Assignment
Question 1
A and B form the AB partnership on January 1, 2015. A contributes real property (10 year straight-line recovery property) she has held for many years with a basis of $500,000 and fair market value of $1,000,000 in exchange for her partnership interest and while B contributes $250,000 in cash in exchange for her partnership interest. A and B have agreed to share profits and losses from the partnership equally but that AB shall allocate 90% of all depreciation deductions from the real property to A. AB partnership elects a December 31 tax year and AB had the following income and expenses during its calendar tax year which ended December 31 of the current year:
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Gross Receipts inventory sales
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550,000
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COGS
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(35000)
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Salaries to Non partners
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(15000)
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Depreciation
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(50000)
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Advertising
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(15000)
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• Create AB partnership's balance sheet as of formation on January 1, 2015 in including partners' basis and capital accounts.
• Assuming all special allocations have economic effect, how and when will AB, and A and B report the income and who will be liable for the taxes?
• What the tax consequences to A and B from the first year of operation?
• Summarize the regulatory requirements which AB must satisfy in order for the allocation of depreciation to have economic effect.
• How would your answer change, if at all, in (b) and (c) if it was determined that the allocation of depreciation to A lacked substantial economic effect. Explain your answer.
• Assume the facts of (b) and (c), if in 2016 AB's non separately stated income equals its expenses (not including separately stated depreciation) except that AB sells the real estate for $1,000,000 what are the tax consequences to AB, A and B? Explain you answer.
Question 2
A and B form AB corporation on January 1, 2015 and commence operations with the intent that the corporation will be treated as subchapter S corporation for federal tax purposes. A contributes real property (10 year straight-line recovery property) she has held for many years with a basis of $500,000 and fair market value of $1,000,000 in exchange for her 80 shares and while B contributes $250,000 in cash in exchange for her 20 shares in the corporation.
AB elects a December 31 tax year and AB had the following income and expenses during its calendar tax year which ended December 31 of the current year:
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Business income
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550,000
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Tax exempt interest
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5000
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Salaries
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(15000)
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Depreciation
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(50000)
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Property Taxes
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(15000)
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Supplies
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(15,000)
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Interest expense paid on a margin account maintained with AB's stock broker
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(6000)
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• Summarize the requirements that AB must satisfy in order to be treated as an S-Corporation under federal law.
• Assuming AB qualifies as an S-corporation for 2015, how will AB, A and B report the income and loss items?
• What is A and B's basis in their shares at the end of 2015? Explain your answer.
• If in 2016 AB's income equals its expenses except that AB sells the real property contributed by A for $1,000,000, how will AB, A and B report that event? Explain your answer.