Reference no: EM13720966

Tom, May, Jane and Joe form ZZ LLC at the beginning of 2012. ZZ LLC files as a tax partnership. Each individual contributes the following to the partnership: Partner Type FMV Tax Cost Liabilities Tom Cash $5 Million $5 Million None Mary Land $7 Million $4 Million $2 Million Jane Apt Building $12 Million $12 Million $7 Million Joe Patent $10 Million $2 Million None Each partner's capital interest equals the net FMV contribution he or she contributed to the partnership.

Note: in the above transfers, the partnership assumed the partner's liabilities on the item transferred into the partnership. For example, Mary contributed $7 Million FMV land; however, the partnership assumed $2 Million debt on the land. Thus, Mary's contribution equals $5 Million.

The same idea applies to Jane's contribution. Each partner share of profits and losses equals: Tom - 20%; Mary - 20%; Jane - 20%; and Joe - 40%. Each partner shares liabilities according to the ratios in the previous sentence. The partnership had the following transactions in 2012 (its first year of operation:

1. Depreciated the building strait line over 30 years. The building represents 80% of the above allocation and land represents the remaining 20%. This apartment building was just completed - Jane has not previously operated it or taken any depreciation on it.

2. In 2012, the apartment building generated $1 Million cash revenues with $400,000 cash expenses [note: you need to also include depreciation as not included in the $400,000 expense figure].

3. The partnership made a yearly 2012 interest only payment on apartment debt on December 31, 2012, (rate equals 5%).

4. Joe's patent does not generate any amortization expense as he self created the patent. Thus, the partnership has no amortization as noted in Section 197(c)(2). However, the patent did create $1 Million in patent royalty revenue for the partnership. The partnership paid $50,000 in ordinary expenses relating to the patent.

5. The partnership used $3 Million cash to buy an additional patent. This patent does generate amortization expense using the Section 197(a) patent life. This patent was bought on July 1, 2012. The partnership had $100,000 in royalty revenue from this patent and $10,000 ordinary expense.

6. During the year, the partnership paid off the $2 Million debt on the land. The partnership paid $2 Million to settle the debt plus $50,000 interest expense due.

7. The partnership later on in the year sold the land for $10 Million cash to an outside party. [Note: as covered in Section 704(c), the partnership allocates the first gain on the sale of the partnership land to Mary's pre contribution gain (FMV less basis) with the remaining gain allocated according to profit ratios.]

8. The partnership distributed $2 Million cash total to the partners at year end based on their profit ratios.

Part a. Prepare a FMV Balance Sheet for the partnership on its formation at the beginning of 2012 (include each partner’s capital account). 

Part b. Prepare a Tax Basis Balance Sheet for the partnership on its formation at the beginning of 2012. 

Part c. Prepare a schedule showing each partners’ tax basis in the partnership (note each partner receives a share of partnership basis in liabilities) at the beginning of the 2012. 

Part d. Prepare a 2012 taxable income statement table for the partnership for 2012. Note: you exclude the land sale from this computation. Then below the taxable income partnership income statement include the land sale total gain and allocate this gain to the partners (you may not need a table for the land gain as you could just explain in some bullets if you wish).

Part e. Prepare a December 31, (her) partnership interest.