Question

The Sparrow Partnership plans to distribute $200,000 cash to its partners at the end of the year. Marjorie is a 40 percent partner and would receive $80,000. Her basis in the partnership is only $10,000, however, so she would recognize a $70,000 gain if she receives the proposed cash distribution.
Marjorie has asked Sparrow instead to purchase a parcel of land that she has found, on which she will build her retirement residence. The partnership then will distribute that land to her. Under the partnership distribution rules, Marjorie would take a $10,000 basis in the land worth $80,000. Her basis in the partnership would be reduced to $0, but recognition of the $70,000 gain is deferred.
Do you think this is an appropriate transaction? Explain your conclusion in an e-mail to your instructor.
1. Ryan Ross (111-11-1111), Oscar Oleander (222-22-2222), Clark Carey (333-33-3333), and Kim Kardigan (444-44-4444) are equal members in ROCK the Ages LLC. ROCK serves as agent and manager for prominent musicians in the Los Angeles area. The LLC's Fed eral ID number is 55-5555555. It uses the cash basis and a calendar tax year, and it began operations on January 1, 2002. Its current address is 6102 Wilshire Boulevard, Suite 2100, Los Angeles, CA 90036. ROCK was the force behind such music icons as Rhiannon and Burgundy 5, and it has had a very profitable year. The following information was taken from the LLC's income statement for the current year.
Revenues
Fees and commissions............... $4,800,000
Taxable interest income from bank deposits..... 1,600
Tax-exempt interest............... 3,200
Net gains on stock sales............... 4,000
Total revenues ................. $4,808,800
Expenses
Advertising and public relations........... $ 380,000
Charitable contributions.............. 28,000
Section 179 expense ............... 20,000
Employee salaries and wages .......... 1,000,000
Guaranteed payment, Ryan Ross, office manager... 800,000
Guaranteed payment, other members........ 600,000
Entertainment, subject to 50% disallowance.... 200,000
Travel..................... 320,000
Legal and accounting fees.............. 132,000
Office rentals paid................. 80,000
Interest expense on line of credit for operations.... 10,000
Insurance premiums ............... 52,000
Office expense ............... 200,000
Payroll taxes .................. 92,000
Utilities................... 54,800
Total expenses ............... $3,968,800
During the past few years, ROCK has taken advantage of bonus depreciation and § 179 deductions and fully remodeled the premises and upgraded its leasehold improvements. This year, ROCK wrapped up its remodeling with the purchase of $20,000 of office furniture, for which it will claim a § 179 deduction. ROCK uses the same cost recovery methods for both tax and financial purposes. There is no depreciation adjustment for alternative minimum tax purposes.
ROCK invests much of its excess cash in non-dividend-paying growth stocks and tax-exempt securities. During the year, the LLC sold two securities. On June 15, 2013, ROCK purchased 1,000 shares of Tech, Inc. stock for $100,000; it sold those shares on December 15, 2013, for $80,000. On March 15, 2012, ROCK purchased 2,000 shares of BioLabs, Inc. stock for $136,000; it sold those shares for $160,000 on December 15, 2013. These transactions were reported to the IRS on Forms 1099-B;
ROCK's basis in these shares was reported on the form.
Net income per books is $840,000. The firm's activities do not constitute "qualified production activities" for purposes of the § 199 deduction. On January 1, 2013, the members' capital accounts equaled $200,000 each. No additional capital contributions were made in 2013. In addition to their guaranteed payments, each member withdrew $250,000 cash during the year.
ROCK’s book balance sheet as of December 31, 2013, is as follows.
All debt is shared equally by the members. Each member has personally guaranteed the debt of the LLC.
The business code for “Agents and Managers for Artists, Athletes, Entertainers, and
Other Public Figures” is 711410. The LLC’s Form 1065 was prepared by Ryan Ross and sent to the Ogden, UTIRS Service Center. All of the owners a reactive in ROCK’s operations.
a. Prepare pages 1, 4, and 5 of the Form 1065 for ROCK the Ages LLC.
b. If you are using tax return preparation software, prepare Form 4562 and Schedule D.
c. PrepareScheduleK-1forRyanRoss,15520W.EarlsonStreet,PacificPalisades,CA90272.


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