Tax 5015 (Spring 2011) – Chapter Review Exercise #7

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TAX 5015 (Spring 2011) – Chapter review exercise #7
Topic review: Partnership formation and operations
Due date: March 23/24, 2011
Name(s): SOLUTION
Part 1: Partnership formation. In January of 2010, Jason and Jesse contribute the following assets to become equal partners in the J&J General Partnership.

Partner
Jason
Jesse

Property contributed
Cash
Office equipment
Land
Building1

Cost

MACRS depreciation taken

49,000
17,000
52,000

15,000
8,000

Fair value
25,000
75,000
35,000
75,000

Note: (1) The building is subject to a nonrecourse liability of $10,000, which is assumed by the partnership.
The partnership will use all of these assets in its business. Subsequent to forming the partnership, J&J
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Treasury bond interest
Long term capital gain
Short term capital loss
City of Orlando bond interest
Salary expense
Sec. 1231 gain
Guaranteed payment to Nelson
Guaranteed payment to Howard
MACRS cost recovery
Straight-line depreciation (used for book purposes)
Charitable contributions
Key-man life insurance premiums
Other expenses
Cash distribution to Nelson
Cash distribution to Howard
Mortgage incurred to purchase new office building

$ 900,000
130,000
20,000
35,000
5,000
25,000
450,000
13,000
100,000
150,000
74,000
42,000
12,000
8,000
160,000
20,000
40,000
90,000

(a) Compute Magic’s 2010 ordinary partnership income (loss) and list the separately stated Items.
Ordinary partnership income (loss)
Gross profit
$ 900,000
Salary expense
(450,000)
Guaranteed payments (250,000)
MACRS
(74,000)
Other expenses
(160,000)
Ordinary p/s loss
(34,000)

Separately stated items
Dividends
$ 130,000
U.S. Treasury interest
20,000
Long term capital gain
35,000
Short term capital loss
(5,000)
Tax-exempt interest
25,000
Sec. 1231 gain
13,000
Charitable contributions
(12,000)
Key-man life insurance
(8,000)
Guaranteed payments
(250,000)
Distributions
60,000

(b) Compute each partner’s basis at the end of 2010.

Beginning basis
Mortgage
Dividends
U.S. Treasury interest
Long term capital gain
Sec. 1231 gain
Tax-exempt interest
Distribution
Short term capital loss

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