Partnership Taxation
Spring 2018
Bogdanski
  

FINAL EXAMINATION

(Three hours)

INSTRUCTIONS

            This examination consists of three essay questions, each of which will be given equal weight in determining grades. Three hours will be permitted for this examination. At the end of the three hours, you must turn in this set of essay questions in the original envelope in which this set came. 

            If you are using a computer, then unless you have been otherwise expressly authorized by the law school, you must submit your answers using Examplify. If you are writing answers by hand, you must write them all in the bluebook(s) you have been provided, and return the bluebook(s) along with this set of questions in the envelope. 

            If you wish to submit handwritten partnership balance sheets with your answers, you must (1) enclose them in the envelope, clearly labeled with your exam number and the question to which they relate, and (2) refer to them in your answers. No credit will be given for anything written on this set of questions. Only your electronic answer file or bluebook(s), and any enclosed balance sheets, will be graded. 

            Pay close attention to the final portion, or “call,” of each question. Failure to respond to the matters called for will result in a low score for the question. On the other hand, discussion of matters outside the scope of the call of the question will not receive credit. Be sure to explain as thoroughly as possible your answers to the questions posed. Your reasoning, discussion, and analysis are often as important as any particular conclusion you reach.

            The suggested time limit for each question is one hour. Experience has shown that failure to budget one's time according to this limit can result in a drastic lowering of one's overall grade on this examination.

            Unless otherwise instructed, you should assume that all individual partners and all partnerships described in the questions use the calendar year as their taxable year for federal income tax purposes. Any references to “the Code” are to the Internal Revenue Code of 1986, as amended. 

QUESTION ONE

(One hour)

            Arthur, a wealthy retired individual, and Corp, a C corporation, form a limited partnership, Limco, to conduct a seasonal business. Corp is the sole general partner of Limco, and Arthur is the sole limited partner. All of Corp’s outstanding stock is owned by its chief executive, an individual named Sani. Arthur and Sani are not related to each other. Corp’s taxable year is the year ending June 30.

            To form the partnership, Arthur contributes to Limco $40,000 cash, plus an account receivable from Klint, a client for whom Arthur recently did some consulting work. The fair market value and face amount of the receivable are both $60,000, and its adjusted basis in the hands of Arthur is zero. Upon Arthur’s contributions to Limco, Arthur’s initial capital account is set up on the partnership books as $100,000. The Limco partnership agreement allocates to Arthur 60 percent of the partnership income, loss, deductions, and credits. The partnership agreement complies with the requirements for substantial economic effect contained in the regulations promulgated under section 704(b) of the Code.

            Also to form the partnership, Corp contributes to Limco some inventory that Corp had been holding for sale to its customers. The fair market value of the contributed inventory is $50,000, and its adjusted basis in the hands of Corp immediately before the contribution is $20,000. Upon Corp’s contribution to Limco, Corp’s initial capital account is set up on the partnership books as $50,000. The Limco partnership agreement allocates to Corp 40 percent of the partnership income, loss, deductions, and credits.

            A few months after it is formed, Limco collects from Klint $60,000 cash on the receivable that had been contributed by Arthur. At about the same time, Limco sells the inventory contributed by Corp, in bulk, for $45,000 cash. 

            Answer each of the following questions. In each question, assume that Limco does not elect to be taxed as an association.

A.        (75 percent of question grade) What are the federal income tax consequences of the transactions just described – to Arthur, Corp, and Limco – with and without all available elections? Be sure to discuss the amount, timing, and character (capital or ordinary) of each item of income, gain, deduction, or loss to each party; and each party’s basis in the property or interest which that party holds (actually or constructively), at each stage of the transactions.

B.        (25 percent of question grade) What taxable year or years may Limco adopt, with and without all available elections?

            Discuss.

(End of Question 1) 

QUESTION TWO

(One hour)

            Mai, Nick, and Oba, all individuals, form a general partnership, Genco. Each partner contributes $20,000 cash in exchange for his or her partnership interest. Genco borrows $40,000 from a bank, in an unsecured, recourse loan, to finance its early operations.

            The Genco partnership agreement calls for the income, loss, deductions, and credits of Genco to be allocated 25 percent to Mai, 25 percent to Nick, and 50 percent to Oba. The agreement provides that (1) the partnership will maintain capital accounts in accordance with the regulations promulgated under section 704(b) of the Code, and (2) upon liquidation of any partner’s interest (including upon any liquidation of the partnership), Genco will distribute to any partner whose interest is being liquidated cash equal to the capital account associated with the interest being liquidated. 

            The partnership agreement also provides that upon liquidation of the interest of Mai or Nick, if either has a deficit balance in that partner’s capital account, the partner in question will restore the negative balance by paying cash to the partnership. The agreement contains no such agreement by Oba, but Oba does agree to a “qualified income offset,” as such term is defined in the regulations promulgated under section 704(b) of the Code.

            In the first year of its operations, Genco has gross income of $60,000 and deductions of $100,000. In the second year of its operations, Genco has gross income of $60,000 and deductions of $70,000. Genco makes no distributions to partners in its first several years of existence.

            Assuming that Genco does not elect to be taxed as an association, what are the federal income tax consequences of the transactions just described – to Mai, Nick, Oba, and Genco – with and without all available elections? Be sure to discuss the amount, timing, and character (capital or ordinary) of each item of income, gain, deduction, or loss to each party; and each party’s basis in the property or interest which that party holds (actually or constructively), at each stage of the transactions.

            Explain.

(End of Question 2)

QUESTION THREE

(One hour)

            Xco is a limited liability company. It has three members, all of whom are individuals: Delfina, Emilio, and Faye. The operating agreement of Xco allocates all items of income, deduction, loss, and credit equally among the three members. This allocation has substantial economic effect.

            Immediately before the distribution described next, the balance sheet of Xco is as follows:

None of the assets were contributed to Xco by any partner.

            In an operating distribution, Xco distributes all of the inventory to Faye. The distribution reduces Faye’s capital account, so that the capital account has a fair market value of $15,000 after the distribution. After the distribution, Faye has a one-fifth interest in the remaining assets of Xco.

            The next year, Faye, who is a dentist and not a dealer in property of any kind, sells the distributed inventory to an unrelated third party for $17,500.

            Assuming that Xco does not elect to be taxed as an association, what are the federal income tax consequences of the transactions just described – to Delfina, Emilio, Faye, and Xco – with and without all available elections? Be sure to discuss the amount, timing, and character (capital or ordinary) of each item of income, gain, deduction, or loss to each party; and each party’s basis in the property or interest which that party holds (actually or constructively), at each stage of the transactions.

            Discuss.

(End of examination)

Created by: bojack@lclark.edu
Update:   7 Apr 19
Expires:  31 Aug 20