Reference no: EM132648180

Problem - Suzy contributed assets valued at $360,000 (basis of $200,000) in exchange for her 40% interest in Suz-Anna GP (a general partnership in which both partners are active owners). Anna contributed land and a building valued at $640,000 (basis of $380,000) in exchange for the remaining 60% interest. Anna's property was encumbered by qualified nonrecourse financing of $100,000, which was assumed by the partnership. The partnership reports the following income and expenses for the current tax year:

Sales $560,000

Utilities, salaries, depreciation, and other operating expenses 360,000

Short-term capital gain 10,000

Tax-exempt interest income 4,000

Charitable contributions (cash) 8,000

Distribution to Suzy 10,000

Distribution to Anna 20,000

During the current tax year, Suz-Anna refinanced the land and building (i.e., the original $100,000 debt was repaid and replaced with new debt). At the end of the year, Suz-Anna held recourse debt of $100,000 for partnership accounts payable (recourse to the partnership but not personally guaranteed by either of the partners) and qualified nonrecourse financing of $200,000.

Required -

a. What is Suzy's basis in Suz-Anna after formation of the partnership? Anna's basis?

b. What income and separately stated items does the partnership report on Suzy's Schedule K-1? What income, deduction, and taxes does Suzy report on her tax return? What additional information is needed?

c. Assume that all partnership debts are shared proportionately. At the end of the tax year, what are Suzy's basis and amount at risk in her partnership interest?

d. Assume that Suz-Anna prepares the capital account rollforward on the partners' Schedules K-1 on a tax basis. What are Suzy's capital account balances at the beginning and end of the tax year? What accounts for the difference between Suzy's ending capital account and her ending tax basis in the partnership interest?

e. Now think about what would happen if Suz-Anna was formed as an LLC instead of a general partnership. How would Suz-Anna's ending liabilities be treated? How would Suzy's basis and amount at risk be different?