Question

Part 1:

List at least 3 common separately stated items. Explain why they must be separately stated to the partners.

Is the character of partnership income/gains and expenses/losses determined at the partnership or partner level? Why?

Kaylyn, Aleeah, Bentley, and Carter LLC each own a 25 percent interest in Bjorn Industries LLC, which generates annual gross receipts of over $100 million. Kaylyn, Aleeah, and Bentley manage the business, but Carter LLC is a non-managing member. Although Bjorn Industries has historically been profitable, for the last three years, losses have been allocated to the members. Given these facts, the members want to know whether Bjorn Industries can use the cash method of accounting. Why or why not?

Part 2:

Explain why a new partner who pays more for a partnership interest than the selling partner’s outside basis would want the partnership to elect a special basis adjustment?

Why might a partnership not want to make a §754 election to allow special basis adjustments? Explain in detail.

Answer 1

List at least 3 common separately stated items. Explain why they must be separately stated to the partners.

Three items are short term capital loss/gains, section 1231 gains/losses, charitable contribution, dividend.

They must be seperately stated because they are related to specific partner or they are taxed differently for different partner.

Is the character of partnership income/gains and expenses/losses determined at the partnership or partner level? Why?

Partnership level because of the entity concept and because IRS has rules it out to unify the character of all items by looking at the character from the partnerships perspective.

Kaylyn, Aleeah, Bentley, and Carter LLC each own a 25 percent interest in Bjorn Industries LLC, which generates annual gross receipts of over $100 million. Kaylyn, Aleeah, and Bentley manage the business, but Carter LLC is a non-managing member. Although Bjorn Industries has historically been profitable, for the last three years, losses have been allocated to the members. Given these facts, the members want to know whether Bjorn Industries can use the cash method of accounting. Why or why not?

Since Bjorn is engaged in business that carry inventory to make, buy or sell tangible merchandise, they may not be allowed by IRS to switch

Only one question is allowed to answer in one post, though I did 3. Hope you understand. Thanks