Advanced Tax Exam 3.docx - Chapter 10 Schedule K and K-1...

Chapter 10
Schedule K and K-1
- Income and expenses related to trade or business activities are combined;
reported as one number on each partner’s Schedule K-1 (1065: Line 22)
- Separately stated items (1065: Schedule K)
- Could affect any two partners’ tax liabilities in different ways (often
items that are subject to limitations)
- Reported separately on each partner’s Schedule K-1
- Examples: Charitable contributions, capital gains/losses, dividend
income, expenditures that could be treated as itemized deductions
Partner’s Basis
- Each year, basis is increased by the partner’s proportionate share of
- Partnership income, including capital gains and tax-exempt income
- Any increase in partnership liabilities
- Each year, basis is decreased by the partner’s proportionate share of
- Partnership deductions and losses, including capital losses
- Nondeductible expenses
- Any reduction in partnership liabilities
Contributing Property to a Partnership
- In general: gains and losses on property transferred to a partnership in exchange
for partnership interest are deferred
- Exceptions:
- Appreciated stocks contributed to an investment partnership
- Taxable exchange of properties ( Example 7 )
- Disguised sale of properties ( Example 8 )
- Interest received in exchange for services rendered
- Contribution of property:
- Partnership’s basis in asset = carryover basis, holding period also carries
over
- Partner’s basis in partnership interest = substitute basis
 EXAMPLE:
28. Emma and Lane form the equal EL partnership. Emma contributes cash
of $100,000. Lane contributes property with an adjusted basis of $40,000 and a fair
market value of $100,000.
How much gain, if any, must Emma recognize on the transfer? How much gain, if
any, for Lane? $100,000 - $40,000 = $60,000 realized gain / $0 recognized gain
Emma = $0 gain Lane = $0 gain
What is Emma’s basis in her partnership interest? $100,000
What is Lane’s basis in his partnership interest? $40,000
What basis does the partnership take in the property transferred by Lane? $40,000

Partnership Allocations
- Contribution to a partnership allows for deferred gains and losses
- When the property is later disposed of by the partnership, the pre-contribution
gains and losses are allocated in a manner that accounts for the variation between
the basis of the property and its FMV on the date of contribution
 EXAMPLE:
42. Phoebe and Parker are equal members of Phoenix Investors, LLC. They
are real estate investors who formed the LLC several years ago with equal cash
contributions. On January 1, Reece contributed some land she held for investment
to acquire a 1/3 interest in Phoenix. Reece purchased the land five years ago for
$75,000. Its FMV on January 1 was $90,000.
LLC Interest $90,000
(Basis) ($75,000)
$15,000 realized gain
$0 recognized gain
What is Reece’s basis in her interest in the LLC?
$75,000
What is the LLC’s holding period for the land?