Problem
A. The UNM Partnership has three partners A, B, and C. C is an attorney and assists the partnership with drafting its partnership agreement. C is paid $20,000 from the partnership for this work. Describe the treatment of the payment to the UNM Partnership and to C (hint: include both income and SE tax, and deductibility of the payment at the partnership level (hint - look at the rules regarding organizational expenses)).
B. How would the answer in Part 1 change if C was compensated with a Profits Interest of 1%?
C. A and B each contribute $1,000,000 to a newly formed partnership and C contributes $2,000,000. The partnership buys LMN stock for $1,500,000 and XYZ stock for $3,500,000. After the value of the LMN and XYZ stock both fall to $1,000,000; the partnership distributes the XYZ stock to C in liquidation of his partnership interest. What is the basis of the stock to C upon distribution? What are further consequences to the partnership if a Section 754 election is in effect (in this case, it would be mandatory without a Section 754 election being in place).
D. Per the regulations under Section 755, how would any adjustment required in Question #3 be allocated to remaining partnership property (assume there is both additional capital and ordinary income assets left in the partnership)?
E. Partner Q contributes land with a basis of $50,000 and a Fair market value of $125,000 to a partnership. Describe the different distribution or partnership disposition scenarios that may result in recognition of this built -in gain to Partner Q.
F. Describe the way in which Section 751 modifies the general rule of Section 741.
G. Are dispositions of trade or business use property subject to the self-employment tax?
H. How do passive losses affect the basis of a partner's basis in his or her partnership basis? What happens at the disposition of a passive activity?
I. How does an S corporation, potentially, offer a greater opportunity to split income from investment in property, plant, and equipment from service income? Why does this matter?
J. Describe the difference between Section 736(a) and Section 736(b) payments. What is the difference in the tax outcomes between these two options?