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
Topic:Distinguishing a hobby from a business, explaining how legislation and case laws determines whether an activity is a business or hobby. Further to make a comment on the impact of a determination by the ATO on whether a taxpayer’s activity is actually a business.
Section 152(a) provides that for a taxpayer to take a dependency exemption, the potential dependent must satisfy either the qualifying child requirement or the qualifying relative requirement. Section 152(b)(2) indicates that the taxpayer is not permitted a dependency exemption for a married dependent if the married individual files a joint return. Pursuant to section 152(c), the term “qualifying child” refers to an individual who has not furnished over one-half of his or her own support and who has not attained the age of 19 or who has not attained the age of 24, if a full-time student, as of the close of such calendar year. The term “qualifying relative” under section 152(d) includes, but is not limited to, an individual whose gross income is less than the exemption amount and to whom the taxpayer provides over-half of the total individual’s support for the calendar year in which such taxable year begins. Under Reg. Sec. 1.152 (a), support received from the taxpayer is compared to the entire amount of support which the potential dependent received from all sources, including support which the individual supplied himself. Support includes food, shelter, medical and dental care, education, recreation,
Write an APA-formatted response of no more than 200 words for each the following questions:
The question at hand is whether or not the brief exchange held between Jay and Emma led to the formation of a legally binding business entity. Now of all the different entity options available, the only viable option this exchange could possibly represent is that of a general partnership. A general partnership is relatively easy to form and doesn’t necessary look at the intentions of the individuals to form a partnership, but rather their actions. So as long there is a desire to carry on a business as co-owners for profit, there really is no other formal requirement involved in forming a legally recognizable partnership.
Jill (45,000 – 500 – 2000 * 75%, yr1/ 134,500 – 1,000 – 2,500 * 75%,
CHAPTER 21 PARTNERSHIPS SOLUTIONS TO PROBLEM MATERIALS | | | | |Status: | Q/P | |Question/ |Learning | | |Present |in Prior | |Problem |Objective |Topic | |Edition |Edition | | | | | | | | | | | | 1 LO 1 Partnership definition New 2 LO 2 General partnership versus LLC New 3
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