South-Western Federal Taxation 2015
P ROBLEM 5P ARTNERSHIP (F ORM 1065) Ryan Ross (111-11-1111), Oscar Oleander (222-22-2222), Clark Carey (333-33-3333),and Kim Kardigan (444-44-4444) are equal members in ROCK the Ages, LLC.ROCK serves as agents and managers for prominent musicians in the Los Angelesarea. The LLCs Federal ID number is 55-5555555. It uses the cash basis and thecalendar year and began operations on January 1, 2002. Its current address is 6102 Wilshire Boulevard, Suite 2100, Los Angeles, CA 90036. ROCK was the forcebehind such music icons as Rhiannon and Burgundy 5 and has had a very profita-ble year. The following information was taken from the LLCs income statement for the current year: Revenues:Fees and commissions $4,800,000Taxable interest income from bank deposits 1,600Tax-exempt interest 3,200Net gain on stock sales 4,000Total revenues $4,808,800Expenses:Advertising and public relations $ 380,000Charitable contributions 28,000Section 179 expense 20,000Employee salaries and wages 1,000,000Guaranteed payment, Ryan Ross, office manager 800,000Guaranteed payment, other members 600,000Entertainment, subject to 50% disallowance 200,000Travel 320,000 Legal and accounting fees $ 132,000Office rentals paid 80,000Interest expense on operating line of credit 10,000Insurance premiums 52,000Office expense 200,000Payroll taxes 92,000Utilities 54,800Total expenses $3,968,800 During the past couple of years, ROCK has taken advantage of bonus deprecia-tion and 179 deductions and fully remodeled the premises and upgraded itsleasehold improvements. This year, ROCK wrapped up its remodel with the pur-chase of $20,000 of office furniture for which it will claim a 179 deduction.
(Forsimplicity, assume that ROCK uses the same cost recovery methods for both taxand financial purposes.) There is no depreciation adjustment for alternative mini-mum tax purposes.ROCK invests much of its excess cash in non-dividend-paying growth stocks andtax-exempt securities. During the year, the LLC sold two securities. On June 15,2013, ROCK purchased 1,000 shares of Tech, Inc. stock for $100,000; it sold thoseshares on December 15, 2013, for $80,000. On March 15, 2012, ROCK purchased2,000 shares of BioLabs, Inc. stock for $136,000; it sold those shares for $160,000 onDecember 15, 2013. These transactions were reported to the IRS on Forms 1099B;ROCKs basis in these shares was reported.Net income per books is $840,000. The firms activities do not constitutequalified production activities for purposes of the 199 deduction. On January 1,2013, the members capital accounts equaled $200,000 each. No additional capitalcontributions were made in 2013. In addition to their guaranteed payments, eachmember withdrew $250,000 cash during the year. The LLCs balance sheet as of December 31, 2013, is as follows: Beginning Ending Cash $ 444,000 $ ??Tax-exempt securities 120,000 120,000Marketable securities 436,000 300,000Leasehold improvements, furniture, andequipment 960,000 980,000Accumulated depreciation (960,000) (980,000)Total assets $1,000,000 $ ??Operating line of credit $ 200,000 $ 160,000Capital, Ross 200,000 ??Capital, Oleander 200,000 ??Capital, Carey 200,000 ??Capital, Kardigan 200,000 ??Total liabilities and capital $1,000,000 $ ?? Assume that all debt is shared equally by the members. Each member has per-sonally guaranteed the debt of the LLC.The business code for Agents and Managers for Artists, Athletes, Entertainers,and Other Public Figures is 711410. The LLCs Form 1065 was prepared by RyanRoss and sent to the Ogden, UT IRS Service Center. All members are active in LLCoperations.
a. Prepare Form 1065, pages 1, 4, and 5, for ROCK the Ages, LLC.
b. If you are using tax return preparation software, prepare Form 4562 and Schedule D
c. Prepare Schedule K1 for Ryan Ross, 15520 W. Earlson Street, Pacific Palisades,CA 90272.