Question 71. [LO 5] Pam, Sergei, and Mercedes are all one-third partners in the capital and

71. [LO 5] 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 of the partnership’s annual income, Pam and Sergei receive annual guaranteed payments of $20,000 to compensate them for additional services they provide. Oak Grove’s income statement for the current year reflects the following revenues and expenses:

Sales revenue $476,700

Dividend income 6,600

§1231 losses (3,800)

Cost of goods sold (245,000)

Employee wages (92,000)

Depreciation expense (31,000)

Guaranteed payments (40,000)

Miscellaneous expenses (11,500)

Overall net income $ 60,000

In addition, Oak Grove owed creditors $90,000 at the beginning and $150,000 at the end of the year, and Pam, Sergei and Mercedes had a tax basis of $50,000 in their interests at the beginning of the year. Also, Sergei and Mercedes agreed to increase Pam’s capital and profits interest from 33.3 percent to 40 percent at the end of the tax year in exchange for additional services she provided to the partnership. The liquidation value of the additional capital interest Pam received at the end of the tax year is $40,000.

a. What tax basis do the partners have in their partnership interests at the end of the year?

b. If, in addition to the expenses listed above, the partnership donated $12,000 to a political campaign, what tax basis do the partners have in their partnership interests at the end of the year assuming the liquidation value of the additional capital interest Pam receives at the end of the year remains at $40,000?

a.

72. [LO 6] {Research} 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, she currently spends approximately 150 hours per year helping to manage the LLC. Other LLC members each work approximately 175 hours per year in the LLC, and the time Laura and other members spend managing the LLC has remained constant since she joined the company three years ago. Laura’s tax basis and amount at-risk are large compared to her share of projected losses; however, she is concerned that her ability to deduct her share of the projected losses will be limited by the passive activity loss rules.

a. As an LLC member, will Laura’s share of losses be presumed to be passive as they are for limited partners? Why or why not? [Hint: See §469(h)(2), Garnett v. Commissioner, 132 T.C. 368 (2009), and Prop. Reg. § 1.469-5(e)(3)(i).]

b. Assuming Laura’s losses are not presumed to be passive, is she devoting sufficient time to the LLC to be considered a material participant? Why or why not?

c. What would you recommend to Laura to help her achieve a more favorable tax outcome?

73. [LO 6] 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 $40,000 of partnership ordinary business loss. Alfonso does not materially participate in this partnership and he has $1,000 of passive income from other sources.

a. How much of Alfonso’s loss is limited by his tax basis?

b. How much of Alfonso’s loss is limited by his at-risk amount?

c. How much of Alfonso’s loss is limited by the passive activity loss rules?

74. [LO 5, 6] {Research} 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 distribution of $50,000.

a. What items related to these allocations does Juan Diego actually report on his tax return for the year? {Hint:See Reg. §1.704-1(d)(2) and Rev. Rul. 66-94.}

b. If any deductions or losses are limited, what are the carryover amounts and what is their character?{Hint:See Reg. §1.704-1(d).}

75. [LO 6] 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 basis in his LLC interest that includes his $90,000 share of Sierra Vista’s general debt obligations. By the end of the year, Farell’s share of Sierra Vista’s general debt obligations has increased to $100,000. Because of the time he spends in other endeavors, Farell does not materially participate in Sierra Vista. His share of the Sierra Vista losses for year 1 is $120,000. As a partner in the Riverwoods Partnership, he also has year 1 Schedule K-1 passive income of $5,000.

a. Determine how much of the Sierra Vista loss Farell will currently be able to deduct on his tax return for year 1, and list the losses suspended due to tax basis, at-risk, and passive activity loss limitations.

b. Assuming Farrell’s Riverwoods K-1 indicates passive income of $30,000, determine how much of the Sierra Vista loss he will ultimately be able to deduct on his tax return for year 1 and list the losses suspended due to tax basis, at-risk, and passive activity loss limitations.

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