Well, it's been a busy day in your office. Another of your 'colorful' clients has come in with tax problems seeking your advice.
Tony Stark has had a bad day. As Iron Man he was defeated by Batroc ze Lepair (he talks with a bad accent, basically just leaps around and is considered a joke villain, hence Tony's depression).
Tony is a general partner in "Avenge This". As he is usually loaded (financially and otherwise), he bankrolled most of the operation and owns 40% of the capital and profit interest in the firm. However, this is mainly a services organization (super-heroing is very labor intensive). The partners never had a partnership agreement. Hank Pym was supposed to see to it but they canned him before got started when they found out he was using partnership resources to develop Ultron (no, it wasn't Stark, he was slandered in the movie). Excess funds, as available, are invested and produce dividends, capital gains and tax-exempt income depending upon the investment.
The partnership's balance sheet on November 1was as follows:
Basis FMV
Cash $ 60,000 $ 60,000
Equipment* $ 100,000 $ 120,000
A/R $ 0 $ 100,000
$ 160,000 $ 280,000
Liabilities $ 80,000 $ 80,000
Partnership Equity
Tony Stark $ 32,000 $ 80,000
Steve Rogers $ 24,000 $ 60,000
Bruce Banner $ 24,000 $ 60,000
$ 80,000 $ 200,000
*Armor suits, shields, quinjets, etc.
Tony has decided to retire at the end of the month (the partnership is on a calendar year). The partnership has agreed to liquidate his interest in exchange for $90,000 (representing his share of partnership assets) and 20% of the partnership profits for the next five years. Tony's outside basis-as of the meeting date-is $32,000.
The partnership estimates it will have $60,000 in profits as of the end of the month, but are unsure about December. (profits have not been posted yet to the balance sheet).There may be a big contract coming in from Shield in December to take out a Hydra base with a big profit, otherwise, as they usually take the holidays off, there would be a deficit.
Tony asks:
How will he report the principal payments (capital gain, ordinary income and why)? What is included?
How should he report the future payments? Should he consider something different?
What should he consider as to this year's income?
His partners came along. They ask:
does Tony's retirement have any effect on the partnership's tax reporting? That is how should they report this year's income?
Does this affect their inside asset basis in any way (no § 754 election is in place)?
Should they consider a § 754 election and why or why not?
How do they report the retirement payments?
Can they deduct any of the retirement payments to Tony? Could they renegotiate some payments so they would be deductible?