ACCT 5308 – Partnership Tax Law

Dr. John J. Masselli

Group Case #1- Due October 4 / 6, 2016

WalterHeisenberg, JessePankmon, and GusFreung form the Heisenberg and Associates-CPAs, a general partnership, on January 1, 2016. All were formerly sole proprietors on the cash basis. Walter contributed cash of $50,000 and accounts receivable worth $50,000 and personal use vehicle with adjusted basis of $38,000 and a FMV of $25,000. Jesse contributed cash of $150,000, land with a FMV of $80,000 and an adjusted basis of $15,000 along with a building with an adjusted basis of $80,000 and a FMV of $320,000 subject to a seller financed non-recourse debt of $280,000 (encumbered by both the land and the building combined). The building has 8 remaining years of depreciation. Gus contributed accounts receivable of $140,000 and office equipment used in his former practice with an adjusted basis of $30,000 and a FMV of $180,000. The partnership also assumed a$110,000 note borrowed from a bank with recourse. The office equipment has 3 remaining years of depreciation while the vehicle is depreciated over 4 years. For purposes of calculating book and tax depreciation use the pure straight-line method with no half year convention. Further assume the starting date for depreciation was 1/1/16.

The investors agree to share profits in accordance with original capital interests but losses and book depreciation are allocated 60% to Walter, 30% to Jesse and 10% to Gus. The partnership is a cash basis partnership. During the year 2016, the partnership incurred an ordinary book and tax cash loss of $95,000. Please calculate the book depreciation using the information provided above and the FMV figures used to create the book balance sheet. Allocate book depreciation using loss sharing ratios. Tax depreciation on the building is $10,000 of which $8,500 is allocated to Walterand $1,500 is allocated to Gus. Tax depreciation on the vehicle and office equipment is $15,000 and is allocated to each partner in accordance with loss sharing ratios. They also paid $10,000of principal on the recourse loan and $30,000 on the non-recourse debt. Assume that none of the accounts receivable contributed have been collected during the year.

  1. Determine each investor’s economic interest in the company at the inception of the partnership and their beginning tax bases. What is the gain or loss recognition, if any, to the partners on the formation of the partnership? What is the gain or loss recognition to the partnership on the formation?
  1. Prepare book and tax balance sheets for the partnership at the end of 2016.
  1. Compute each partner’ basis in the partnership interest at the end of 2016.
  1. How much loss can each partner deduct on his/her tax return? How much can be carried over to a future tax year. What type of carryover is it? (e.g., 704(d) or 465.) Explain.