Reference no: EM133258405

Question 1.

Ricky & Walter decide to start their own tax law practice. On March 1, 2021, they establish R&W LLC, and file elections to treat it first as a corporation, and then as an "S" corporation for tax purposes. Ricky and Walter each contribute $1,000 to R&W, and each receives a 50% membership interest in the entity. Ricky and Walter also become employees of R&W LLC, paying themselves a $20,000 salary each for 1,500 hours of work (by each) during 2021. R&W LLC earns $200,000 from clients and has $60,000 of other deductible expenses (such as rent), in addition to the $40,000 in salaries paid to Ricky & Walter, for 2021. Ricky and Walter each take a $50,000 distribution from R&W LLC during 2021, in addition to their $20,000 salaries.

a. Describe the tax treatment of these transactions (ie formation, operation, distribution, salary) if the form of these transactions is respected for tax purposes.

b. In what manner is the IRS likely to re-characterize these transactions? What would be the tax consequences of such recharacterization?

Question 2.

Angela and Carmela (each calendar year taxpayers) form the AC partnership, with each owning a 50% interest. Angela contributes $40,000 and sanding equipment worth $20,000, with an adjusted basis of $15,000, owned 10 years. Carmela contributes mining equipment, held several

years, with a gross value of $60,000, and an adjusted basis is $10,000. Do Angela and Carmela have any gain or loss on formation of the AC partnership? What is the tax basis and holding period of each partner's partnership interest? Initial capital

accounts? What is the tax basis and holding period to the partnership with respect to the assets

contributed? What is the tax impact of the following activity in the first year:

The partnership makes a charitable contribution of $1,000;

The partnership has $1,600 in interest income from tax exempt municipal bonds.

The partnership paid $400 to Angela as interest on her capital contribution.