Question

Hello, this is a TAX scenario for a class on pass-through entities. Please show all calculations and work for each question (a-e listed below):

KEY INFORMATION:

John, Karl, and Laura form an entity under state law to be known as JKL. The entity elects to be taxed as a partnership. The three owners make the following initial contributions:

1. John contributes $26,000 in cash and agrees to do all of the accounting work required by the partnership for 3 full years. John would normally charge $33,000 for similar accounting work done on behalf of a paying client. However, John’s out of pocket expenses in performing this work for JKL will be $800. By the end of the first year John’s out of pocket expenditures totaled $170. John will receive a 40% partnership interest.
2. Karl contributes land with a building on it. Karl paid $50,000 for the land 12 years ago, and constructed the building at a cost of $195,000 two years ago. Karl claimed $15,000 is depreciation on the building before transferring the building to the partnership. The land and building have a current fair market value of $400,000, but were subject to a liability of $180,000 on the date of the transfer to the partnership. The partnership assumed full responsibility for repayment of this debt. Karl will receive a 20% interest in the partnership.
3. Laura transferred a complete technology package, including 4 computers, 4 printers, memory, memory backup, security protection, software and an extensive data base which Laura had acquired 4 years ago. The technology package cost $112,000 when it was originally acquired, but had been fully depreciated prior to the time of the transfer to the partnership. The technology package had a fair market value of $44,000 on the date of the transfer to the partnership. Laura will receive a 40% interest in the partnership.

REQUIRED QUESTIONS (Please answer according to the information above):

Provide your written answer to each of the following questions (Include all calculations and work):

1. How much gain or loss must John recognize as a result of the three transfers and what is his basis in his partnership interest immediately after all transfers to the partnership?
2. How much gain or loss must Karl recognize as a result of the three transfers and what is his basis in his partnership interest immediately after all transfers to the partnership?
3. How much gain or loss must Laura recognize as a result of the three transfers and what is her basis in her partnership interest immediately after all transfers to the partnership?
4. How much gain or loss must JKL recognize as a result of the three transfers and what is JKL’s basis in each of its assets immediately after all transfers to the partnership?
5. Prepare JKL’s balance sheet immediately after all of the transfers, and before any business is conducted?

Answer 1

John Contributes
Cash	$26,000
Accounting work for 3 Years	$33,000
Out of Pocket Expenses	$170
Karl Contributes
Land and Building	$400,000
Loan on Building	$180,000
Laura Contrbutes
Computer Paackage	$44,000
all Contribution to JKL
John ( 26000+33000)	$    59,000.00
Karl (400000-180000)	$ 220,000.00
Laura	$    44,000.00
Total Contbution	$ 323,000.00
Share of Each Partner After Transfer
John 40% of 323000	$ 129,200.00
Karl 20% of 323000	$    64,600.00
Laura 40% of 323000	$ 129,200.00
Answer A
John Should recognize (129200-37000)=   $92200   as a profit just after tranfer
Answer B
Karl Should recognize (64600-230000)= $165400 as a loss just after transfer
Answer C
Laura Should recognize (129200-44000)=   $85200   as a profit just after tranfer
Answer D
There is no Profit and loss as JKL is concerned as there is no trading activity so far and Partners only made contribution at this stage

Answer E
Balancesheet of JKL just after transfer
Liabilities	Amount	Assets	Amount
Partners Capital:		Fixed Assets:
John	$      59,000.00	Land and Building	400000
Karl	$    220,000.00
Laura	$      44,000.00	Technology Pakcage	44000
Loan on Building (Karl)	$    180,000.00	Current Assets
		Cash	26000
		Advance Accounting Exp. Provision	33000
	$    503,000.00		$    503,000.00