Chapter 20 Homework

Solutions

41. [LO 2] Cosmo contributed land with a fair market value of $400,000 and a tax basis of
$90,000 to the Y Mountain partnership in exchange for a 25 percent profits and capital
interest in the partnership. The land is secured by $120,000 of nonrecourse debt. Other than
this nonrecourse debt, Y Mountain partnership does not have any debt.
a. How much gain will Cosmo recognize from the contribution?
b. What is Cosmos tax basis in his partnership interest?

a. $0.
As reflected in the table below, Cosmo does not recognize any gain because the
$120,000 of cash he is deemed to receive from debt relief does not exceed his basis in
Y Mountain prior to this deemed distribution.

Description

Cosmo

Explanation

(1) Basis in contributed Land

$90,000

(2) Nonrecourse mortgage in

$30,000 Nonrecourse

excess of basis in contributed

debt > basis is

land

allocated only
to Cosmo

(3) Remaining nonrecourse

$22,500 25% x

mortgage
Basis immediately prior to

[120,000 - (2)]
$142,500

debt relief
(4) Relief from mortgage debt
Cosmos initial tax basis in Y
Mountain
b. $22,500 as indicated in the table above.

($120,000)
$22,500 (1) + (2) + (3)
+ (4)

42. [LO2] When High Horizon LLC was formed, Maude contributed the following assets in
exchange for a 25 percent capital and profits interest in the LLC:
Maude:
Cash
Land*
Totals

Basis Fair Market Value

$ 20,000
$ 20,000
100,000
360,000
$ 120,000
$ 380,000

*Nonrecourse debt secured by the land equals $160,000

James, Harold and Jenny each contributed $220,000 in cash for a 25% profits and capital
interest.
a. How much gain or loss will Maude and the other members recognize?
b. What is Maudes tax basis in her LLC interest?
c. What tax basis do James, Harold, and Jenny have in their LLC interests?

a. $0.
None of the members recognize gain because their debt relief was not in excess of
their bases in their LLC interest prior to any debt relief. See table below:
Description

Maude

Other

Explanation

Members
(1) Basis in contributed Land

$100,000

(2) Cash contributed

$20,000

(3) Nonrecourse mortgage in

$60,000

$220,000
Nonrecourse

excess of basis in contributed

debt > basis is

land

allocated only
to Maude

(4) Remaining nonrecourse

$25,000

$25,000

mortgage
Basis immediately prior to

25% x
[160,000 - (3)]

$205,000

debt relief
(5) Relief from mortgage debt
Each members initial tax
basis in the LLC

($160,000)
$45,000

$245,000

(1) + (2) + (3)

+ (4) + (5)

b. $45,000.
See table in part a. above.
c. $245,000 each.
See table in part a. above.
43. [LO2] Kevan, Jerry, and Dave formed Albee LLC. Jerry and Dave each contributed
$245,000 in cash. Kevan contributed the following assets:
Kevan:
Cash
Land*
Totals

Basis Fair Market Value

$ 15,000
$ 15,000
120,000
440,000
$ 135,000
$ 455,000

*Nonrecourse debt secured by the land equals $210,000

Each member received a one-third capital and profits interest in the LLC.
a. How much gain or loss will Jerry, Dave and Kevan recognize on the contributions?
b. What is Kevans tax basis in his LLC interest?
c. What tax basis do Jerry and Dave have in their LLC interests?

a. $0.
None of the members recognize gain because their debt relief was not in excess of
their bases in their LLC interest prior to any debt relief. See table below:
Description

Kevan

Other

Explanation

Members
(1) Basis in contributed Land

$120,000

(2) Cash contributed

$15,000

(3) Nonrecourse mortgage in

$90,000

$245,000
Nonrecourse

excess of basis in contributed

debt > basis is

land

allocated only
to Kevan

(4) Remaining nonrecourse

mortgage

$40,000

$40,000

33.3% x
[$210,000 -

(3)]
Basis immediately prior to

$265,000

debt relief
(5) Relief from mortgage debt

($210,000)

Each members initial tax

$55,000

$285,000

basis in the LLC

(1) + (2) + (3)

+ (4)+ (5)

b. $55,000.
See table in part a. above.
c. $285,000 each.
See table in part a. above
58. [LO 4] Turtle Creek Partnership had the following revenues, expenses, gains, losses, and
distributions:
Sales revenue
Long-term capital gains
Cost of goods sold
Depreciation - MACRS
Amortization of organization costs
Guaranteed payments to partners for general management
Cash distributions to partners

$40,000
$2,000
($13,000)
($3,000)
($1,000)
($10,000)
($2,000)

Given these items, what is Turtle Creeks ordinary business income (loss) for the year?
Turtle Creeks ordinary business income is calculated in the table below:
Description
Sales revenue

Amount
$40,000

Less:
Cost of goods sold

(13,000)

Depreciation - MACRS

(3,000)

Amortization of organization costs

(1,000)

Guaranteed payments

(10,000)

Ordinary Business Income

$13,000

Separately Stated Items on Schedule K-1:

Long-term capital gains

$2,000

Guaranteed payments

$10,000

Cash distributions

$2,000

note that guaranteed payments must be separately disclosed to the partners that receive
them, and cash distributions must be separately disclosed so that partners can reduce the
tax basis of their partnership interests by the amount of the distributions.

59. [LO 4] Georgio owns a 20 percent profits and capital interest in Rain Tree LLC. For the
current year, Rain Tree had the following revenues, expenses, gains, and losses:
Sales revenue
Gain on sale of land (1231)
Cost of goods sold
Depreciation - MACRS
179 deduction*
Employee wages
Fines and penalties
Municipal bond interest
Short-term capital gains
Guaranteed payment to Sandra

$70,000
$11,000
($26,000)
($3,000)
($10,000)
($11,000)
($3,000)
$6,000
$4,000
($3,000)

*Assume the 179 property placed in service limitation does not apply.
a. How much ordinary business income (loss) is allocated to Georgio for the year?
b. What are Georgios separately stated items for the year?
a. Georgios allocation of ordinary business income is reflected in the table below:

Description

Total

20%

Amount

Allocated to
Georgio

Sales revenue

$70,000

Less:
Cost of goods sold
Depreciation - MACRS
Employee wages
Guaranteed payments
Ordinary Business Income

(26,000)
(3,000)
(11,000)
(3,000)
$27,000

$5,400

b. Georgios separately stated items are calculated in the table below:

Description

Total

20%

Amount

Allocated to
Georgio

Separately Stated Items on Schedule K-1:

Section 1231 gains

$11,000

$2,200

Section 179 deduction

(10,000)

(2,000)

Short-term capital gains

4,000

800

Municipal bond interest*

6,000

1,200

(3,000)

(600)

Fines and penalties*

*Although these amounts are not included in Georgios taxable income computation, they
must be separately disclosed because they affect Georgios tax basis in his LLC interest.