b )( 2 )( iv B u s i n e s s F i n a n c e
6. Mark and Jeremy form an LLC. Mark is the manager and contributes $50,000 and Jeremy contributes $50,000. The LLC borrows $900,000 on a nonrecourse basis, and the members agree to share profits and losses equally. The LLC uses its $1,000,000 to buy a building.
a) What is the outside basis of each member?
b) Assume the LLC specially allocates all the depreciation deductions to Mark. Assuming the allocations are valid under the Sec 704(b) regulations, compute the members’ shares of liability when the book value of the building has been reduced to $600,000 from depreciation deductions.
7. Mary and Carol each contribute $50,000 to their newly formed general partnership (each partner is required to restore any deficit in the partner’s capital account upon liquidation of the partnership). The partnership borrows $900,000 on a non-recourse basis and buys a $1,000,000 building. The building generates $100,000 of depreciation a year for ten years, and the partnership has no other items of income or loss. The partners agree to allocate all losses equally until their capital accounts are zero; after that the partnership specially allocates all losses to Mary. Assume that capital accounts are maintained in accordance with the rules in Regulations §1.704-1(b)(2)(iv) and that liquidating distributions are to be made in accordance with positive capital account balances. Do the allocations have economic effect in years 1, 2 and 3?
8. Lydia and Ellen own the LE Partnership. Lydia takes care of daily operations and receives a guaranteed payment for her efforts. What amount and character of income will each partner report in each of the following independent situations?
a) The LE Partnership has no ordinary income and reports a $100,000 short-term capital gain. Lydia receives a $40,000 guaranteed payment plus a 40% distributive share of all partnership income after deducting the guaranteed payment.
b) The LE Partnership reports $160,000 of ordinary income before considering any guaranteed payment. Lydia receives 60% of partnership income but not less than $110,000.
9. Eve and Tom own 40% and 60%, respectively, of the ET Partnership, which manufactures clocks. The partnership is a limited partnership, and Eve is the only general partner. She works full-time in the business. Tom essentially is an investor in the firm and works full-time at another job. Tom has no other income except his salary from his full-time employer. During the current year, the partnership reports the following gain and loss:
Ordinary loss 140,000
Long-term capital gain 20,000
Before including the current year’s gain and loss, Eve and Tom had $46,000 and $75,000 bases for their partnership interests, respectively. The partnership has no nonrecourse liabilities. Tom has no further obligation to make any additional investment in the partnership.
a) What gain or loss should each partner report on his or her individual tax return?
b) If the partnership borrowed an additional $100,000 of recourse liabilities, how would your answer to Part a change?