1. A, B and C are the members of All, LLC, a limited liability company that is treated as a partnership for federal income tax purposes. All, LLC is contemplating taking a loan of $90,000 from a local Maryland bank to finance acquisition of the newest generation of river rafts for use in its operation on the Middle River, not asking for personal guarantees. After careful review, A does not see where the loan agreement limits her personal exposure and demands that B and C indemnify her from liability on the loan. B, in turn, demands an indemnity from C with respect to any amount that she is required to pay to A (although not with respect to any amount she is required to pay to the bank). If the requested indemnities are given, what are the partners' respective shares of the bank loan allocated to their outside basis? Also: Indicate how the loan should be considered allocated - recourse or non-recourse. Explain why.
2. Richard and two friends from law school recently formed Richard and Associates as a limited liability partnership (LLP). Income from the partnership will be split equally among the partners. The partnership will generate fee income primarily from representing clients in bankruptcy and foreclosure matters. While some attorney friends have suggested that partners' earnings will be self-employment income, other attorneys they know from their local bar association meetings claim just the opposite.
After examining relevant authority, explain how you would advise Richard and Associates on this matter.
a) Is Richard and Assoc proposed special allocation acceptable under current tax rules? Why or why not?
b) If the IRS ultimately disagrees with Richard and Assoc special allocation, how will it likely reallocate the taxable and tax-exempt interest among the members?
3. J has a one-third capital and profits interest in the General Partnership. On January 1, year 1, General has $120,000 of general debt obligations, and J has a $50,000 tax basis (including his share of General's debt) in his partnership interest. During the year, General incurred a $30,000 nonrecourse debt that is not secured by real estate. Because General is a rental real estate partnership, J is deemed to be a passive participant in General. His share of the General losses for year 1 is $75,000. J is not involved in any other passive activities, and this is the first year he has been allocated losses from General.
a) Determine how much of the General loss J will currently be able to deduct on his tax return for year 1, and list the losses suspended due to tax basis, at-risk, and passive activity loss limitations.
b) If J sells his interest on January 1, year 2, what happens to his suspended losses from year 1?