Question

(Tax ex) The Bolos, LLC limited partnership was formed on Sep 30, 2008, by Zed, its general partner, and a limited partner, Amy. Each contributed an equal amount of cash to start the new enterprise. In addition, Amy loaned the LLC $100,000. She has not been paid back yet. The partnership has an increase in recourse debt of $20,000.

Also, Bolos, LLC is a holiday equipment retailer. Their specialties are grave markers, potted flowers, toys, and tequila. Zed has 40% profits and capital interest and the limited partner holds the remaining 60% of the profits and capital interest. Zed is actively involved in managing the business and the limited partner is simply an investor. Zed's basis at the beginning of 2020 was $255,000, while Amy’s was $100,000. Bolos, LLC uses the accrual method of accounting and has a calendar year-end.

a. Calculate the partners' ending bases in their partnership interests.

b. Complete Zed's Schedule K-1 and Amy's Schedule K-1.

Answer 1

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Ans: a)

Particulars	Zed (40%)	Amy(60%)
	$$	$$
Opening capital/Basis at the beginning	255000	100000
Increase in recourse debt ( 20000 * psr)	8000	12000
Amy’s Loan ( only allocated to her , sec 752)		100000
Total	263000	212000

Note : 1

All liabilities in an LLC, whether they would be deemed recourse or nonrecourse at the partnership level for purposes of Section 1001, are considered nonrecourse liabilities for purposes of Section 752, because in the event the partnership fails to satisfy the liabilities, no partner would be required to come out of pocket for the deficiency.

Note 2 :

If a partner is the party that makes the loan to the partnership, the partner is on the hook for that loan; if the partnership fails to pay up, the partner loses. As a result, under the Section 752 rules, any time a partner is the lending party, the partnership debt should be treated as a recourse liability – regardless of the nature of the debt or the type of entity — and allocated solely to the lending partner.

Ans (b) :

A Schedule K-1 is a tax form that reports how much income, losses, deductions, and credits were passed through to your company’s shareholders or partners.

If we’re a partnership then we use Form 1065 to Fill out Schedule K-1.

Each form has three sections.

· Part I asks for information about your company.

· Part II asks for information about the partner or shareholder. You’ll see that this section is much longer in Schedule K-1 (Form 1065) because the IRS wants a lot more information about partners than shareholders.

· Part III is where you detail the partner or shareholder’s share of income, gains, losses, deductions, and credits.

In part – I : we will fill up the general information of partner :

· A-B: Your employer identification number (EIN), business name, and address

· C: Your business’s IRS filing location — which will be either “e-file” or, if you’re filing by paper, the location listed here

· D: If your company is a publicly-traded partnership or traded on a stock exchange

In Part – II – as per our sum ,

we will fill up row G : Zed – Put cross in general , Amy - limited partner

we will fill up row H : Both will fill up domestic partner.

we will fill up row I : Individual

we will fill up row J : In all columns and rows ( Profits , Loss , Capital ) put psr : Zed – 40 % , Amy - 60%.

In Row K : Zed -80000 ( recourse ) , Amy - 12000 ( recourse) , 100000 ( Non recourse)

In Row L : Since we hv only info of opening capital and tick tax basis   , we will fill it up.

For part – III – we don’t have any info.