Question

A and B, both calendar year noncorporate taxpayers, are equal partners in the AB partnership, which
had the following income and expenses during its (business purpose) taxable year that ended on July 31
of the current year:
Gross receipts from inventory sales $100,000
Cost of goods sold $30,000
Salaries paid to nonpartners $10,000
Depreciation $12,000
Advertising expenses $8,000
Interest expense paid on investment margin account
maintained by AB (see § 163(d)) $6,000
Gain from the sale of machine held for 2 years:
§ 1245 gain $8,000
§ 1231 gain $2,000
Dividends $7,000
Charitable contributions $800
Tax Exempt Interest $500
STCG on a sale of stock $6,000
LTCG on a sale of stock held for 2 years $4,000
LTCL on a sale of stock held for 2 years $2,000
§ 1231 gain on a casualty to a machine held for 2 years $1,000

(a) How and when will AB, A and B report the income and who will liable for the taxes?
(b) Assume this is the first year of partnership operations, A’s basis in his partnership interest is
$70,000 and B’s basis in her partnership interest is $40,000. What will be the tax consequences
of AB’s first year of operations to A and B?
(c) What would be the result in (b), above, if the partnership distributed $20,000 in cash to each
partner at the end of the year?
(d) Would it matter if the § 1231 gain on the sale of the machine would have been ordinary income
if A had sold it individually?

Answer 1

a. 'Partnership' is not liable for tax payment instead the individual partners are liable for the payment of tax through their individual tax returns (Income or loss should be appropriately valued) of the following tax year. 'Form 1065' is to be done with IRS which evaluates the proper result of the partnership profits & losses or Incomes&Expenses and Schedule- K which evaluates individual tax returns of the partner.

b. Even though it's the first year, tax returns should be obviously filed even though the accounting period does not end in that year. Double taxation is avoided by filing appropriate schedules and forms. The interest is treated as ordinary income and charged for tax returns of the individual interest account.

c.If partnership distributed cash to each partner i.e $20000 it is affected individually in their capital accounts and gain or loss should be determined and as per that the tax returns are filed which will indirectly also affects the partnership tax returns. No differences occurs regarding the type of payment to the partners by the partnership but with exception referred in the Internal Revenue Service norms.

d. If A had sold it individually he should file it as a capital gain as it is an asset of the firm which often termed as capital asset and tax consequences occurs while filing the return to the partnership and partner selling the asset will not be affected. So, it matters differently to the partner and partnership.