Accounting Partnerships/corporations

1. Chris and Lauren each contributed $90,000 cash to the cash basis CL Partnership. The partnership uses all $180,000 of the cash to purchase a depreciable asset. The partnership agreement provides that depreciation is allocated 60% to Chris and 40% to Lauren. All other items of partnership income, gain, loss or deduction are allocated equally between the two partners. During the first year of operations, the partnership produces $30,000 of income before depreciation and deducts $30,000 of depreciation. At the end of the first year, the partnership sells the depreciable asset for its $150,000 book value. Following these transactions, the partnership has $180,000 of cash ($150,000 from sale of the asset and $30,000 from operations). assume nothing else happens in the first year that affects the partners and liquidates at the end of the first year.


a) How much cash is distributed to each partner in the liquidating distribution under the economic effect test?


b) if the partnership distributes $30,000 cash to Lauren on June 30 of the current year, how much cash is distributed to each partner in the liquidating distribution under the economic effect test?


2. At the end of last year, Ben, a 40% partner in the four-person BBJR Partnership, has an outside basis of $50,000 in the partnership, including a $40,000 share of partnership debt. Ben’s share of the partnership’s § 1245 recapture potential is $25,000. All parties use the calendar year. Describe the income tax consequences to Ben in each of the following independent situations that take place in the current year:

a) On the first day of the tax year, Ben sells his partnership interest to Marilyn for $80,000 cash and the assumption by Marilyn of the appropriate share of partnership liabilities.


b) Ben dies after a lengthy illness on April 1of the current year. Ben’s brother immediately takes Ben’s place in the partnership.

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