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Mike and Melissa form the equal MM Partnership. Melissa contributes the assets of her sole proprietorship (value of $140,000, adjusted basis of $115,000). Mike sells his land (fair market value of $100,000, adjusted basis of $120,000) to a third party for $100,000 and then contributes that cash as well as an additional $40,000 to the partnership. The partnership locates equivalent land that it purchases for $110,000.

How do these changes affect the tax and economic result for Mike and the partnership?

Mike has a realized loss of $______ on the sale of the land of which $_____ is recognized. Mike recognizes no gain or loss on his contribution to the partnership and has a basis of $_____ in his partnership interest. The partnership incurs a $_____ economic cost when it purchases equivalent land instead of receiving the land as a contribution from Mike.

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Casey Durgan
Casey DurganLv2
28 Sep 2019

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Adam, Linda, and Mike are considering starting a bakery togetherin Burlington, VT called Vermont Bakes. They have come to youlooking for advice on the advantages and disadvantages of eachbusiness entity. Adam and Linda will each own 40% of the businessand Mike will own 20%. Adam would like to contribute cash of$40,000, Linda will contribute land with an FMV of $60,000 and anadjusted basis of $25,000. Mike will contribute services of$20,000. In addition, Linda receives $20,000 of cash. Adam, Linda& Mike have indicated that they would like to takedistributions of profits from Vermont Bakes each year in additionto compensation. They plan to pay themselves compensation of$45,000 each and they project that Vermont Bakes will have $10,000in profits each year that they would like to distribute based ontheir ownership percentages. The distributions are as follows:Adjusted Basis FMV Adam - Equipment $2,000 $4,000 Linda - Cash$4,000 $4,000 Mike - Cash $2,000 $2,000 In a concise, well-writtenessay (do not use bullet points - write out your answers inparagraph form): • Explain the advantages and disadvantages of eachentity type (C Corporation, S Corporation, Partnership/LLC),including both tax and non-tax considerations we discussed inclass. Include in your discussion an explanation of entities aretaxed at the entity level and which offer flow through taxation.Explain how are income and losses aggregated when they flow throughto the shareholder/member/partner including the effect this has onthe owner's basis in the entity (if any). • Explain the taxtreatment of property contributions from theshareholder/member/partner to each type entity upon formation.including a discussion of the basis the entity would take in thecontributed property and the basis the shareholder/member/ownerwould have in the entity as a result of the contribution. oCalculate Adam, Linda & Mike's basis in their ownershipinterest if they were part of a prearranged plan to incorporateVermont Bakes as a C corporation. Calculate the basis the Ccorporation would take in the property contributed by Adam, Linda& Mike. Calculate the realized and recognized gain to Adam,Linda & Mike on their contribution to the C corporation (ifany). o Calculate Adam, Linda & Mike's basis in their ownershipinterest if they decided to form Vermont Bakes as a partnership.Calculate the basis the partnership would take in the propertycontributed by Adam, Linda & Mike. Calculate the realized andrecognized gain to Adam, Linda & Mike on their contribution tothe partnership (if any). • Explain the tax treatment of cash andproperty distributions/dividends to a shareholder/member/partner ofeach type of entity. Include in your discussion an explanation ofthe concepts of E&P and AAA and the purpose of thosecalculations. o Calculate Adam's basis in the distributed propertyassuming Vermont Bakes is a C Corporation and indicate whether theproperty distribution would result in gain or loss recognition.Assume Adam's basis just prior to the distribution was $1,000.Would your answer change if this was a liquidating distribution? oCalculate Adam's basis in the distributed property assuming VermontBakes is a partnership and indicate whether the propertydistribution would result in gain or loss recognition. AssumeAdam's basis just prior to the distribution was $1,000. Would youranswer change if this was a liquidating distribution? • ProvideVermont Bakes with a recommendation on which entity you think wouldbest suit their needs including the justification for yourrecommendation.

Gary acquired a 30% interest in the Woo General Partnership bycontributing investment land with an adjusted basis of $30,000 anda fair market value of $100,000. Gary originally acquired the landon 2/2/1991. The land was subject to a $40,000 mortgage which wasassumed by the Woo partnership as part of the deal.

Ewe Crane acquired a 70% interest in the partnership in exchangefor a capital contribution of $140,000 in cash.

Both capital contribution occurred on 1 January 2014

The partnership used the land contributed by Gary to operate aparking lot

During 2014, the partnership had net rental income of$70,000

In addition, on 13 April 2014, the land was sold for a totalsales price of @125,000 ($85,000 of cash, and the buyer assumed the$40,000 mortgage).

During 2014, the partnership distributed #30,000 of cash($90,000 of Gary and 421,000 to Ewe.)

The partnership had $60,000 of recourse liabilities as of12/31/2014 (the partnership borrowed $60,000 to provide funds foroperations and possible expansion.)

Required:

How much and what type of income and/or loss must Gary reportfrom 2014 partnership activity?

What is Gary’s basis in the partnership as of 12/31/2014?

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a. What is the amount and character of any gain or loss toLonnie?

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c.What is the amount and character of Lonnie’s gain or loss ifhe holds the land for 13 months as investment property and thensells it for $120,000?

d.What is the amount and character of Lonnie’s gain or loss ifhe places the land into service in his sole proprietorship and thensells it 13 months later for $120,000?

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