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1/18 PARTNERSHIPS AND LIMITED LIABILITY COMPANIES CASE STUDY 1AO ASSOCIATED OPHTHALMOLOGISTS ± Burt Blue (age 60) has practiced ophthalmology as a sole proprietor. ± Greg Green (age 45) was in an HMO which just disbanded. In the breakup, he was allowed to take the ophthalmologic patients and the related receivables ± Herb Hazel (age 30), also an ophthalmologist, has been an employee of Burt's. ± The three doctors decide to form a limited liability partnership, "Associated Ophthalmologists, LLP," to commence business in rented offices at the beginning of 2008. ± Burt and Greg are to contribute the assets as set forth below; Herb is to contribute nothing. Burt Greg Basis FMV Basis FMV Cash 10,000 10,000 15,000 15,000 Due from patients 0 20,000 0 25,000 14,400 40,000 Accounts payable 0 (10,000) Totals 24,400 60,000 15,000 40,000 Partnership Interests (%) 60.00% 40.00% The furniture is five year MACRS property. Burt had purchased all of it in 1998 for $50,000 and had depreciated it using the half-year convention. ± In exchange for the assets contributed, Burt is to receive 60% of the capital and profits interests, and Greg 40 % . ± However, for services performed, at the end of 2001, Herb is to receive a 10 % capital and profits interest, and an additional 10% interest at the end of 2002; Burt's and Greg's interests will be reduced proportionately. ± The partnership books are to be kept on the accrual method and with recognition of the values of the contributed assets, but tax returns are to be filed on the cash method. Both proprietors had used the cash method of accounting. The accounts payable are due to vendors of services to Burt’s practice, and are not related to the Furniture and Equipment. ± The doctors, all of whom file their individual returns on a calendar-year basis, are indifferent to the choice of a fiscal year. ± This exercise is intended to fortify your existing knowledge that no gain or loss is recognized on the contribution of property to a partnership in exchange for a partnership interest [Section 721(a)], that the initial basis of the partnership interest
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2/18PARTNERSHIPS AND LIMITED LIABILITY COMPANIES CASE STUDY 1AO 2/18 received is equal to the bases of the properties contributed [Section 722], and that an increase or decrease in the partner's or member's share of liabilities, respectively, increases or decreases such initial basis [Section 752]. It further sets the stage for the tax-adjustment process of the succeeding chapters. DISCUSSION QUESTIONS 1. In the worksheet below, compute for Burt, Greg and Herb: (a) their "financial" capital accounts, (b) their "tax" capital accounts, and (c) the bases of their ownership interests at the time of the formation of the partnership . Description
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