Question

C and D, both individuals, are 60% and 40% partners, respectively, in the CD partnership. C starts the year with an adjusted basis of 600 in his partnership interest, while D has an initial adjusted basis of 400 in her partnership interest. (a) For the year, the partnership has sales of 300, cost of goods sold of 230, T-bill interest income of 30, a long-term capital gain of 150, charitable contributions of 30 and payroll costs of 60. How do these facts impact the parties for tax purposes? (b) Same as (a) except that the LTCG of 150 was from stock contributed by C which at the time of contribution had an adjusted basis of 160 and a fair market value of 300

Answer 1

Dear Student,

First of all, I am not certain about the country for which this question belongs. It is important to know about the country for questions that have a Tax element in them. Nevertheless, you question seems basic and most of the countries have similar tax provisions for such items. Here is the answer to your question:

The partnership ratio is 6:4. "Percentage" and "basis of" are different terms and talking about the same thing.

Part (a)

Income Source	Amount	C	D
Sales	300
Less: cost of goods sold	-230
Gross Profit / Margin	70
Less: Other Expenses - Payroll Cost	60
Net Business Income [X]	10	6	4
Income from Capital Gains: [Y] Long-term Capital Gains	150	90	60
Income from Other Sources: [Z] Interest on T-bill	30	18	12
Total Income from all sources [X + Y + Z]	190	114	76

Note:

Income of C and D are provided in respective columns for each income source.

Charitable Contributions are not deductible as business expense for the purpose of Income Tax calculations. Hence the same are not considered in above calculation of .

Charitable Contributions may be deducted as Other Deductions from respective Income statements of C and D based on the Income Tax rules of the country.

Part (b)

In this case, if the long-term capital gain is from the C's contribution only then long-term capital gain or loss shall be adjusted in C's total Income only. Now replacing Y with Y1 in above analysis. Nevertheless, adjusted long-term capital gain or loss will be calculated since we are provided with additional information of fair market value.

Particulars	Amount	C	D
Long-term Capital Gain	150
Add: Original Contribution	160
Total Proceeds	310
Less Adjusted cost of acquisition of stock - higher of fair market value (300) or adjusted capital base (160).	300
Adjusted Long-term Capital Gain (Only to be added in C's income) [Y1]	10	10	0
Total Income from all sources [X + Y1 + Z]	50	34	16

Hope this clarifies. Happy learning!