Question

E) Aaron, Deanne, and Keon formed the Blue Bell General Partnership at the beginning of the current year. Aaron and Deanne each contributed $110,000 and Keon transferred an acre of undeveloped land to the partnership. The land had a tax basis of $70,000 and was appraised at $180,000. The land was also encumbered with a $70,000 nonrecourse mortgage for which no one was personally liable. All three partners agreed to split profits and losses equally. At the end of the first year Blue Bell made a $7,000 principal payment on the mortgage. For the first year of operations, the partnership records disclosed the following information:Sales revenue $470,000Cost of goods sold $410,000Operating expenses $70,000Long-term capital gains $2,400§1231 gains $900Charitable contributions $300Municipal bond interest $300Salary paid as a guaranteed payment to Deanne (not included inexpenses)

a.Compute the adjusted basis of each partner’s interest in the partnership immediately after the formation of the partnership.b.List the separate items of partnership income, gains, losses, and deductions that the partners must show on their individual income tax returns that include the results of the partnership’s first year of REVIEW QUESTIONSoperations.c.What are the partners’ adjusted bases in their partnership interests at the end of the first year of operations

Answer 1

Answer-

a.      This initial adjusted basis for Keon is $23,333, for Aaron is $133,333, and for Deanne is $133,333 as shown in the calculations with table below:

 

 

Description	Keon	Aaron	Deanne	Explanation
(1) Basis in contributed land	$70,000
(2) Cash contributed		$110,000	$110,000
(3) Debt allocated to partners	$23,333	$23,333	$23,333
(4) Relief from nonrecourse mortgage	($70,000)
(5) Gain recognized	$0	$0	$0	(4 )- [(1)+ (2)+ (3)] if positive, otherwise 0
(6) Partners’ initial tax basis	$23,333	$133,333	$133,333	(1) + (2) + (3)+ (4) + (5)

b.     The partners’ shares of ordinary business loss and separately stated items are reflected in the table below:

Description	Total	Keon	Aaron	Deanne	Explanation
(1) Partners’ initial Tax basis		$23,333	$133,333	$133,333	See problem a. above
(2) Sales revenue	$470,000
Less:
(3) Cost of goods sold	(410,000)
(4) Operating expenses	(70,000)
(5) Guaranteed payments	(3,000)
(6) Ordinary Business Loss	($13,000)	($4,333)	($4,333)	($4,333)	[Sum of (2) through (5)] x 33.33%
Separately Stated Items on Schedule K-1:
(7) Long-term capital gains	$2,400	$800	$800	$800	$2,400 x 33.33%
(8) Section 1231 gains	$900	$300	$300	$300	$900 x 33.33%
(9) Municipal bond interest	$300	$100	$100	$100	$300 x 33.33%
(10) Charitable contributions	($300)	($100)	($100)	($100)	($300) x 33.33%
(11) Mortgage reduction (deemed cash distribution)	($7,000)	($2,333)	($2,333)	($2,333)	($7,000) x 33.33%
(12) Self-employment Loss	($10,000)	($4,333)	($4,334)	($1,333)	Line 6 + 1

(13) Guaranteed Payment				3,000
Partners’ ending tax basis		$17,767	127,767	127,767	(1) + (6)+ (7) through (11)

  Keon has an ending basis of $17,767, Aaron has an ending basis of $127,767 and Deanne has an ending basis of $127,767.