1- Howard and Robin form the ShockJock, LLC. Howard contributes land with an adjusted basis of $10,000 and a FMV of $100,000 while Robin contributes $100,000 cash. The LLC meets the “Big 3” and agrees to use the remedial method pursuant to §704(c). After holding the land for a few years during which time it decreased in value, ShockJock, LLC sells the land for $90,000 and distributes all its cash in liquidation. There was no other activity at the entity. Which of the following statements is correct?
Howard will be allocated $80,000 of tax gain.
Robin will be allocated a $5,000 book and tax loss
Howard will recognize $5,000 tax gain on liquidation of the LLC
Robin will recognize a $5,000 tax loss on liquidation of the LLC.
2- Which of the following statements is not a requirement of the substantial economic effect test?
a.nIncome, gains, losses, and deductions must be allocated to the partners in accordance with their capital contributions.
b.An allocation of income must increase the partner’s capital account balance, and allocation of deduction must decrease the partner’s capital account balance.
c.nA partner with a negative capital account balance must “restore” that capital account on liquidation, generally by contributing cash to the partnership.
d.mOn liquidation of the partner’s interest in the partnership, the partner must receive assets that have a fair market value equal to the partner’s positive capital account balance.
3- Lauren and Megan each contributed $100,000 for a general partnership interest. The partnership agreement provided that Lauren and Megan would share profits and losses equally but that all depreciation would be allocated to Megan. The agreement also provided that capital accounts would be maintained in accordance with the regulations, that a partner must restore a negative capital account, and that liquidating distributions would be made in accordance with capital account balances. The partnership used the cash to purchase a depreciable asset for $200,000. The partnership is entitled to $50,000 of depreciation each year. In each year, before taking into consideration the depreciation, income equaled expenses.
Based on the above, which of the following statements is true:
a. The allocation of depreciation in year 3 will not have economic effect.
b. Lauren’s basis in her partnership interest will be $75,000 at the end of year 3.
c. Megan’s capital account and tax basis will be equal at the end of year 3.
d. Megan will have a negative capital account but her tax basis will be $0.
4- Partnership XYZ generated a loss of $30,000 in 20X1. The partnership owns a building which is security for a nonrecourse loan of $980,000, the principal balance of which remained unchanged during 20X1. The basis of the building at 1/1/20X1 and 12/31/20X2 was $960,000 and $940,000, respectively. Which of the following statements is correct?
a. The nonrecourse deductions during 20X1 were $30,000
b. The nonrecourse deductions during 20X1 were $20,000
c. The minimum gain at 12/31/20X1 was $20,000
d. The minimum gain at 1/1/20X1 was $30,000
5- Siobhan and Taggart form a general partnership. Siobhan contributed $75,000. Taggart contributed land with a fair market value of $100,000 and a tax basis of $20,000. The land was encumbered by a $25,000 nonrecourse debt and the partnership took the property to the debt. The partnership agreement provided that capital accounts would be maintained in accordance with the regulations, that the partners would have obligation to restore negative capital accounts, and that liquidating distributions would be made in accordance with capital accounts. The agreement also contained a minimum gain chargeback provision. It provided that any excess nonrecourse debt would be allocated equally between the partners.
Based on the above, all of the following are true, except:
a. There is no Tier I allocation of the liability.
b. Immediately after contribution, Siobhan’s tax basis is $87,500.
c. The Tier II allocation of the liability is $5,000 which is allocated to Taggart.
d. Taggart’s capital account is not affected by the reallocation of the liability on contribution.
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