Richard Meyer and two friends from law school recently formed Meyer 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' data-toggle="tooltip" data-placement="top" title="Click to view definition...">foreclosure matters. While some attorney friends have suggested that the 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 Meyer and Associates on this matter. {Hint: See §1402(a)(13) and Renkemeyer, Campbell & Weaver LLP v. Commissioner, 136 T.C. 137 (2011)}
> Briefly describe what is meant by the asset and liability or balance sheet approach taken by ASC 740 with respect to computing a corporation’s deferred tax provision.
> When does a temporary difference resulting from income create a taxable temporary difference? A deductible temporary difference?
> When does a temporary difference resulting from an expense (deduction) create a taxable temporary difference? A deductible temporary difference?
> How does a corporation’s computation of earnings and profits differ based on the tax treatment of a stock redemption to the shareholder (that is, as either a dividend or exchange)?
> True or False: All differences between book and taxable income, both permanent and temporary, affect a company’s effective tax rate. Explain.
> Georgio owns a 20 percent profits and capital interest in Rain Tree LLC. For the current year, Rain Tree had the following revenues, expenses, gains, and losses: Sales revenue………………………………………………………………………………………….$70,000 Gain on sale of land (§1231)…………………
> Turtle Creek Partnership had the following revenues, expenses, gains, losses, and distributions: Sales revenue……………………………………………………………………………………………$40,000 Long-term capital gains………………………………………………………………………………$2,000 Cost of goods sold……………………………………………………………
> Ashlee, Hiroki, Kate, and Albee LLC each own a 25 percent interest in Tally Industries LLC, which generates annual gross receipts of over $10 million. Ashlee, Hiroki, and Kate manage the business, but Albee LLC is a non-managing member. Although Tally In
> Ryan, Dahir, and Bill have operated Broken Feather LLC for the last four years using a calendar year-end. Each has a one-third interest. Since they began operating, their busy season has run from June through August, with 35 percent of their gross receip
> Rock Creek LLC was recently formed with the following members: What is the required taxable year-end for Rock Creek LLC? Name Tax Year End Capital/Profits % Mark Banks December 31 35% Highball Properties March 31 25% LLC Chavez Builders Inc. November
> Tall Tree LLC was recently formed with the following members: What is the required taxable year-end for Tall Tree LLC? Name Tax Year End Capital/Profits % Eddie Robinson December 31 40% Pitcher Lenders LLC June 30 25% Perry Homes Inc. October 31 35%
> Granite Slab LLC was recently formed with the following members: What is the required taxable year-end for Granite Slab LLC? Name Tax Year End Capital/Profits % Nelson Black December 31 22.0% Brittany Jones December 31 24.0% Lone Pine LLC June 30 4.5
> Last December 31, Ramon sold the 10 percent interest in the Del Sol Partnership that he had held for two years to Garrett for $400,000. Prior to selling his interest, Ramon’s basis in Del Sol was $200,000 which included a $100,000 share of nonrecourse de
> Dave LaCroix recently received a 10 percent capital and profits interest in Cirque Capital LLC in exchange for consulting services he provided. If Cirque Capital had paid an outsider to provide the advice, it would have deducted the payment as compensati
> What must a shareholder do to waive the family attribution rules in a complete redemption of stock?
> Mary and Scott formed a partnership that maintains its records on a calendar-year basis. The balance sheet of the MS Partnership at year-end is as follows: At the end of the current year, Kari will receive a one-third capital interest only in exchange fo
> Connie recently provided legal services to the Winterhaven LLC and received a 5 percent interest in the LLC as compensation. Winterhaven currently has $50,000 of accounts payable and no other debt. The current fair market value of Winterhaven’s capital i
> Reggie contributed $10,000 in cash and a capital asset he had held for three years with a fair market value of $20,000 and tax basis of $10,000 for a 5 percent capital and profits interest in Green Valley LLC. a. If Reggie sells his LLC interest thirteen
> Claude purchased raw land three years ago for $1,500,000 to develop into lots and sell to individuals planning to build their dream homes. Claude intended to treat this property as inventory, like his other development properties. Before completing the d
> Ansel purchased raw land three years ago for $200,000 to hold as an investment. After watching the value of the land drop to $150,000, he decided to contribute it to Mountainside Developers LLC in exchange for a 5 percent capital and profits interest. Mo
> Jim has decided to contribute some equipment he previously used in his sole proprietorship in exchange for a 10 percent profits and capital interest in Fast Choppers LLC. Jim originally paid $200,000 cash for the equipment. Since then, the tax basis in t
> Kevan, Jerry, and Dave formed Albee LLC. Jerry and Dave each contributed $245,000 in cash. Kevan contributed the following assets: *Nonrecourse debt secured by the land equals $210,000 Each member received a one-third capital and profits interest in the
> When High Horizon LLC was formed, Maude contributed the following assets in exchange for a 25 percent capital and profits interest in the LLC: *Nonrecourse debt secured by the land equals $160,000 James, Harold and Jenny each contributed $220,000 in cash
> Cosmo contributed land with a fair market value of $400,000 and a tax basis of $90,000 to the Y Mountain partnership in exchange for a 25 percent profits and capital interest in the partnership. The land is secured by $120,000 of nonrecourse debt. Other
> Harry and Sally formed the Evergreen partnership by contributing the following assets in exchange for a 50 percent capital and profits interest in the partnership: a. How much gain or loss will Harry recognize on the contribution? b. How much gain or los
> Maria has all of her stock in Mayan Corporation redeemed. Under what conditions will Maria treat the redemption as an exchange and recognize capital gain or loss?
> Laurel contributed equipment worth $200,000, purchased 10 months ago for $250,000 cash and used in her sole proprietorship, to Sand Creek LLC in exchange for a 15 percent profits and capital interest in the LLC. Laurel agreed to guarantee all $15,000 of
> Lance contributed investment property worth $500,000, purchased three years ago for $200,000 cash, to Cloud Peak LLC in exchange for an 85 percent profits and capital interest in the LLC. Cloud Peak owes $300,000 to its suppliers but has no other debts.
> Joseph contributed $22,000 in cash and equipment with a tax basis of $5,000 and a fair market value of $11,000 to Berry Hill Partnership in exchange for a partnership interest. a. What is Joseph’s tax basis in his partnership interest? b. What is Berry
> Ray and Chuck own 50 percent capital and profits interests in Alpine Properties LLC. Alpine builds and manages rental real estate, and Ray and Chuck each work full time (over 1000 hours per year) managing Alpine. Alpine’s debt (both at the beginning and
> Suki and Steve own 50 percent capital and profits interests in Lorinda LLC. Lorinda operates the local minor league baseball team and owns the stadium where the team plays. Although the debt incurred to build the stadium was paid off several years ago, L
> Jenkins has a one-third capital and profits interest in the Maverick General Partnership. On January 1, year 1, Maverick has $120,000 of general debt obligations and Jenkins has a $50,000 tax basis (including his share of Maverick’s debt) in his partners
> Farell is a member of Sierra Vista LLC. Although Sierra Vista is involved in a number of different business ventures, it is not currently involved in real estate either as an investor or as a developer. On January 1, year 1, Farell has a $100,000 tax bas
> Juan Diego began the year with a tax basis in his partnership interest of $50,000. During the year, he was allocated $20,000 of partnership ordinary business income, $70,000 of §1231 losses, $30,000 of short-term capital losses, and received a cash distr
> Jenna began the year with a tax basis of $45,000 in her partnership interest. Her share of partnership debt consists of $6,000 of recourse debt and $10,000 of nonrecourse debt at the beginning of the year and $6,000 of recourse debt and $13,000 of nonrec
> Alfonso began the year with a tax basis in his partnership interest of $30,000. His share of partnership debt at the beginning and end of the year consists of $4,000 of recourse debt and $6,000 of nonrecourse debt. During the year, he was allocated $40,0
> What are the criteria to meet the “not essentially equivalent to a dividend” change-in-stock-ownership test in a stock redemption?
> Laura Davis is a member in a limited liability company that has historically been profitable but is expecting to generate losses in the near future because of a weak local economy. In addition to the hours she works as an employee of a local business, sh
> Pam, Sergei, and Mercedes are all one-third partners in the capital and profits of Oak Grove General Partnership. Partnership debt is allocated among the partners in accordance with their capital and profits interests. In addition to their normal share o
> Oscar, Felix, and Marv are all one-third partners in the capital and profits of Eastside general partnership. In addition to their normal share of the partnership’s annual income, Oscar and Felix receive annual guaranteed payments of $7,000 to compensate
> Carmine was allocated the following items from the Piccolo LLC for last year: Ordinary business loss Nondeductible penalties Tax-exempt interest income Short-term capital gain Cash distributions Rank these items in terms of the order they should be appli
> Lane and Cal each own 50 percent of the profits and capital of High Yield LLC. High Yield owns a portfolio of taxable bonds and municipal bonds, and each year the portfolio generates approximately $10,000 of taxable interest and $10,000 of tax-exempt int
> This year, Alex’s distributive share from Eden Lakes Partnership includes $8,000 of interest income, $4,000 of net long-term capital gains, $2,000 net section 1231 gain from the sale of property used in the partnership’s trade or business, and $83,000 of
> This year, Darrel’s distributive share from Alcove Partnership includes $6,000 of interest income, $3,000 of dividend income, and $70,000 ordinary business income. a. Assume that Darrel materially participates in the partnership. How much of his distribu
> Jhumpa, Stewart, and Kelly are all one-third partners in the capital and profits of Firewalker general partnership. In addition to their normal share of the partnership’s annual income, Jhumpa and Stewart receive an annual guaranteed payment of $10,000 t
> On the last day of its current tax year, Buy Rite LLC received $300,000 when it sold a machine it had purchased for $200,000 three years ago to use in its business. At the time of the sale, the basis in the equipment had been reduced to $100,000 due to t
> Hoki Poki, a cash-method general partnership, recorded the following items for its current tax year: Rental real estate income…………………………………………………………………………..$2,000 Sales revenue……………………………………………………………………………………………$70,000 §1245 recapture income…………………………………
> What stock ownership tests must be met before a shareholder receives exchange treatment under the substantially disproportionate change-in-stock-ownership test in a stock redemption? Why is a change in stock ownership test used to determine the tax statu
> The partnership agreement of the G&P general partnership states that Gary will receive a guaranteed payment of $13,000, and that Gary and Prudence will share the remaining profits or losses in a 45/55 ratio. For year 1, the G&P partnership reports the fo
> What is a tax basis capital account, and what type of tax-related information does it provide?
> How does the amount of debt allocated to a partner affect the amount of gain a partner recognizes when contributing property secured by debt?
> What is recourse and nonrecourse debt, and how is each generally allocated to partners?
> What is inside basis and outside basis, and why are they relevant for taxing partnerships and partners?
> Under what circumstances is it possible for partners to recognize gain when contributing property to partnerships?
> What is the rationale for requiring partners to defer most gains and all losses when they contribute property to a partnership?
> What is a partnership interest, and what specific economic rights or entitlements are included with it?
> Compare and contrast the aggregate and entity concepts for taxing partnerships and their partners.
> In general, what causes a stock dividend to be taxable to the recipient?
> What types of business entities are taxed as flow-through entities?
> What is a flow-through entity, and what effect does this designation have on how business entities and their owners are taxed?
> Under what circumstances can partners with passive losses from partnerships deduct their passive losses?
> How do partners determine whether they are passive participants in partnerships when applying the passive activity loss limitation rules?
> In what order are the loss limitation rules applied to limit partner’s losses from partnerships?
> How do partners measure the amount they have at risk in the partnership?
> In what sense is the at-risk loss limitation rule more restrictive than the tax basis loss limitation rule?
> What happens to partnership losses allocated to partners in excess of the tax basis in their partnership interests?
> What hurdles (or limitations) must partners overcome before they can ultimately deduct partnership losses on their tax returns?
> What items will decrease a partner’s basis in her partnership interest?
> Why might a corporation issue a stock dividend to its shareholders?
> What items will increase a partner’s basis in her partnership interest?
> Why does a partner’s tax basis in her partnership need to be adjusted annually?
> In what situations do partners need to know the tax basis in their partnership interests?
> What are the basic tax-filing requirements imposed on partnerships?
> How much flexibility do partnerships have in allocating partnership items to partners?
> What challenges do LLCs face when deciding whether to treat their members’ shares of ordinary business income as self-employment income?
> How do general and limited partners treat their share of ordinary business income for self-employment tax purposes?
> What are guaranteed payments and how do partnerships and partners treat them for income and self-employment tax purposes?
> Is the character of partnership income/gains and expenses/losses determined at the partnership or partner level? Why?
> What are some common separately stated items, and why must they be separately stated to the partners?
> Amy is the sole shareholder of a corporation. Rather than have the corporation pay her a dividend, Amy decides to have the corporation declare a “bonus” at year-end and pay her tax-deductible compensation. What potential tax issue may arise in this situa
> What is a partnership’s ordinary business income (loss) and how is it calculated?
> When are partnerships eligible to use the cash method of accounting?
> Explain the least aggregate deferral test for determining a partnership’s year end and discuss when it applies.
> In what situation will there be a common year-end for the principal partners when there is no majority interest taxable year?
> If a partner with a taxable year-end of December 31 is in a partnership with a March 31 taxable year-end, how many months of deferral will the partner receive? Why?
> Why do you think partnerships, rather than the individual partners, are responsible for making most of the tax elections related to the operation of the partnership?
> How do partners who purchase a partnership interest determine the tax basis and holding period of their partnership interests?
> Distinguish between a capital interest and a profits interest, and explain how partners and partnerships treat when exchanging them for services provided.
> Aaron, Deanne, and Keon formed the Blue Bell General Partnership at the beginning of the current year. Aaron and Deanne each contributed $110,000 and Keon transferred an acre of undeveloped land to the partnership. The land had a tax basis of $70,000 and
> LeBron, Dennis, and Susan formed the Bar T LLC at the beginning of the current year. LeBron and Dennis each contributed $200,000 and Susan transferred several acres of agricultural land she had purchased two years earlier to the LLC. The land had a tax b
> A shareholder receives appreciated noncash property in a corporate distribution and assumes a liability attached to the property. How does this assumption affect the amount of gain the corporation recognizes? From the corporation’s perspective, does it m
> What was IBM’s accounting effective tax rate for 2014? What items caused the company’s accounting effective tax rate to differ from the “hypothetical” tax rate of 35 percent? What was the company’s cash effective tax rate for 2014? What factors cause a c
> Assume that on January 1, year 1, ABC, Inc. issued 5,000 stock options with an estimated value of $10 per option. Each option entitles the owner to purchase one share of ABC stock for $25 a share (the per share price of ABC stock on January 1, year 1 whe
> On July 1 of year 1, Riverside, Corp. (RC), a calendar-year taxpayer, acquired the assets of another business in a taxable acquisition. When the purchase price was allocated to the assets purchased, RC determined it had a basis of $1,200,000 in goodwill
> JDog corporation owns stock in Oscar, Inc. JDog received a $10,000 dividend from Oscar, Inc. What temporary book-tax difference associated with the dividend will JDog report for the year in the following alternative scenarios (income difference only - ig
> Assume Maple Corp. has just completed the third year of its existence (year 3). The table below indicates Maple’s ending book inventory for each year and the additional §263A costs it was required to include in its ending inventory. Maple immediately exp
> On its year 1 financial statements, Seatax Corporation, an accrual-method taxpayer, reported federal income tax expense of $570,000. On its year 1 tax return, it reported a tax liability of $650,000. During year 1, Seatax made estimated tax payments of $
> ELS corporation is about to begin its sixth year of existence. Assume that ELS reported gross receipts for each of its first five years of existence for scenarios A, B, and C as follows: a. In what years is ELS allowed to use the cash method of accountin
> ATW corporation currently uses the FIFO method of accounting for its inventory for book and tax purposes. Its beginning inventory for the current year was $8,000,000. Its ending inventory for the current year was $7,000,000. If ATW had been using the LIF
> In year 1, Lazy Corporation reported a $500,000 net operating loss for regular tax purposes and a $450,000 net operating loss for alternative minimum tax purposes (called an alternative tax net operating loss). In year 2, Lazy reported $450,000 of taxabl
