Problem 2. Part 1. The AB Partnership is a law firm. C, an associate in the firm, is offered a one- third partnership interest in the future profits of the partnership. C is not required to make any capital contribution. Is C taxable upon his admission to the partnership? Part 2. C, an experience real estate manager, received a nonforfeitable one-tenth profits interest in the AB general partnership, whose sole asset is a commercial building with a value of $1,000,000 in return for his agreement to render management services in his capacity as a partner for five years. Net rentals from the building recently have been averaging $100,000 per year. C has been asked to manage the building in the hope that his expertise will increase the rental income and ultimately lead to a profitable sale of the property. a. What are the tax consequences to C upon receipt of the profits interest? b. What are the tax consequences to C upon receipt of the profits interest if C, prior to becoming a partner, rendered services to the partnership in connection with obtaining financing and soliciting tenants for the building? What result in (a) above, if C sells his profits interest for $50,000 within one year of acquiring the interest and prior to receiving any profits? Chapter 6 & 7 1.) A and B form a general partnership in which they will share equally in profits and losses. Both A and B contribute $500,000 of cash and the partnership acquires an apartment project for $1 million. For 2019, the partnership expects the following income and expense items: Rent $200,000 Cash Operating Expenses (200,000) Income Prior to Depreciation 0 Depreciation (50,000) Taxable Loss $(50,000) A and B would like to make a special book and tax allocation to B of all depreciation deductions taken by the partnership. The allocations will be properly reflected in the partners’ capital accounts. Discussion Questions:
Given the following alternative additional facts, discuss whether or not the special allocation of all depreciation deductions to B will be respected. (Ignore any potential passive activity limitations on the deductibility of any loss allocations in your answer.) a. A and B agree that for tax and book purposes any gain on the sale of the property will be allocated to B to the extent of the depreciation deductions previously allocated to B. However, in the event the property is sold and the partnership is liquidated, each partner will receive one-half of the partnership’s assets. b. A and B agree that B will be “charged back” as in question (a), for any resulting gain from a sale of the property. Any distributions in liquidation of the partnership will be according to the balance in each partner’s capital account. c. If A and B come to you prior to reaching any agreement, what steps would you advise them to take to ensure a valid special allocation of depreciation?
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- Fall '19
- Limited partnership, Types of business entity, partner, partnership D