Comprehensive Problem. Hazel Patrick owns a building in which she practices dentistry. She also owns substantial amounts of equipment used in her practice. The building cost her $100,000 and its adjusted basis is $60,000; its present fair market value is $200,000. Had she used straight-line depreciation, her adjusted basis would be $75,000. Her equipment, which originally cost her $20,000 three years ago, has an adjusted basis of $5,000 and a present fair market value of $7,500. She also has cash-basis accounts receivable with a face amount of $20,000 and accounts payable in the amount of $15,000. She has $5,000 in fair market value of dental gold, which she had expensed upon purchase.
Hazel has been approached to enter into an equal partnership with another dental practitioner. They would prefer that their contributions to the partnership have substantially equal value. It has been suggested that Hazel either retain her building and rent it to the partnership at $25,000 net rent per year or place a mortgage of $100,000 against it and contribute it to the new partnership subject to the mortgage.
a. Compute Hazel's basis in the partnership under the alternative propositions.
b. Determine what and how much, if any, are the recaptures.
53. Research Problem. Mary Black, Nell Brown, and Louise Gray each has her own computer equipment and service retail store. In an effort to potentially reduce their costs and increase their control over supply channels, they buy a plant which manufactures selected computer supplies and equipment. Each makes an equal cash contribution toward the purchase of the plant, each has an equal capital and profits interest in the plant, and they agree to share all losses equally. They own the plant as tenants in common. The co-owners have a written operating agreement specifying that each has an equal interest in the plant's production, each is responsible for her equal share of expenses, and each owns a proportionate, undivided part of the plant's equipment. The agreement also provides that the plant, as such, does not have the right to market the manufactured computer supplies and equipment. In lieu of the plant's selling the manufactured computer supplies and equipment to other purchasers, Mary, Nell, and Louise agree that each will take one-third of the plant's annual output. Each takes her share of the output, commingles it with other computer equipment and supplies in their respective computer equipment and service retail stores, and sells it to customers.
With regard to the plant, research and answer the following questions:
1. Is the plant a partnership for federal income tax purposes?
2. If the plant is a partnership for federal income tax purposes, may it make an election not to be subject to the partnership provisions of Subchapter K of the Internal Revenue Code?
3. Without regard to your answer to question two, assume that the plant may elect out of Subchapter K. Are Mary, Nell, and Louise subject to the self-employment tax on their distributive shares of the plant's earnings, assuming the output was purchased by Mary, Nell, and Louise, rather than being distributed to each?