Question 1. On the formation of a partnership, when might a “disguised sale” occur? How can this treatment be a

1. On the formation of a partnership, when might a “disguised sale” occur? How can this treatment be avoided?

2. Your client owns a parcel of land that has depreciated in value. He wants to know if there is a way he can contribute the property to his partnership, have the partnership sell the property, and convert the existing capital loss into an ordinary loss. He also wants to know if part of the loss would be allocated to his other partners. What is your reaction?

3. What are “syndication costs” and how are they treated for tax purposes?

4. Harry and Sally are considering forming a partnership. Both taxpayers use the calendar year and are cash basis taxpayers. The partnership will not be a tax shelter. The partners are uncertain as to whether the partnership should use the cash or accrual method of accounting. Also, the idea of a tax deferral in the first year of operations has led them to consider using a June 30 fiscal year-end for the partnership.

As their tax adviser, identify the issues that must be considered in selecting an accounting method and tax year for the partnership.

5. The MOG Partnership reports ordinary income of $60,000, long-term capital gain of $12,000, and tax-exempt income of $12,000. The partnership agreement provides that Molly will receive all long-term capital gains and George will receive all tax-exempt interest income. Their allocation of ordinary income will be reduced accordingly, and Olivia will be allocated a proportionately greater share of ordinary income. (In other words, each partner will receive allocations totaling 1/3 of the total $84,000 of partnership income.) This allocation was agreed upon because Molly and George are in a high marginal tax bracket and Olivia is in a low marginal tax bracket.

a. Describe the elements that must be included in a partnership agreement in order for an allocation to have “economic effect.”

b. Discuss whether or not the MOG allocation would be permitted and provide your reasoning.

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