50,000, from
$18,000 of income to a $32,000 loss.) Each partner’s share of the loss is $16,000. The
separately stated long-term capital gain remains $6,000, with $3,000 being allocated to each
partner.
At the partner level, it is not possible to start with the beginning basis and add and subtract
amounts from Schedule K–1. The basis ordering rules (Exhibit 10.2) and the loss limitation
rules must be considered.
b. Kayla’s basis in her partnership interest at the end of the tax year is determined as follows,
using the ordering rules in Exhibit 10.2.
Beginning basis $20,000
Share of separately stated income items:
Long-term capital gain 3,000 *
Basis before loss allocation and distribution $23,000
Less: Distribution (partnership payment of medical expenses) (12,000)
Basis before loss allocation $11,000
Less: Ordinary loss allowed under § 704(d) (11,000)*
Ending basis in interest $ –0–
* As in Problem 51, Kayla reports the long-term capital gain. Per the ordering rules of
Exhibit 10.2, the distribution is considered before the loss. The distribution from the
partnership is not taxable as it is less than her basis after current income items. Her ordinary
loss from the partnership is limited under § 704(d) to $11,000. The remaining $5,000
ordinary loss is carried forward (as a suspended loss) until such time as Kayla has sufficient
basis in her partnership interest to utilize the loss.
c. Lisa’s basis in her partnership interest at the end of the tax year is determined as follows.
Beginning basis $16,000
Share of separately stated income items:
Long-term capital gain 3,000
Basis before loss allocation and distribution $19,000
Less: Distribution (15,000)
Basis before loss allocation $ 4,000
Less: Ordinary loss allowed under § 704(d) (4,000)
Ending basis in interest $ –0–
Lisa reports the long-term capital gain. The distribution is again considered before
determining the allowable loss. Lisa’s basis is $4,000 lower than Kayla’s, and the distribution
Lisa received is $3,000 higher than the distribution to Kayla, so Lisa’s deductible loss is
$7,000 less than Kayla’s. Lisa may only deduct $4,000 of the loss. The remaining $12,000
loss is carried forward.
d. The amounts calculated on the spreadsheet are not the same as shown in Exhibit 10.2,
because of the aforementioned basis limitations. You can use this spreadsheet to determine
amounts at the partnership level. The file also can be used to calculate allocations to the
partner. The partnerʼs basis can be calculated on the spreadsheet as long as the loss is not
suspended.
53. (LO 3, 7, 9, 10)

a. Suzy’s beginning basis in her partnership interest is $240,000, calculated as follows.
Basis in contributed business-related assets $200,000
Share of partnership nonrecourse debt assumed from Anna 40,000
Total beginning basis $240,000
Anna’s beginning basis in her partnership interest is $340,000, calculated as follows.
Basis in contributed business-related assets $380,000

Relief of debt assumed by the partnership (100,000)
Share of partnership nonrecourse debt assumed from Anna 60,000
Total beginning basis $340,000
b. The partnership reports ordinary business income of $200,000. Separately stated items
include the short-term capital gain ($10,000), tax-exempt interest income ($4,000), and
charitable contributions ($8,000). Suzy’s Schedule K–1 shows the following items.
Ordinary income $80,000
Short-term capital gain 4,000
Tax-exempt interest income 1,600
Charitable contributions 3,200
Distribution received by Suzy 10,000
On her tax return, Suzy reports the $80,000 of ordinary income on Schedule E. She reports the
short-term capital gain ($4,000) with her capital transactions on Form 8949 and Schedule D.
She reports the charitable contributions ($3,200) on Schedule A with her personal charitable
contributions. The tax-exempt interest income and the distribution she receives are not
taxable, although they affect her basis (as shown below). (Although not taxable, the tax-
exempt interest income is reported as an information item on Suzy’s Schedule B and line 8b of
her Form 1040.)
Suzy might also be eligible for the qualified business income deduction; the partnership needs
to provide additional information (i.e., W–2 wages and the unadjusted basis of partnership
depreciable property) so Suzy can calculate the deduction.
Suzy also calculates self-employment tax (and potentially additional Medicare tax) on her
distributive share of partnership income. She might also be subject to net investment income
tax on her share of the partnership’s short-term capital gain.
c. At the end of the tax year, Suzy’s basis in her partnership interest is $392,400 (including an
$80,000 share of partnership nonrecourse debt and a $40,000 share of partnership recourse
debt), calculated as follows.
Beginning basis (including $40,000 share of debt) $240,000
Increase in Suzy’s share of recourse debt
(40% × $100,000) 40,000
Increase in Suzy’s share of qualified nonrecourse
financing [40% × ($200,000 – $100,000)] 40,000
Partnership ordinary income 80,000
Charitable contributions (3,200)
Distribution to Suzy (10,000)
Ending basis $392,400
Suzy’s amount at risk is the same as her basis in the partnership interest, because the
nonrecourse debt is qualified nonrecourse financing.
54. (LO 11)

a. Suzy’s beginning capital account balance equals her basis in the property she contributed to
the partnership, or $200,000. The capital account does not include the partner’s share of
liabilities.
b. Suzy’s capital account is increased and decreased by her share of Suz-Anna’s income and
deductions, and it is decreased by the distribution she received. Her ending capital account is
$272,400, calculated as follows.
Beginning capital account $200,000
Partnership ordinary income 80,000
Charitable contributions (3,200)
Distribution to Suzy (10,000)
Ending capital account $272,400
c. In this situation, Suzy’s ending capital account differs from her ending tax basis, because
her $120,000 share of partnership liabilities ($40,000 of recourse debt and $80,000 of
nonrecourse debt) is not included in her ending capital account.
55. (LO 3, 7, 9, 10)

a. Recourse debts are debts for which at least one partner (or LLC member) has an economic
risk of loss. Nonrecourse debts are debts for which no partner (or LLC member) has an
economic risk of loss. Because an LLC limits owner liability to the assets of the entity itself,
none of the LLC members are personally liable for the accounts payable of the LLC.
As such, the accounts payable are treated as nonrecourse debt. They are included in the
members’ bases in their LLC interests (shown as nonrecourse debt on their Schedules K–1),
but they are not included in the amounts at risk.
Similarly, none of the LLC members are personally liable for the nonrecourse debt of the
LLC. It is included in the LLC members’ bases (under § 705) as a nonrecourse debt. Because
the LLC debt is considered qualified nonrecourse financing, it is included in the amount at
risk for purposes of the § 465 limitation.
b. Suzy’s basis in her LLC interest is the same as calculated in 53.c. above—$392,400. This
amount includes the same share of LLC liabilities, even though $40,000 of those liabilities are
now classified as nonrecourse rather than recourse debt.
Suzy’s amount at risk in her LLC interest is $352,400. This is $40,000 less than her basis,
because her share of ending partnership accounts payable is $40,000. These liabilities are
nonrecourse debt to the LLC member and are not qualified nonrecourse financing. Therefore,
they cannot be included in the amount at risk.
56. (LO 7)
a. In its April 30, 2019 tax return, Burgundy, Inc., must report income from BV LLC of
$140,000. This includes Burgundy’s $100,000 guaranteed payment and its 50% distributive
share of the partnership’s $80,000 of taxable income for the tax year ended December 31,
2018.
b. In her December 31, 2019 tax return, Violet must report income from BV of $45,000. This is
her 50% share of the partnership’s $90,000 of taxable income for the tax year ended
December 31, 2019. Violet does not receive a guaranteed payment.
57. (LO 7) If Burgundy’s guaranteed payment increases to $120,000 on January 1, 2019, Burgundy’s
income for the April 30, 2019 tax year still is $140,000 [as in 56.a. above]. The increase is
reflected as a guaranteed payment on the Schedule K–1 issued for Burgundy for the partnership
year ended December 31, 2019, and Burgundy reports this amount in the April 30, 2020 tax return.
58. (LO 3, 7, 9, 12)

a. The partners’ bases at the end of the first year are determined as follows.
Bryan Cody
Capital contribution $120,000 $120,000
Loss allocation (40,000) (40,000)
Depreciation allocation (28,800) (7,200)
Basis at end of year 1 $ 51,200 $ 72,800
The partners’ bases at the end of the second year are determined as follows.
Bryan Cody
Basis at end of year 1 $51,200 $72,800
Income allocation 20,000 20,000
Depreciation allocation (46,080) (11,520)
Basis at end of year 2 $25,120 $81,280
None of the losses are suspended for either partner, because the initial capital contribution
exceeds cumulative profit and loss allocations.
b. These allocations have economic effect because (1) gains, income, loss, etc., allocations
are reflected in capital account balances, (2) liquidating distributions are in accordance
with ending capital account balances, and (3) deficit capital account balances must be
restored.
59. (LO 7, 9, 12)

a. Gain must be recognized on sale of the equipment.
Less: Adjusted basis
Original basis $200,000
Less: Year 1 depreciation (36,000)
Less: Year 2 depreciation (57,600) (106,400)
Gain $ 43,600
This gain is reflected in basis as follows.
Bryan Cody
Basis at end of year 2 $25,120 $ 81,280
Plus: Gain on equipment 21,800 21,800
Basis before final distribution $46,920 $103,080
Note that part a. in the text says to disregard depreciation in year 3.
b. Each partner will receive cash from the $150,000 sale proceeds in the amount of the
capital account balance reflected above. (Bryan gets $46,920 and Cody gets $103,080, for
a total of $150,000.)
c. Bryan has directly reduced his right to cash flows on liquidation in favor of current
deductions from taxable income. Absent the special allocation of depreciation, the parties
would each have received $75,000 on the distribution of sale proceeds. The economic effect
rules ensure that a deduction reflects a true economic consequence to the partner. The partners
must decide which is more valuable: the value of a current deduction or the present value of $1
of cash distributed on termination of the partnership.
60. (LO 10) The debt assumed by the LLC is treated as a nonrecourse debt to the LLC members because
they are protected from entity liabilities and neither LLC member was required to personally
guarantee the debt. (The LLC members are treated as limited partners for purposes of liability
allocations.) Nonrecourse debts are allocated, in general, according to the LLC membersʼ profit
sharing ratios, so the debt is allocated 40% to Callie ($60,000) and 60% to Neil ($90,000). Neil’s and
Callie’s bases in their LLC interests are determined as follows.
Callie Neil
Substituted basis of contributed property or cash $300,000 $200,000
Less: Liability assumed by LLC –0– (150,000)
Plus: Allocation of nonrecourse debt 60,000 90,000
Basis in LLC interest $360,000 $140,000
61. (LO 3, 9, 10) TAX FILE MEMORANDUM

DATE December 11, 2018
FROM Jane Student
SUBJECT PA LLC debt allocation
Facts The PA LLC will be formed before the end of the current year to manufacture specialty athletic
apparel. The LLC will be equally owned by Paul and Anna, and both parties will be managing
members. It will purchase equipment and pay other expenses for $600,000, with $160,000 paid in
cash. The remaining $440,000 will be borrowed from First State Bank. The loan will be personally
guaranteed by Anna. By the end of the tax year, the LLC will also have $40,000 of accounts payable
(not guaranteed by either LLC member).
The operating agreement provides that all LLC items will be allocated equally. Capital accounts
will be appropriately maintained under the § 704(b) Regulations. Any member with a deficit
capital account balance upon liquidation of the LLC will be required to contribute cash in the amount
of the deficit at that time. (See Instructor Note below.)
The LLC expects to produce a loss of about $580,000 for its first taxable year (allocated $290,000 each to
Paul and Anna), and the LLC members would both like to be able to deduct their share of the loss.
Issues Paul and Anna would like to know whether the loss limitation rules will affect their ability to
deduct the $580,000 loss (allocated $290,000 to each LLC member). If limitations arise, can any
adjustments be made to ensure the losses can be deducted?
Conclusion and recommendations Under the existing scenario, Paul’s § 704(d) loss limitation will
be $100,000 and Annaʼs will be $340,000. Both amounts are reduced by an additional $20,000 under
the at-risk limitations to $80,000 and $320,000, respectively.
Paul’s basis and at-risk amounts will only allow him to deduct $80,000 of his expected $290,000
share of LLC losses.
Both Paul and Anna are active LLC members, so the passive activity loss limitations will not apply.
The excess business loss limitation would apply to Anna and limit her allowable loss to $250,000
instead of $290,000.
Instead, if both Paul and Anna were to guarantee one-half of the recourse debt, each member would
have an amount at risk of $300,000. However, both Paul and Anna are single taxpayers, so, under the
excess business loss rules, their loss would be limited to $250,000 each, with the additional $40,000
loss carried forward as part of each taxpayer’s net operating loss. However, this is a better result than
the original allocation. (See Instructor Note below.)
Law and analysis Losses only can be deducted under § 704(d), to the extent of the LLC membersʼ
basis in the LLC interest. Paul and Anna each contributed $80,000 of cash. In addition, their basis
includes their share of the LLCʼs liabilities.
Recourse debt is allocated to the partners/members who have an economic risk of loss with respect to
the debt. Anna has guaranteed the $440,000 equipment loan, so she bears the entire economic risk of
loss with respect to that debt. The entire amount is allocated to her.
The accounts payable are recourse to the LLC, but neither LLC member has guaranteed the debt, so it
is nonrecourse with respect to the two LLC members. It is allocated according to the profit sharing
ratios, $20,000 to each LLC member.
Losses also must be evaluated under the at-risk limitations. Because PA is an LLC, neither partner is
liable for the accounts payable, so those liabilities cannot be included in their amounts at risk.
Absent other arrangements, Paul and Annaʼs losses for the year are limited as follows.
Paul Anna
Cash contribution $ 80,000 $ 80,000
Recourse debt share –0– 440,000
Nonrecourse debt share 20,000 20,000
§ 704(d) loss limitation $100,000 $540,000
Less: Nonrecourse debt (20,000) (20,000)
§ 465 limitation $ 80,000 $520,000
As mentioned, the passive activity loss limitation would not arise because both LLC members are
active in the business. However, the members must also consider whether the excess business loss
limitation would apply. Under this rule, a single individual taxpayer’s business losses are limited to
$250,000 in a given tax year. Neither Paul nor Anna has business income (or losses) from other
sources, so the $80,000 and $520,000 amounts calculated above are the amounts considered under
this limitation. Unfortunately, Anna’s allocated loss would exceed the threshold amount, so she could
only deduct $250,000 and the remaining $270,000 loss would be carried forward as part of her net
operating loss carryover.
If, instead, Paul and Anna each agreed to guarantee one-half of the recourse debt, the $440,000 would
be allocated $220,000 to each person. Paul and Annaʼs bases [§ 704(d) loss limitation] would be
$320,000 each, and their amounts at risk would be $300,000 each.
The passive activity loss limitation would not apply, but the excess business loss limitation would. As
single taxpayers, both Paul and Anna would be limited to a $250,000 loss. Therefore, of the total
$290,000 loss allocated to each partner, a $250,000 deduction would be permitted. The excess
$40,000 loss would be carried over as part of each LLC member’s net operating loss.
Instructor note The assumption that the LLC’s operating agreement contains a deficit capital
restoration provision is for simplification only. Many LLCs utilize other provisions of the
§ 704(b) Regulations to ensure profit allocations will be respected and do not include the restoration
provision in the operating agreement.
Some students might suggest that both Paul and Anna guarantee the full amount of the debt. Final and
Proposed Regulations address situations where there are overlapping guarantees and allocate debt in
proportion to the amount guaranteed. Under those rules (beyond the scope of this text), if each LLC
member guaranteed the full amount of the debt (doubly guaranteed), half the debt would be allocated
to each member. This is the same tax result that would arise if each member were to guarantee half the
debt, as suggested above.
62. (LO 9, 10, 12, 14)
a. A partner’s basis in the partnership interest must be adjusted in the order shown in
Exhibit 10.2: income items and contributions first increase basis, then basis is reduced by
distributions from the partnership. Finally, losses may be deducted under § 704(d) to the
extent of any remaining basis. However, this allowed loss may be further limited under
the at-risk, passive activity loss, and excess business loss rules.
b. In Brad’s case, the $20,000 distribution reduces his basis in the partnership interest to $0 and
Brad must recognize a $5,000 gain (probably a capital gain) in the amount of the distribution
that exceeds his $15,000 basis. (Instructor note: Distribution rules and gain recognition are
introduced in Example 2 and discussed in detail in Chapter 11.)
c. Because his basis is reduced to $0, none of the loss can be deducted. The full $10,000 is
suspended under § 704(d) and must be carried forward until Brad has adequate basis to absorb
the loss.
d. If the partnership can make the distribution at the beginning of the following tax year, Brad
could deduct his $10,000 share of the loss in the current year. The partnership expects to
report earnings in future years, so Brad’s share of that income would increase his basis before
the cash is distributed, and he will probably not be required to report a capital gain on
the distribution.
Alternatively, the partnership could incur additional (short-term) debt at the end of the year.
Brad’s share of the debt would be treated as a contribution of capital that increases Brad’s
basis in his partnership interest. With adequate basis, the cash could be distributed
without gain recognition, and the losses would be fully deductible (subject to other loss
limitations). Clearly, the partnership would need to consider the economic consequences of
additional debt, even on a short-term basis.
63. (LO 10, 12) TAX FILE MEMORANDUM

DATE January 28, 2019
FROM Beth Mullins
SUBJECT Deductibility of loss from LLC
Facts Jasmine Gregory reports the following allocations and bases in her LLC interests for the
current year.
Sparrow Starling
Income (loss) allocation ($100,000) $36,000
Basis excluding liabilities 50,000 N/A
Recourse liability allocation 10,000 N/A
Nonrecourse liability allocation 30,000* N/A
*This debt cannot be treated as qualified nonrecourse financing.
Jasmine spends significant time working for each LLC during the year. Her modified AGI is
$300,000 before considering the LLCs’ activities. She has no other business losses.
Issues How much of the $100,000 loss from Sparrow Properties LLC can Jasmine deduct in the
current year?
Under what Code provision are any disallowed losses suspended?
Conclusion Jasmine can deduct $36,000 of the $100,000 loss. Of the disallowed loss, $10,000 is
suspended under § 704(d). An additional $30,000 is suspended under the at-risk limitations. The
remaining suspended loss of $24,000 is suspended under the passive activity loss rules of § 469. The
special $25,000 deduction for active participation in a passive real estate activity is not available
because Jasmine’s modified AGI is too high. None of the loss is suspended under the excess business
loss limitation.
Law and analysis Under § 704(d), Jasmine may deduct a portion of the Sparrow loss equal to
her basis in her LLC interest, including recourse and nonrecourse liabilities. The basis is $90,000
($50,000 + $10,000 + $30,000), and the excess $10,000 loss is suspended.
The $30,000 of nonrecourse debt cannot be included in the amount at risk, because it is not
qualified nonrecourse indebtedness. Therefore, an additional $30,000 is suspended under the at-risk
limitation rules of § 465. (After this limitation, $60,000 of the loss is still available for testing under
the passive loss limitation rules.)
The activities of both LLCs are treated as rental activities, which, by definition, are passive for
purposes of § 469. The Sparrow loss is deductible to the extent of the $36,000 of income from
Starling. Also, because Sparrow conducts rental real estate activities and Jasmine is an active
participant owning more than 10%, this loss is eligible for an additional $25,000 deduction.
However, none of this additional $25,000 deduction is available to Jasmine, because her
modified AGI exceeds $150,000 (the top of the phaseout range for the additional deduction
allowance).
The $36,000 loss allowed under the passive activity loss rules exactly equals the passive income from
Starling, so the net deductible loss from all activities is $0. Therefore, the excess business loss
limitation does not apply.
64. (LO 13)

a. $50,000 loss. As a 40% owner, Lacy’s loss on the sale to the partnership is not disallowed.
b. $60,000 gain. The partnership has a cost basis in the property of $200,000.
c. Lacy would claim no loss. Section 707(b)(1)(A) applies, and Lacy’s $50,000 realized loss is
not deductible.
On the partnership’s later sale of the property, it would recognize a gain of $10,000. Section
267(d) permits the partnership to offset any subsequent gain by the loss previously disallowed
($60,000 gain less $50,000 previously disallowed loss).
d. $80,000 gain. Lacy’s $80,000 gain would be ordinary under § 707(b)(2) if the investment
property immediately after the transfer is not a capital asset of the Four GRRLs Partnership.
RESEARCH PROBLEMS
1. a. Either June 30 or December 31 would be an acceptable year-end. Under § 706(b)(1), the

LLC’s (partnership’s) required taxable year is the first of the following that applies:
(1) the majority interest taxable year.
(2) the same taxable year as all the principal (5% or greater interest) partners.
(3) the year determined under the “least aggregate deferral” rules, as explained in the
Regulations.
The majority interest taxable year does not apply because neither of the LLC members has a
majority interest (>50%) in the profits and capital of the LLC [§ 706(b)(4)(A)].
Both Barney and Aldrin, Inc., are principal partners (5% or greater interests) in BA LLC.
However, as both members do not have the same taxable year, the principal partner rule does
not apply.
Therefore, BA LLC must choose the taxable year that provides for the least aggregate
deferral of income. To determine the required tax year of an LLC (partnership) under this
method, perform the following steps:
• Select one partner’s tax year as a test year.
• Calculate the number of months from the end of the test year to the next year-end for
each partner (i.e., determine the number of deferral months for each partner).
• Multiply the number of income deferral months for each partner by each partner’s profit
percent.
• Add the products to determine the aggregate number of deferral months for the test year.
• Repeat the process until each partner’s tax year has been used as a test year.
• Compare the aggregate number of deferral months for each test year.
• The test year that has the smallest number of aggregate deferral months is the required
tax year.
TEST FOR 12/31 YEAR-END (Barney’s year-end)
Profit Months of
Partner Year Ends Interest Deferral Product
Barney 12/31 1/2 × 0 = 0.00
Aldrin, Inc. 6/30 1/2 × 6 = 3.00
Aggregate number of deferral months 3.00
TEST FOR 6/30 YEAR-END (Aldrin, Inc.’s year-end)
Profit Months of
Partner Year Ends Interest Deferral Product
Barney 12/31 1/2 × 6 = 3.00
Aldrin, Inc. 6/30 1/2 × 0 = 0.00
Aggregate number of deferral months 3.00
Under the least aggregate deferral rule, both a June 30 and December 31 year-end provide for
the same amount of deferral. Under Regulations, if this calculation results in two taxable
years with the same least aggregate deferral, the partnership may select either one of these
taxable years as its taxable year [Reg. § 1.706–1(b)(3)(i)].
b. If the partnership originally selected a June 30 taxable year, the year-end of the LLC will
remain June 30. The majority interest rule will now apply, and Aldrin, Inc., a June 30 fiscal
year taxpayer, will own a majority (75%) interest in the LLC.
If the partnership originally selected a December 31 taxable year, the taxable year of the LLC
must change to June 30. Under Reg. § 1.706–1(b)(8)(i)(A), a partnership has automatic
approval from the IRS to make this change.
Under Reg. § 1.706–1(b)(9), the December 31 partnership taxable year could be retained only
if the LLC could get approval from the IRS for a “natural business year” or by making a
§ 444 election. The problem states that BA does not have a natural business year. A § 444
election is not available because the six-month deferral from the required taxable year is
greater than the maximum three-month deferral permitted under § 444 [§ 444(b)(2)].
The change from a December 31 taxable year to a June 30 taxable year will be made under
the provisions of Rev.Proc. 2006–46, 2006–2 C.B. 859.
2. This question is designed to focus on the liability-sharing Regulations. Specifically, item a. stresses
the requirement that time value of money considerations must be taken into account in determining an
allocation of liabilities. Item b. addresses Final and Proposed Regulations that clarify that a liability
can only be included in basis one time and that provide guidelines for allocating liabilities where
there is an overlapping economic risk of loss.
a. The allocation of recourse liabilities to the partners depends on the extent to which a partner
bears the economic risk of loss for any amount [Reg. § 1.752–2(a)]. The extent to which a
partner bears the economic risk of loss for a liability is determined under the constructive
liquidation scenario of Reg. § 1.752–2(b)(1). Under this scenario, assets are deemed to be
sold for $0, and losses on disposal are allocated to the partners. Partners with negative capital
account balances would then be required to contribute cash to make up any deficits. Under
Reg. § 1.752–2(g), any restoration must be discounted to reflect the present value of the
restoration obligation.
For the Realty partnership, both partners are required to restore deficit balances in their
capital accounts. Fredstone’s restoration is within the 90-day safe harbor allowed [Reg.
§ 1.752–2(g)], so his restoration is treated at the face amount. Gradison is not required to
restore the deficit in its capital account until three years following liquidation of the
partnership, and the deferred obligation does not bear interest. Therefore, Gradison’s
economic risk of loss is limited to the present value of the future obligation.
During the three-year deferral period, Fredstone is presumed to cover any shortfalls and bear
further risk of loss to the extent of the difference between the present and future amount of
the obligation. See the example in Reg. § 1.752–2(g)(4).
The discount rate is assumed to be 2%, compounded semiannually for three years. This
translates to six discount periods at 1% each. Using the Present Value of $1 table in Appendix F,
the actual allocation of the liability would be determined as follows.
(1) Under the constructive liquidation scenario, the $100,000 partnership liability becomes
due in full.
(2) The partnership assets (basis $130,000) become worthless and are sold for $0, resulting
in a loss of $130,000.
(3) The loss is allocated equally to the partners under the partnership agreement, resulting
in capital account deficits of $50,000 each, as follows.
Fredstone Gradison
Initial contribution $15,000 $15,000
Loss allocation 65,000 65,000
Capital account balance ($50,000) ($50,000)
(4) Gradison’s deficit restoration obligation is discounted to the “fair market value” of the
obligation at the date of the constructive liquidation. Because the obligation does not
bear interest, the fair market value is equal to the imputed principal amount under
§ 1274(b) (i.e., the present value of the restoration payment obligation). Per the
Appendix F, Present Value of $1 table, the factor for six discount periods at 1% per
period is .9420. Therefore, Gradisonʼs restoration obligation would be $47,100
($50,000 × .9420). Gradison’s remaining obligation of $2,900 is deemed not to exist.
(5) Fredstone would be required to contribute $50,000 to restore the deficit in its capital
account. In addition, as general partner, Fredstone would be required to make up the
shortfall in Gradison’s restoration, or $2,900. Fredstone’s total restoration, then, is
$52,900.
(6) The partners’ cash contributions under the constructive liquidation scenario totals
$100,000 ($52,900 + $47,100). This amount would be used by the partnership to repay
the $100,000 liability, and the partnership would liquidate.
The restoration obligations of both partners would be used exclusively to repay partnership
liabilities. Therefore, the deficit restoration obligations ($52,900 for Fredstone and $47,100
for Gradison) will be the amount of liabilities allocated to the partners under § 752.
b. In the revised scenario, the entity is an LLC, and the debt, therefore, is nominally
nonrecourse. However, Fredstone is required to guarantee the full debt and Gradison is
required to guarantee a portion of the debt that corresponds to Gradison’s ownership interest.
Therefore, not only is the debt recourse to the LLC members, but the members have
guaranteed 150% of the debt rather than just 100% of the debt.
Proposed Reg. § 1.752–2 provides guidance for allocating recourse debt when there is an
overlapping risk of loss. Example 1 in this Regulation illustrates that the debt is allocated
based on the proportionate risk of loss that would arise if all partners were required to bear a
proportionate share of their maximum debt guarantee.
(1) Fredstone would have a risk of loss of $100,000 and Gradison would have a risk of loss
of $50,000 for a total guarantee of $150,000 toward a maximum debt of $100,000.
(2) Fredstone’s allocated risk of loss is 2/3 of the total debt ($100,000/$150,000 =
66.67%), or $66,667.
(3) Gradison’s allocated risk of loss is 1/3 of the total debt ($50,000/$150,000 = 33.33%),
or $33,333.
(4) The recourse debt allocation to the LLC members then is $66,667 to Fredstone and
$33,333 to Gradison.
3. Section 179(b)(1) limits the amount of qualifying property that may be immediately expensed by a
taxpayer to $1 million annually. Section 179(b)(2) reduces that limit by the amount the cost of
qualifying property placed in service exceeds $2.5 million.
Section 179(d)(8) states that the limitations on § 179 expense contained in § 179(b) apply at both the
partnership and partner levels. This is reiterated in Reg. § 1.179–2(b)(3). Reg. § 1.179–2(b)(3)(i)
provides that the § 179 expense allocated to each partner can be added to any nonpartnership expense
the partner may have. This Regulation also provides that for purposes of determining whether excess
property has been placed in service, the amount of § 179 property placed in service by a partnership is
not attributed to any partner.
The Attic’s total § 179 expense is limited to $600,000 [$1,000,000 − ($2,900,000 − $2,500,000)],
with $540,000 allocable to Andy. Neither the property additions placed in service by The Attic ($2.9
million) nor the excess property additions ($400,000) are attributable to Andy or any other partner.
Andy’s qualifying additions, then, are considered to only be the $700,000 of property purchased by
his proprietorship, MoveOn. Therefore, Andy’s § 179 allowance is not reduced by the dollar
limitations of § 179(b)(2).
In deciding the amount to elect to expense under § 179 from his proprietorship, Andy should consider
the amount passed through from the LLC. There is no carryforward permitted under § 179 (unless the
taxpayerʼs deduction is limited under the taxable income limitation). Therefore, Andy’s § 179
deduction related to his proprietorship expenses should be the amount that maximizes his deduction,
or $460,000 ($1,000,000 maximum − $540,000 from the LLC). His remaining MoveOn expenditures,
$240,000, should be depreciated as usual.
Andy’s total § 179 expense for the year is $1,000,000 ($460,000 from the proprietorship and
$540,000 from The Attic).
Research Problems 4 to 6
These research problems require that students utilize online resources to research and answer the questions.
As a result, solutions may vary among students and courses. You should determine the skill and experience
levels of the students before assigning these problems, coaching where necessary. Encourage students to use
reliable websites and blogs of the IRS and other government agencies, media outlets, businesses, tax
professionals, academics, think tanks, and political outlets to research their answers.
CHECK FIGURES
16. $32,000 income taxed; $10,000 30.b. $360,000.

distribution not taxed. 30.c. $380,000.
17.a. $15,000 realized; $0 recognized. 30.d. $380,000.
17.b. Henrietta’s basis is $85,000. 30.e. Sell and contribute cash.
17.c. Partnership’s equipment basis is $10,000. 31.a. $15,000 realized on land; $150,000
18.a. $50,000 ordinary compensation income. realized on equipment.
18.b. $50,000 basis in partnership interest; 31.b. No gain recognized under § 721.
$50,000 probable organizational or 31.c. Liz $155,000; John $20,000.
startup cost for LLC. 31.d. $75,000 basis in land; $20,000 basis in
19. $90,000 ordinary income on collection of equipment.
accounts receivable; $35,000 ordinary 31.e. Inside = Outside = $175,000.
income on sale of inventory. 31.f. Partnership continues John’s depreciation
20. $5,100 organizational costs; $1,700 schedule.
startup costs. 32. No gain or loss to Mike, Melissa, or
21. Schedule K includes some or all: Ordinary partnership; Mike’s basis $176,000;
income; Guaranteed payments; Business Melissa’s basis $115,000; partnership’s
interest expense information; Various basis in land $136,000; partnership steps
types of investment income; Gains/losses into Melissa’s shoes for depreciation;
on asset sales; SE income; Foreign tax consider precontribution gain and loss rules.
credit information; AMT information; 33.a. Alt. 1 year 6 $36,000 § 1231 loss to Mike.
Investment interest income; Net investment Alt. 2 $36,000 year 1 long-term capital
income (if not stated elsewhere); loss to Mike deductible at $3,000/year
Information for calculating the qualified years 1 to 12.
business income deduction. 33.b. Present value (PV) of Alt. 1 tax savings
22.a. $72,000 guaranteed payment deducted. ($10,553) > PV of Alt. 2 tax savings
22.b. $20,000 partnership income. ($10,452).
22.c. Stella reports $90,000. 33.c. If sold in year 4, MM has long-term
22.d. Euclid reports $2,000. capital loss allocated to Mike.
23.a. $200,000 § 704(b) book basis. 34.a. $0.
23.b. $50,000 tax basis. 34.b. $100,000.
23.c. $200,000 gain allocated to Nova; $50,000 34.c. $50,000 ordinary income. No carried
gain allocated to Oscar. interest.
24. $62,000 basis. 34.d. $200,000 basis.
25. Elisha’s and Ezra’s bases are each 35.a. Capitalize $50,000 value of services.
$299,100. 35.b. Contribute “property” of “permits” and
26. $10,000 debt share; $30,000 basis. “development plan” completed before
27. Tobias deducts $90,000; $20,000 contribution.
suspended under § 704(d); $25,000 36.a. Distribution.
suspended under § 465; $15,000 36.b. $0 gain or loss.
suspended under § 469; $0 suspended 36.c. $100,000.
under excess business loss limitation of 36.d. Disguised sale.
§ 461(l). 36.e. $50,000 gain.
28.a. Heather’s loss = $0. 36.f. $150,000 basis.
28.b. Partnership’s later gain = $5,000. 36.g. Less likely to be disguised sale if
29.a. $0; $0. (1) entrepreneurial risk and/or (2)
29.b. $100,000. extended time between formation date
29.c. $40,000. and distribution.
29.d. $40,000 basis in property. 37.a. Jessica $420,000; Matt $720,000.
30.a. ($20,000) realized; $0 recognized. 37.b. $200,000 ordinary income.
37.c. $120,000 capital loss and $20,000 ordinary 47. $200,000 ordinary income; $2,000 interest
loss. income; $3,000 net long-term capital gain;
37.d. All ordinary (>5 years after contribution). $2,000 charitable contribution. Self-
38. Organization costs $30,000 ($5,000 employment and Medicare taxes.
deducted, remainder amortized over 180 48. Amy’s capital account = Basis – Liabilities
months); startup costs $60,000 amortized = $483,000.
over 180 months; property acquisition 49. See Schedule K–1 for AM Partnership.
costs $5,000 (added to property basis; 50.a. $40,000 QBI deduction (all deductible
depreciated as newly acquired asset); because < (1) $50,000 W–2 wage limit,
syndication costs $600,000 (nondeductible). (2) $45,000 W–2 wage plus property limit,
39.a. Organizational costs: $8,000; syndication and (3) $100,000 taxable income limit).
costs $10,000; startup costs: $51,500. 50.b. No cash paid; no basis or capital account
39.b. $5,000 deduction plus $50 amortization of effect.
organization costs. $3,500 deduction plus 51.a. $18,000 ordinary income; long-term
$800 amortization of startup costs. $0 capital gain $6,000.
syndication costs. 51.b. See Form 1065, pages 1 and 4.
39.c. 180-month amortization (organization and 51.c. $9,000 ordinary income; $3,000 long-term
startup costs). No amortization of capital gain for each partner.
syndication costs. 51.d. $20,000 basis for Kayla; $13,000 basis for
40. BR can use cash, accrual, or hybrid method Lisa.
in 2018, 2019, and 2020. In 2021 and later 52.a. ($32,000); long-term capital gain $6,000.
years, BR may no longer use cash method. 52.b. $0 basis; $11,000 loss allowed,
41. § 197 intangibles $200,000; § 709 $5,000 suspended.
organization cost $8,000; § 195 startup 52.c. $0 basis; $4,000 loss allowed; $12,000
costs $44,000; § 162 expenses $101,000; suspended.
guaranteed payment $36,000. 52.d. If a ceiling comes into play, the
42. Required taxable year determined under spreadsheet wonʼt always work.
Regulations; Natural business year; § 444 53.a. $240,000 (Suzy); $340,000 (Anna).
year of July, August, or September; 52- to 53.b. Ordinary income $80,000; short-term
53-week year. capital gain $4,000; tax-exempt interest
43.a. Partnership deducts $12 million business $1,600; charitable contribution $3,200;
interest expense. distribution to Suzy $10,000.
43.b. Allocate $2 million excess interest 53.c. $392,400 basis and at-risk amount.
expense to partners for carryover; 54.a. $200,000 beginning capital.
separately state $1 million of investment 54.b. $272,400 ending capital.
interest expense. 54.c. Liabilities not included.
43.c. Partners deduct investment interest 55.a. Accounts payable are nonrecourse for LLC.
expense now; deduct business interest 55.b. $392,400 basis; $352,400 amount at risk.
expense later against future partnership 56.a. $140,000, incl. guaranteed payment.
excess taxable income. 56.b. $45,000.
43.d. Small business exception; partnership 57. $140,000.
deducts all business interest expense now. 58.a. Year 1—Bryan $51,200; Cody $72,800.
44.a. $75,000. Year 2—Bryan $25,120; Cody $81,280.
44.b. Five years. 58.b. Yes, has economic effect.
44.c. $15,000 gain. 59.a. Gain $43,600 allocated equally. Basis—
45.a. $36,000 loss; $30,000 to Reece and remaining Bryan $46,920; Cody $103,080.
$6,000 allocated equally among members. 59.b. Bryan’s cash $46,920; Cody’s cash
46.a. $400,000. $103,080.
46.b. $553,000. 59.c. Tax savings now or cash later; not both.
60. Debt is nonrecourse to LLC members. 62.b. $5,000 gain, $0 basis.

Allocated using profit sharing ratios. 62.c. No loss deduction.
Callie $360,000; Neil $140,000. 62.d. Make distribution next year so Brad can
61. Original: § 704(d) and § 465 loss deduct loss this year. Partnership can incur
limitations apply; Paul limited to $80,000; additional debt.
Anna limited to $320,000. 63. $36,000 deducted; $64,000 suspended
Alternative: Both guarantee half so debt is [$10,000 under § 704(d); $30,000 under
allocated equally. Both limited to § 465; $24,000 under § 469; no further
$250,000 with $40,000 treated as NOL limit under § 441(l)].
carryover. 64.a. $50,000 loss.
62.a. Basis adjustment rules per Concept 64.b. $60,000 gain.
Summary 10.2; then loss limitation rules 64.c. $0 loss now; $10,000 gain later.
[§ 704(d), § 465, then § 469; § 461(l) 64.d. $80,000 gain; may be ordinary.
NA.].
SOLUTION TO ETHICS & EQUITY FEATURE
Built-In Appreciation on Contributed Property (p. 10-29). The aggregate theory of taxation supports the
§ 704(c) required allocation of built-in gain to contributing partners. Each partner is deemed to own a share of
the underlying partnership assets—and retains the full share of any unrecognized gains on property the partner
contributed.
The S corporation shareholder, on the other hand, is treated as contributing property to a separate entity, with
no future tax ramifications to that shareholder except for those that flow from being a partial owner of the
S corporation.
For property contributed to a partnership, the tax effects of any precontribution gains or losses remain with the
contributing partner. In the illustration, if the partner sells property with a basis of $60,000 for $100,000, the
partner recognizes a $40,000 gain. Similarly, if the partner contributes that property to the partnership and the
partnership sells the property, the gain is still allocated to the partner under § 704(c).
However, for property contributed to an S corporation, the tax effects of any precontribution gains or losses are
shifted to the entity. The contributing shareholder will pay tax on the proportionate share of the gain or loss. In
the illustration, if a shareholder sells property with a basis of $60,000 for $100,000, the shareholder recognizes
a $40,000 gain. If the shareholder, instead, contributes that property to the S corporation and that entity sells it,
the gain is allocated among all the shareholders on a per-share/per-day basis.
SOLUTIONS TO BECKER CPA REVIEW QUESTIONS
Detailed answer feedback for Becker CPA Review questions is available on the instructor companion site
(www.cengage.com/login).
1. a 5. a
2. d 6. b
3. c 7. a
4. d
TAX RETURN PROBLEM
Problem 1: ROCK the Ages LLC Partnership Tax Return

• When preparing page 1 of Form 1065, the payment for the partners’ services is deducted on line 10 as
a guaranteed payment.
• When preparing Schedule K–1, the net earnings from self-employment (line 14a) equals the
combination of lines 1 and 4 on the K–1. This is Ryan’s 1/4 share of the partnership’s ordinary
income plus his guaranteed payment for services.
• Ryan Ross’s “current year increase/decrease” in item L of the Schedule K–1 is computed as follows:
$840,000 (book income) ÷ 4 = $210,000. This amount consists of the following items on the K–1.
Line 1, Ordinary business income (loss) $244,800
Plus: Line 5, Interest income 400
Less: Line 8, Net short-term capital gain (loss) (5,000)
Plus: Line 9a, Net long-term capital gain (loss) 6,000
Less: Line 12, Section 179 deduction (5,000)
Less: Line 13a, Charitable contributions (7,000)
Plus: Line 18 (Code A), Tax-exempt interest income 800
Less: Line 18 (Code C), Nondeductible expenses (25,000)
Line L, current year increase (decrease) $210,000
• On Schedules K and K–1, no amount is shown for net investment income on line 20, Code Y,
because all components of net investment income are readily identifiable (e.g., interest income). An
amount would have been shown, for example, if some or all of the guaranteed payments had been for
use of the members’ capital.
• A partnership must report information the partner needs to calculate the deduction limitation under
§ 199A, including W–2 wages and the unadjusted basis of the partnership’s depreciable property. At
this writing, no IRS guidance has been provided for reporting this information.
Selected Check Figures
Form 1065, Page 1 Line F $ 800,000
Line 20 1,238,800
Line 22 979,200
Form 1065, Page 4 Line 4 1,400,000
Line 12 20,000
Line 14a 2,379,200
Line 18a 3,200
Line 18c 100,000
Line 19a 1,000,000
Form 1065, Page 5 Line 2b(ii) 2,336,800
Schedule M–1 Line 5 2,340,000
Line 9 2,336,800
Schedule M–2 Line 9 640,000
Ryan Ross Schedule K–1 Line K 40,000
Line 8 (5,000)
Line 9a 6,000
Line 20A 400
W–2 wages 250,000
Another random document with
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CHAPTER XVII.
THE DISTRIBUTION OF FRESHWATER FISHES.
Having shown above that numerous marine fishes enter fresh

waters, and that some of them have permanently established
themselves therein, we have to eliminate from the category of
freshwater fishes all such adventitious elements. They are derived
from forms, the distribution of which is regulated by other agencies,
and which, therefore, would obscure the relations of the faunæ of
terrestrial regions if they were included in them. They will be
mentioned with greater propriety along with the fishes constituting
the fauna of the brackish water.
True freshwater fishes are the following families and groups only:
—
Dipnoi with 4 species.
Acipenseridæ and „ 26 „
Polyodontidæ
Amiidæ „ 1 „
Polypteridæ. „ 2 „
Lepidosteidæ. „ 3 „
Percina „ 46 „
Grystina „ 11 „
Aphredoderidæ „ 1 „
Centrarchina „ 26 „
Dules „ 10 „
Nandidæ „ 7 „
Polycentridæ „ 3 „
Labyrinthici „ 30 „
Luciocephalidæ „ 1 „
Gastrosteus „ 10 „
Ophiocephalidæ „ 31 „
Mastacembelidaæ „ 13 „
Chromides „ 105 „
Comephoridæ „ 1 „
Gadopsidæ „ 1 „
Siluridæ „ 572 „
Characinidæ „ 261 „
Haplochitonidæ „ 3 „
Salmonidæ (3 genera excepted) „ 135 „
Percopsidæ „ 1 „
Galaxiidæ „ 15 „
Mormyridæ (and Gymnarchidæ) „ 52 „
Esocidæ „ 8 „
Umbridæ „ 2 „
Cyprinodontidæ „ 112 „
Heteropygii „ 2 „
Cyprinidæ „ 724 „
Kneriidæ „ 2 „
Hyodontidæ „ 1 „
Osteoglossidæ „ 5 „
Notopteridæ „ 5 „
Gymnotidæ „ 20 „
Symbranchidæ „ 5 „
Petromyzontidæ „ 12 „
Total 2269 species.
As in every other class of animals, these freshwater genera and

families vary greatly with regard to the extent of their geographical
range; some extend over the greater half of the continental areas,
whilst others are limited to one continent only, or even to a very small
portion of it. As a general rule, a genus or family of freshwater fishes
is regularly dispersed and most developed within a certain district,
the species and individuals becoming scarcer towards the periphery
as the type recedes more from its central home, some outposts
being frequently pushed far beyond the outskirts of the area
occupied by it. But there are not wanting those remarkable instances
of closely allied forms occurring, almost isolated, at most distant
points, without being connected by allied species in the intervening
space; or of members of the same family, genus, or species
inhabiting the opposite shores of an ocean, and separated by many
degrees of abyssal depths. We mention of a multitude of such
instances the following only:—
A. Species identical in distant continents—

1. A number of species inhabiting Europe and the temperate
parts of eastern North America, as Perca fluviatilis, Gastrosteus
pungitius, Lota vulgaris, Salmo solar, Esox lucius, Acipenser sturio,
Acipenser maculosus, and several Petromyzonts.
2. Lates calcarifer is common in India as well as in Queensland.
3. Galaxias attenuatus inhabits Tasmania, New Zealand, the
Falkland Islands, and the southernmost part of the South American
continent.
4. Several Petromyzonts enter the fresh waters of Tasmania,
South Australia, New Zealand, and Chili.
B. Genera identical in distant continents—

1. The genus Umbra, so peculiar a form as to be the type of a
distinct family consisting of two most closely allied species only, one
of which is found in the Atlantic States of North America, the other in
the system of the Danube.
2. A very distinct genus of Sturgeons, Scaphirhynchus, consisting
of two species only, one inhabiting fresh waters of Central Asia, the
other the system of the Mississippi.
3. A second most peculiar genus of Sturgeons, Polyodon,
consists likewise of two species only, one inhabiting the Mississippi,
the other the Yang-tse-kiang.
4. Amiurus, a Siluroid, and Catostomus, a Cyprinoid genus, both
well represented in North America, occur in a single species in
temperate China.
5. Lepidosiren is represented by one species in tropical America,
and by the second in tropical Africa (Protopterus).
6. Notopterus consists of three Indian and two West African
species.
7. Mastacembelus and Ophiocephalus, genera characteristic of
the Indian region, emerge severally by a single species in West and
Central Africa.
8. Symbranchus has two Indian and one South American
species.
9. Prototroctes, the singular antarctic analogue of Coregonus,
consists of two species, one in the south of Australia the other in
New Zealand.
10. Galaxias is equally represented in Southern Australia, New
Zealand, and the southern parts of South America.
C. Families identical in distant continents—

1. The Labyrinthici, represented in Africa by 5, and in India by 25
species.
2. The Chromides, represented in Africa by 25, and in South
America by 80 species.
3. The Characinidæ, represented in Africa by 35, and in South
America by 226 species.
4. The Haplochitonidæ, represented in Southern Australia by
one, in New Zealand by one, and in Patagonia by a third species.
This list could be much increased from the families of Siluridæ
and Cyprinidæ, but as these have a greater range than the other
Freshwater fishes, they do not illustrate with equal force the object
for which the list has been composed.
The ways in which the dispersal of Freshwater fishes has been

effected were various; they are probably all still in operation, but
most work so slowly and imperceptibly as to escape direct
observation; perhaps, they will be more conspicuous, after science
and scientific inquiry shall have reached to a somewhat greater age.
From the great number of freshwater forms which we see at this
present day acclimatised in, gradually acclimatising themselves in, or
periodically or sporadically migrating into, the sea, we must conclude
that, under certain circumstances, salt water may cease to be an
impassable barrier at some period of the existence of freshwater
species, and that many of them have passed from one river through
salt water into another. Secondly, the headwaters of some of the
grandest rivers, the mouths of which are at opposite ends of the
continents which they drain, are sometimes distant from each other a
few miles only; the intervening space may have been easily bridged
over for the passage of fishes by a slight geological change affecting
the level of the watershed, or even by temporary floods; and a
communication of this kind, if existing for a limited period only, would
afford the ready means of an exchange of a number of species
previously peculiar to one or the other of those river or lake systems.
Some fishes, provided with gill-openings so narrow that the water
moistening the gills cannot readily evaporate; and endowed,
besides, with an extraordinary degree of vitality, like many Siluroids
(Clarias, Callichthys), Eels, etc., are enabled to wander for some
distance over land, and may thus reach a water-course leading them
thousands of miles from their original home. Finally, fishes or their
ova may be accidentally carried by waterspouts, by aquatic birds or
insects, to considerable distances.
Freshwater fishes of the present fauna were already in existence
when the great changes of the distribution of land and water took
place in the tertiary epoch; and having stated that salt water is not an
absolute barrier to the spreading of Freshwater fishes, we can now
more easily account for those instances of singular disconnection of
certain families or genera. It is not necessary to assume that there
was a continuity of land stretching from the present coast of Africa to
South America, or from South America to New Zealand and
Australia, to explain the presence of identical forms at so distant
localities; it suffices to assume that the distances were lessened by
intervening archipelagoes, or that an oscillation has taken place in
the level of the land area.
Dispersal of a type over several distant continental areas may be
evidence of its great antiquity, but it does not prove that it is of
greater antiquity than another limited to one region only. Geological
evidence is the only proof of the antiquity of a type. Thus, although
the Dipnoi occur on the continents of Africa, South America, and
Australia, and their present distribution is evidently the consequence
of their wide range in palæozoic and secondary epochs; the proof of
their high antiquity can be found in their fossil remains only. For,
though the Siluroids have a still greater range, their wide distribution
is of comparatively recent date, as the few fossil remains that have
been found belong to the tertiary epoch. The rapidity of dispersal of a
type depends entirely on its facility to accommodate itself to a variety
of physical conditions, and on the degree of vitality by which it is
enabled to survive more or less sudden changes under unfavourable
conditions; proof of this is afforded by the family of Siluroids, many of
which can suspend for some time the energy of their respiratory
functions, and readily survive a change of water.
To trace the geological sequence of the distribution of an ichthyic

type, and to recognise the various laws which have governed, and
are still governing its dispersal, is one of the ultimate tasks of
Ichthyology. But the endeavour to establish by means of our present
fragmentary geological knowledge the divisions of the fauna of the
globe, leads us into a maze of conflicting evidence; or, as Mr.
Wallace truly observes, “any attempt to exhibit the regions of former
geological ages in combination with those of our own period must
lead to confusion.” Nevertheless, as the different types of animals
found at the present day within a particular area have made their
appearance therein at distant periods, we should endeavour to
decide as far as we can, in an account of the several zoo-
geographical divisions, the following questions:—
1. Which of the fishes of an area should be considered to be the
remnants of ancient types, probably spread over much larger areas
in preceding epochs?
2. Which of them are to be considered to be autochthont species,
that is, forms which came in the tertiary epoch or later into existence
within the area to which they are still limited, or from which they have
since spread?
3. Which are the forms which must be considered to be
immigrants from some other region?
The mode of division of the earth’s surface into zoological regions
or areas now generally adopted, is that proposed by Mr. Sclater,
which recommends itself as most nearly agreeing with the
geographical divisions. These regions are as follows:—
I. Palæogæa.
1. The Palæarctic region; including Europe, temperate Asia,
and North Africa.
2. The Ethiopian region; including Africa, south of the
Sahara, Madagascar, and the Mascarene Islands; also
Southern Arabia.
3. The Indian region; including India south of the
Himalayas, to Southern China, Borneo, and Java.
4. The Australian region; including Australia, the Pacific
Islands, Celebes, and Lombock.
II. Neogæa.
5. The Nearctic region; including North America to Northern
Mexico.
6. The Neotropical region; including South America, the
West Indies, and Southern Mexico.
Comparatively few classes and orders of animals have been
carefully studied with regard to their geographical distribution, but the
majority of those which have been examined show that the
difference of latitude is accompanied by a greater dissimilarity of
indigenous species than that of longitude, and that a main division
into an old world and new world fauna is untenable. More especially
the Freshwater fishes, with which we are here solely concerned,
have been spread in circumpolar zones, and in a but limited degree
from north to south. No family, much less a genus, ranges from the
north to the south, whilst a number of families and genera make the
entire circuit, and some species more than half of the circuit round
the globe within the zone to which they belong. Not even the
Cyprinoids and Siluroids, which are most characteristic of the
freshwater fauna of our period, are an exception to this. Temperature
and climate, indeed, are the principal factors by which the character
of the freshwater fauna is determined; they form the barriers which
interfere with the unlimited dispersal of an ichthyic type, much more
than mountain ranges, deserts, or oceans. Hence the tropical zone is
an impassable barrier to the northern Freshwater fish in its progress
towards the south; where a similarly temperate climate obtains in the
southern hemisphere, fish-forms appear analogous to those of the
north, but genetically and structurally distinct.
The similarity which obtains in fishes at somewhat distant points
of the same degree of longitude, rarely extends far, and is due to the
natural tendency of every animal to spread as far as physical
conditions will permit. Between two regions situated north and south
of each other there is always a debateable border ground, in parts of
which sometimes the fishes of the one, sometimes those of the
other, predominate, and which is, in fact, a band of demarcation.
Within this band the regions overlap each other; therefore, their
border lines are rarely identical, and should be determined by the
northern and southernmost extent of the most characteristic types of
each region. Thus, for instance, in China, a broad band intervenes
between temperate and tropical Asia, in which these two faunæ mix,
and the actual northern border line of the tropical fauna is north of
the southern border line of temperate Asia.
It is the aim of every philosophical classification to indicate the
degree of affinity which obtains between the various divisions; but
the mode of division into six equivalent regions, as given above,
does not fulfil this aim with regard to Freshwater fishes, the
distribution of which allows of further generalisation and subdivision.
The two families, Cyprinidæ and Siluridæ, of which the former yields
a contingent of one-third, and the latter of one-fourth of all the
freshwater species known of our period, afford most valuable
guidance for the valuation of the degrees of affinity between the
various divisions. The Cyprinoids may be assumed to have taken
their origin in the Alpine region, dividing the temperate and tropical
parts of Asia; endowed with a greater capability of acclimatising
themselves in a temperate as well as tropical climate than any other
family of freshwater fishes, they spread north and south as well as
east and west; in the preglacial epoch they reached North America,
but they have not had time to penetrate into South America,
Australia, or the islands of the Pacific. The Siluroids, principally
fishes of the sluggish waters of the plains, and well adapted for
surviving changes of the water in which they live, for living in mud or
sea-water, flourish most in the tropical climate, in which this type
evidently had its origin. They came into existence after the
Cyprinoids, fossil remains being known only from tertiary deposits in
India, none from Europe. They rapidly spread over the areas of land
within the tropical zone, reaching northern Australia from India, and
one species even immigrated into the Sandwich Islands, probably
from South America. The Coral Islands of the Pacific still remain
untenanted by them. Their progress into temperate regions was
evidently slow, only very few species penetrating into the temperate
parts of Asia and Europe; and the North American species, although
more numerous, showing no great variety of structure, all belonging
to the same group (Amiurina). Towards the south their progress was
still slower, Tasmania, New Zealand, and Patagonia being without
representatives, whilst the streams of the Andes of Chili are
inhabited by a few dwarfed forms identical with such as are
characteristic of similar localities in the more northern and warmer
parts of the South American continent.
After these preliminary remarks we propose the following division
of the fauna of Freshwater fishes:—
I. The Northern Zone.—Characterised by Acipenseridæ. Few
Siluridæ. Numerous Cyprinidæ. Salmonidæ, Esocidæ.
1. Europo-Asiatic or Palæarctic Region.—Characterised by
absence of osseous Ganoidei; Cobitidæ and Barbus
numerous.
2. North American Region.—Characterised by osseous Ganoidei,
Amiurina, and Catostomina; but no Cobitidæ or Barbus.
II. The Equatorial Zone.—Characterised by the development of
Siluridæ.
A. Cyprinoid Division.—Characterised by presence of Cyprinidæ
and Labyrinthici.
1. Indian Region.—Characterised by [absence of Dipnoi[18]]
Ophiocephalidæ, Mastacembelidæ. Cobitidæ numerous.
2. African Region.—Characterised by presence of Dipnoi and
Polypteridæ. Chromides and Characinidæ numerous.
Mormyridæ. Cobitidæ absent.
B. Acyprinoid Division.—Characterised by absence of Cyprinidæ
and Labyrinthici.
1. Tropical American Region.—Characterised by presence of
Dipnoi. Chromides and Characinidæ numerous.
Gymnotidæ.
2. Tropical Pacific Region.—Characterised by presence of
Dipnoi. Chromides and Characinidæ absent.
III. The Southern Zone.—Characterised by absence of Cyprinidæ,
and scarcity of Siluridæ. Haplochitonidæ and Galaxiidæ
represent the Salmonoids and Esoces of the Northern zone.
One region only.
1. Antarctic Region.—Characterised by the small number of
species; the fishes of—
a. The Tasmanian sub-region; b. The New Zealand sub-region;
c. The Patagonian sub-region;
being almost identical.[19]
In the following detailed account we begin with a description of
the equatorial zone, this being the one from which the two principal
families of freshwater fishes seem to have spread.
I. Equatorial Zone.
Roughly speaking, the borders of this zoological zone coincide
with the geographical limits of the tropical zone, the tropics of the
Cancer and Capricorn; its characteristic forms, however, extend in
undulating lines several degrees north and southwards.
Commencing from the west coast of Africa the desert of the Sahara
forms a well-marked boundary between the equatorial and northern
zones; as the boundary approaches the Nile it makes a sudden
sweep towards the north as far as Northern Syria (Mastacembelus,
near Aleppo, and in the Tigris; Clarias and Chromides, in the lake of
Galilee); crosses through Persia and Afghanistan (Ophiocephalus),
to the southern ranges of the Himalayas, and follows the course of
the Yang-tse-Kiang, which receives its contingent of equatorial fishes
through its southern tributaries. Its continuation through the North
Pacific may be considered to be indicated by the tropic which strikes
the coast of Mexico at the southern end of the Gulf of California.
Equatorial types of South America are known to extend so far
northwards; and by following the same line the West India Islands
are naturally included in this zone.
Towards the south the equatorial zone embraces the whole of
Africa and Madagascar, and seems to extend still farther south in
Australia, its boundary probably following the southern coast of that
continent; the detailed distribution of the freshwater fishes of South-
Western Australia has been but little studied, but the few facts which
we know show that the tropical fishes of Queensland follow the
principal water-course of that country, the Murray River, far towards
the south and probably to its mouth. The boundary-line then
stretches northwards of Tasmania and New Zealand, coinciding with
the tropic until it strikes the western slope of the Andes, on the South
American Continent, where it again bends southwards to embrace
the system of the Rio de la Plata.
The equatorial zone is divided into four regions:—
A. The Indian region.
B. The African region.
C. The Tropical American region.
D. The Tropical Pacific region.
These four regions diverge into two well-marked divisions, one of

which is characterised by the presence of Cyprinoid fishes,
combined with the development of Labyrinthici; whilst in the other
both these types are absent. The boundary between the Cyprinoid
and Acyprinoid division seems to follow Wallace’s line, a line drawn
from the south of the Philippines between Borneo and Celebes, and
farther south between Bali and Lombock. Borneo abounds in
Cyprinoids; from the Philippine Islands a few only are known at
present, and in Bali two species have been found; but none are
known from Celebes or Lombock, or from islands situated farther
east of them.[20]
Taking into consideration the manner in which Cyprinoids and
Siluroids have been dispersed, we are obliged to place the Indian
region as the first in the order of our treatment; and indeed the
number of its freshwater fishes, which appear to have spread from it
into the neighbouring regions, far exceeds that of the species which
it has received from them.
A. The Indian Region comprises the whole continent of Asia

south of the Himalayas and the Yang-tse-kiang; it includes the
islands to the west of Wallace’s line. Towards the north-east the
island of Formosa, which also by other parts of its fauna leans more
towards the equatorial zone, has received some characteristic
Japanese Freshwater fishes, for instance, the singular Salmonoid
Plecoglossus. Within the geographical boundaries of China the
Freshwater fishes of the tropics pass gradually into those of the
northern zone, both being separated by a broad debateable ground.
The affluents of the great river traversing this district are more
numerous from the south than from the north, and carry the southern
fishes far into the temperate zone. The boundary of this region
towards the north-west is scarcely better defined. Before Persia
passed through the geological changes by which its waters were
converted into brine and finally dried up, it seems to have been
inhabited by many characteristic Indian forms, of which a few still
survive in the tract intervening between Afghanistan and Syria;
Ophiocephalus and Discognathus have each at least one
representative, Macrones has survived in the Tigris, and
Mastacembelus has penetrated as far as Aleppo. Thus, Freshwater
fishes belonging to India, Africa, and Europe, are intermingled in a
district which forms the connecting link between the three continents.
Of the freshwater fishes of Arabia we are perfectly ignorant; so much
only being known that the Indian Discognathus lamta occurs in the
reservoirs of Aden, having, moreover, found its way to the opposite
African coast; and that the ubiquitous Cyprinodonts flourish in
brackish pools of Northern Arabia.
The following is the list of the forms of freshwater fishes
inhabiting this region:[21]—
Percina—
Lates[22] [Africa, Australia] 1 species.
Nandina 7 „
Labyrinthici [Africa] 25 „
Luciocephalidæ 1 „
Ophiocephalidæ [1 species in Africa] 30 „
Mastacembelidæ [3 species in Africa] 10 „
Chromides [Africa, South America]
Etroplus 2 „
Siluridæ—
Clariina [Africa] 12 „
Chacina 3 „
Silurina [Africa, Palæarct.] 72 „
Bagrina [Africa] 50 „
Ariina [Africa, Australia, South America] 40 „
Bagariina 20 „
Rhinoglanina [Africa] 1 „
Hypostomatina [South America] 5 „
Cyprinodontidæ—
Carnivoræ [Palæarct., North America, Africa, South America]
Haplochilus [Africa, South America, North America, Japan] 4 „
Cyprinidæ [Palæarct., N. America, Africa]—

Cyprinina [Palæarct., N. America, Africa] 190 „
Rasborina [Africa, 1 species] 20 „
Semiplotina 4 „
Danionina [Africa] 30 „
Abramidina [Palæarct., N. Amer., Africa] 30 „
Homalopterina 10 „
Cobitidina [Palæarct.] 50 „
Osteoglossidæ [Africa, Australia, S. America] 1 „
Notopteridæ [Africa] 3 „
Symbranchidæ—
Amphipnous 1 „
Monopterus 1 „
Symbranchus [1 species in S. America] 2 „
625 species.
In analysing this list we find that out of 39 families or groups of

freshwater fishes 12 are represented in this region, and that 625
species are known to occur in it; a number equal to two-sevenths of
the entire number of freshwater fishes known. This large proportion
is principally due to the development of numerous local forms of
Siluroids and Cyprinoids, of which the former show a contingent of
about 200, and the latter of about 330 species. The combined
development of those two families, and their undue preponderance
over the other freshwater types, is therefore the principal
characteristic of the Indian region. The second important character of
its fauna is the apparently total absence of Ganoid and
Cyclostomous fishes. Every other region has representatives of
either Ganoids or Cyclostomes, some of both. However, attention
has been directed to the remarkable coincidence of the geographical
distribution of the Sirenidæ and Osteoglossidæ, and as the latter
family is represented in Sumatra and Borneo, it may be reasonably
expected that a Dipnoous form will be found to accompany it. The
distribution of the Sirenidæ and Osteoglossidæ is as follows:—
Tropical America.
Lepidosiren paradoxa. Osteoglossum bicirrhosum.
Arapaima gigas.
Tropical Australia.
Ceratodus forsteri. Osteoglossum leichardti.
Ceratodus miolepis.
East Indian Archipelago.

? Osteoglossum formosum.
Tropical Africa.
Protopterus annectens. Heterotis niloticus.
Not only are the corresponding species found within the same
region, but also in the same river systems; and although such a
connection may and must be partly due to a similarity of habit, yet
the identity of this singular distribution is so striking that it can only
be accounted for by assuming that the Osteoglossidæ are one of the
earliest Teleosteous types which have been contemporaries of and
have accompanied the present Dipnoi since or even before the
beginning of the tertiary epoch.
Of the autochthont freshwater fishes of the Indian region, some
are still limited to it, viz., the Nandina, the Luciocephalidæ (of which
one species only exists in the Archipelago), of Siluroids the Chacina
and Bagariina, of Cyprinoids the Semiplotina and Homalopterina;
others very nearly so, like the Labyrinthici, Ophiocephalidæ,
Mastacembelidæ, of Siluroids the Silurina, of Cyprinoids the
Rasborina and Danionina, and Symbranchidæ.
The regions with which the Indian has least similarity are the
North American and Antarctic, as they are the most distant. Its
affinity to the other regions is of a very different degree:—
1. Its affinity to the Europo-Asiatic region is indicated almost
solely by three groups of Cyprinoids, viz., the Cyprinina, Abramidina,
and Cobitidina. The development of these groups north and south of
the Himalayas is due to their common origin in the highlands of Asia;
but the forms which descended into the tropical climate of the south
are now so distinct from their northern brethren that most of them are
referred to distinct genera. The genera which are still common to
both regions are only the true Barbels (Barbus), a genus which, of all
Cyprinoids, has the largest range over the old world, and of which
some 160 species have been described; and, secondly, the
Mountain Barbels (Schizothorax, etc.), which, peculiar to the Alpine
waters of Central Asia, descend a short distance only towards the
tropical plains, but extend farther into rivers within the northern
temperate districts. The origin and the laws of the distribution of the
Cobitidina appear to have been identical with those of Barbus, but
they have not spread into Africa.
If, in determining the degree of affinity between two regions, we
take into consideration the extent in which an exchange has taken
place of the faunæ originally peculiar to each, we must estimate that
obtaining between the freshwater fishes of the Europo-Asiatic and
Indian regions as very slight indeed.
2. There exists a great affinity between the Indian and African
regions; seventeen out of the twenty-six families or groups found in
the former are represented by one or more species in Africa, and
many of the African species are not even generically different from
the Indian. As the majority of these groups have many more
representatives in India than in Africa, we may reasonably assume
that the African species have been derived from the Indian stock; but
this is probably not the case with the Siluroid group of Clariina, which
with regard to species is nearly equally distributed between the two
regions, the African species being referable to three genera (Clarias,
Heterobranchus, Gymnallabes, with the subgenus Channallabes),
whilst the Indian species belong to two genera only, viz. Clarias and
Heterobranchus. On the other hand, the Indian region has derived
from Africa one freshwater form only, viz. Etroplus, a member of the
family of Chromides, so well represented in tropical Africa and South
America. Etroplus inhabits Southern and Western India and Ceylon,
and has its nearest ally in a Madegasse Freshwater fish,
Paretroplus. Considering that other African Chromides have
acclimatised themselves at the present day in saline water, we think
it more probable that Etroplus should have found its way to India
through the ocean than over the connecting land area; where,
besides, it does not occur.
3. A closer affinity between the Indian and Tropical American
regions than is indicated by the character of the equatorial zone
generally, does not exist. No genus of Freshwater fishes occurs in
India and South America without being found in the intermediate
African region, with two exceptions. Four small Indian Siluroids
(Sisor, Erethistes, Pseudecheneis, and Exostoma) have been
referred to the South American Hypostomatina; but it remains to be
seen whether this combination is based upon a sufficient agreement
of their internal structure, or whether it is not rather artificial. On the
other hand, the occurrence and wide distribution in tropical America
of a fish of the Indian family Symbranchidæ (Symbranchus
marmoratus), which is not only congeneric with, but also most
closely allied to, the Indian Symbranchus bengalensis, offers one of
those extraordinary anomalies in the distribution of animals of which
no satisfactory explanation can be given at present.
4. The relation of the Indian region to the Tropical Pacific region
consists only in its having contributed a few species to the poor
fauna of the latter. This immigration must have taken place within a
recent period, because some species now inhabit fresh waters of
tropical Australia and the South Sea Islands without having in any
way changed their specific characters, as Lates calcarifer, species of
Dules, Plotosus anguillaris; others (species of Arius) are but little
different from Indian congeners. All these fishes must have migrated
by the sea; a supposition which is supported by what we know of
their habits. We need not add that India has not received a single
addition to its freshwater fish-fauna from the Pacific region.
Before concluding these remarks on the Indian region, we must
mention that peculiar genera of Cyprinoids and Siluroids inhabit the
streams and lakes of its alpine ranges in the north. Some of them,
like the Siluroid genera Glyptosternum, Euglyptosternum,
Pseudecheneis, have a folded disk on the thorax between their
horizontally spread pectoral fins; by means of this they adhere to
stones at the bottom of the mountain torrents, and without it they
would be swept away into the lower courses of the rivers. The
Cyprinoid genera inhabiting similar localities, and the lakes into
which the alpine rivers pass, such as Oreinus, Schizothorax,
Ptychobarbus, Schizopygopsis, Diptychus, Gymnocypris, are
distinguished by peculiarly enlarged scales near the vent, the
physiological use of which has not yet been ascertained. These
alpine genera extend far into the Europo-Asiatic region, where the
climate is similar to that of their southern home. No observations
have been made by which the altitudinal limits of fish life in the
Himalayas can be fixed, but it is probable that it reaches the line of
perpetual snow, as in the European Alps which are inhabited by
Salmonoids. Griffith found an Oreinus and a Loach, the former in
abundance, in the Helmund at Gridun Dewar, altitude 10,500 feet;
and another Loach at Kaloo at 11,000 feet.
B. The African Region comprises the whole of the African
continent south of the Atlas and the Sahara. It might have been
conjectured that the more temperate climate of its southern extremity
would have been accompanied by a conspicuous difference of the
fish-fauna. But this is not the case; the difference between the
tropical and southern parts of Africa consists simply in the gradual
disappearance of specifically tropical forms, whilst Siluroids,
Cyprinoids, and even Labyrinthici penetrate to its southern coast; no
new form has entered to impart to South Africa a character distinct
from the central portion of the continent. In the north-east the African
fauna passes the Isthmus of Suez and penetrates into Syria; the
system of the Jordan presenting so many African types that it has to
be included in a description of the African region as well as of the
Europo-Asiatic. This river is inhabited by three species of Chromis,
one of Hemichromis, and Clarias macracanthus, a common fish of
the Upper Nile. This infusion of African forms cannot be accounted
for by any one of those accidental means of dispersal, as
Hemichromis is not represented in the north-eastern parts of Africa
proper, but chiefly on the west coast and in the Central African lakes.
Madagascar clearly belongs to this region. Besides some Gobies
and Dules, which are not true freshwater fishes, four Chromides are
known. To judge from general accounts, its Freshwater fauna is
poorer than might be expected; but, singular as it may appear,
collectors have hitherto paid but little attention to the Freshwater
fishes of this island. The fishes found in the freshwaters of the
Seychelles and Mascarenes are brackish-water fishes, such as
Fundulus, Haplochilus, Elops, Mugil, etc.
The following is the list of the forms of Freshwater fishes
inhabiting this region:—
Dipnoi [Australia, Neotrop.]—
Lepidosiren annectens 1 species.
Polypteridæ 2 „
Percina (Cosmopol.)—
Lates [India, Australia] 1 „
Labyrinthici [India] 5 „
Ophiocephalidæ [India] 1 „
Mastacembelidæ [India] 3 „
Chromides [South America]—

Chromis 23 „
Hemichromis 5 „
Paretroplus 1 „
Siluridæ—
Clariina [India] 14 „
Silurina [India, Palæarct.] 11 „
Bagrina [India] 10 „
Pimelodina [South America] 2 „
Ariina[23] [India, Australia, S. Amer., Patagonia] 4 „
Doradina [South America]—
Synodontis 15 „
Rhinoglanina [India] 2 „
Malapterurina 3 „
Characinidæ [South America]—

Citharinina 2 „
Nannocharacina 2 „
Tetragonopterina—
Alestes 14 „
Crenuchina—
Xenocharax 1 „
Hydrocyonina—
Hydrocyon 4 „
Distichodontina 10 „
Ichthyborina 2 „
Mormyridæ (Gymnarchidæ) 51 „
Cyprinodontidæ—
Carnivoræ [Palæarct., India, S. America—
Haplochilus [India, South America] 7 „
Fundulus [Palæarct., Nearct.] 1 „
Cyprinidæ [Palæarct., India, North America]—

Cyprinina [Palæarct., India, N. America—
Labeo [India] 6 „
Barynotus [India] 2 „
Abrostomus 2 „
Discognathus lamta[24] [India] 1 „
Barbus [Palæarct., India] 35 „

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South-Western Federal Taxation 2019

Corporations Partnerships Estates and

Corporations, Corporations, Corporations,

Corporations, Corporations, Corporations,

Corporations, Corporations, Corporations,

PARTNERSHIPS: FORMATION, OPERATION, AND BASIS

SOLUTIONS TO PROBLEM MATERIALS

Type of Expenditure Treatment Reference

Acquisition of property Capitalized and depreciated; potential bonus § 167, § 168,

28. (LO 13)

b. Emma will take a cash basis of $100,000 in her partnership interest.

30. (LO 3, 14)

c. $380,000. The adjusted basis of the contributed property (§ 722).

In Alternative 2, the $36,000 loss would be recognized immediately by Mike as a long-term

34. (LO 3, 9, 14)

FMV at contribution $600,000

Section 162 ordinary and necessary business expense:

*$75,000 LLC interest plus $15,000 gain.

45. (LO 7, 8, 11)

Capital account balance, beginning of year $300,000

Amy’s share of the LLC’s ordinary income is calculated as follows.

Amy’s 50% share of AM’s ordinary business income $200,000*

Capital account balance, beginning year $300,000

50. (LO 7, 8, 9, 11)

53. (LO 3, 7, 9, 10)

Basis in contributed business-related assets $380,000

54. (LO 11)

55. (LO 3, 7, 9, 10)

58. (LO 3, 7, 9, 12)

59. (LO 7, 9, 12)

61. (LO 3, 9, 10) TAX FILE MEMORANDUM

63. (LO 10, 12) TAX FILE MEMORANDUM

64. (LO 13)

1. a. Either June 30 or December 31 would be an acceptable year-end. Under § 706(b)(1), the

16. $32,000 income taxed; $10,000 30.b. $360,000.

60. Debt is nonrecourse to LLC members. 62.b. $5,000 gain, $0 basis.

SOLUTION TO ETHICS & EQUITY FEATURE

SOLUTIONS TO BECKER CPA REVIEW QUESTIONS

TAX RETURN PROBLEM

Problem 1: ROCK the Ages LLC Partnership Tax Return

THE DISTRIBUTION OF FRESHWATER FISHES.

Having shown above that numerous marine fishes enter fresh

As in every other class of animals, these freshwater genera and

A. Species identical in distant continents—

B. Genera identical in distant continents—

C. Families identical in distant continents—

The ways in which the dispersal of Freshwater fishes has been

To trace the geological sequence of the distribution of an ichthyic

These four regions diverge into two well-marked divisions, one of

A. The Indian Region comprises the whole continent of Asia

Cyprinidæ [Palæarct., N. America, Africa]—

In analysing this list we find that out of 39 families or groups of

East Indian Archipelago.

Chromides [South America]—

Characinidæ [South America]—

Cyprinidæ [Palæarct., India, North America]—

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