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Problem 50 At the end of last year, June, a 30% partner in the four-person BJJM Partnership, has an outside basis of $75,000 in BJJM, including a $60,000 share of BJJM’s debt. June’s share of the partnership’s §1245 recapture potential is $40,000. All parties use the calendar year. On the first day of the tax year, June sells her partnership interest to Marilyn for $120,000 cash and the assumption by Marilyn of the appropriate share of liabilities. What are the tax consequences to June?
Problem 50, continued At the end of last year, June, a 30% partner in the four-person BJJM Partnership, has an outside basis of $75,000 in BJJM, including a $60,000 share of BJJM’s debt. June’s share of the partnership’s §1245 recapture potential is $40,000. All parties use the calendar year. June dies after a lengthy illness on April 1 of the current year. June’s brother immediately takes June’s place in the partnership. What are the tax consequences to June?
Bonus Question 2Briefly discuss how your responses in Problem 50 would change if the BJJM Partnership had $360,000 of unrealized receivables at the end of the current year, including the §1245 recapture potential.
Family partnershipsDefinition:Partnership owned and controlled primarily by members of the same familyPurpose:Typically to pay less tax by funneling income from parents to childrenDifficult to establish
Family partnershipsDetermine which family member(s) may be recognized as partnersMust provide material capital or services“Kiddie tax” issues can apply to partners:Under 19 or full-time students under 24Claimed as a dependentWith excess unearned incomeAvoided by providing services and earning incomeExample 45
Family partnershipsIf a family member acquires a capital interest by giftin a family partnership in which capital is a material income-producing factor, only some income is allocable to this interestFirst, donor is allocated an amount of partnership income equal to reasonable compensation for servicesRemaining income is divided among the partners in accordance with their capital interests in the partnershipExample 46
Problem 52 Mona and Denise, mother and daughter, operate a local restaurant as an LLC. The MD, LLC earned a profit of $200,000 in the current year. Denise’s equal partnership interest was acquired by gift from Mona. Capital is a material income-producing factor. Mona manages the day-to-day operations of the restaurant without any help from Denise. Reasonable compensation for Mona’s services is $50,000.a)How much of the LLC’s income is allocated to Mona? To Denise?b)Assuming that Denise is 15 years old, has no other income, and is claimed as a dependent by Mona, how is Denise’s income from the LLC taxed?