Judy and Karen have always wanted to run a specialty printing company that designs and prints wedding invitations and other high-end products. They approach their high school classmate Earle to ask him to dip into his trust fund to invest in their dream. Thus is born Elegance sur Papier LLC, a limited liability company taxed as a partnership in which Earle owns 80% of the membership interests and Judy and Karen own 10% each. Earle insists on receiving an allocation of 99% of the tax losses from the first three years of operation, to be offset by an allocation of 99% of profits, when realized, up to the amount of losses previously allocated. All profits thereafter will be split among the partners in accordance with their percentage interests. After a rocky start, the company prospers. By the end of the sixth year of operation, Earle's chargeback is complete and the partnership is well on its way to an elegant future. Assume that all special allocations in the operating agreement have economic effect. If the IRS challenges these allocations, what will be the result?

a) The special allocations will be respected, because they do not violate any substantiality test.

b) The presumption employed in the transitory test is that the actual results achieved by the partnership were strongly likely to be achieved from the outset. Therefore, the special allocations will be reversed because they fail to meet the transitory test.

c) The special allocations will be reversed, because the value-equals­ basis presumption applies only to a chargeback of depreciation from gain on the sale of the depreciated asset, which is not the nature of the chargeback in this case.

d) The special allocations will be reversed, because the entire chargeback occurs within the three-year period between the close of year 3 and the close of year 6, which violates the five-year safe harbor in the transitory test.

8.7 On November 28, Maurice acquires a 10% interest as a limited partner in the Greenbriar Partnership LP by making a capital contribution to the partnership. At the time of Maurice's purchase, Greenbriar owns common stock in two portfolio companies, both C corporations for tax purposes, as follows:

Tax Basis	Fair Market Value
Corp A	$1,000,000	$4,500,000
Corp B	$500,000	$2750,000

Greenbriar acquired both investments by cash purchase several years ago and both are revalued on the books of the partnership in connection with Maurice's purchase. Two weeks later, Greenbriar sells its investment in Corp A for $5,000,000. Assuming it has not made an election under section 754, What is the amount and character of the tax gain that Greenbriar will allocate to Maurice on this sale?

a) $400,000 of long-term capital gain

b) $400,000 of short-term capital

c) $50,000 of long-term capital gain

d) $50,000 of short-term capital gain

Answer rating: 100% (QA)

c 50000 of longterm capital gain formula and working 5000000 1000000 4000000 ... View the full answer