Homework
Please consult the Terra Firma, LLC Balance Sheet (attached) in answering Questions 1 - 9; assume each of the questions are independent and have no relationship to each other unless specifically noted.
Question 1 - If Terra Firma distributed Land Parcel 2 (LP2) and $8k of cash to Manny in complete redemption of his LLC interest on 12-31-15, Manny's tax basis in LP2 after the redemption would be: $___________
Question 2 - If Terra Firma distributed Land Parcel 2 (LP2) to Manny in a current (i.e., non-liquidating) distribution on 12-31-15, Manny's tax basis in LP2 after the distribution would be (you should assume that Manny will remain a 1/3 member and that he will continue to be allocated 1/3 of the mortgage): $_________
And Manny's outside tax basis in Terra Firma, LLC after the distribution would be: $___________
Question 3 - In the facts presented in Question 1, above, assuming the LLC made a §754 election on its 2015 tax return, the §734(b) adjustment that would result upon the distribution to Manny would be: $___________ (be specific as to positive or negative)
Question 4 - In the facts presented in Question 2, above, assuming the LLC made a §754 election on its 2015 tax return, the §734(b) adjustment that would result upon the distribution to Manny would be: $___________ (be specific as to positive or negative)
Question 5 - If Terra Firma distributed Land Parcel 4 (LP4) to Manny in complete redemption of his LLC interest on 12-31-15, Manny's tax basis in LP4 after the redemption would be: $___________
Question 6 - If Terra Firma distributed Land Parcel 4 (LP4) to Manny in a current (i.e., non-liquidating) distribution on 12-31-15, Manny's tax basis in LP4 after the distribution would be (you should assume that Manny will remain a 1/3 member and that he will continue to be allocated 1/3 of the mortgage): $___________
And Manny's outside tax basis in Terra Firma, LLC after the distribution would be: $___________
Question 7 - If Felix acquired Moe's 1/3 interest for $58k in cash on 1-1-16, Moe's gain or loss upon sale would be: $___________
And Felix's outside tax basis in Terra Firma, LLC after the purchase would be: $__________
Question 8 - In the facts presented in Question 7, above, assuming the LLC made a §754 election on its 2016 tax return, the §743(b) adjustment that would result upon the sale of Moe's interest would be: $___________ (be specific as to positive or negative)
Question 9 - True or False (circle one): In the facts presented in Questions 1 and 3 above, any adjustment under §734(b) would benefit Moe and Jack.
Question 10 - As of June 30, 2015, B's outside tax basis in ABC, GP is $50, which includes a $10 share of recourse debt. On July 1, 2015, B receives a distribution of Land with a value of $60 and an adjusted tax basis of $30 in complete liquidation/redemption of his interest. B also assumes the partnership's $20 mortgage on the Land as part of the distribution (thus the net value of the distribution is $40).
B's adjusted tax basis in the Land after the distribution is: $____________
Question 11 -Which of the following would never lead to an IRC §734(b) adjustment inside a partnership (assume the partnership already has a valid IRC §754 election in place):
a) a current distribution of cash
b) a current distribution of property
c) a liquidating distribution of cash
d) a liquidating distribution of property
e) none of the above, as all four could lead to an IRC §734(b) adjustment
Question 12 - True or False (circle one): an allocation that lacks substantiality under the §704(b) regime is to be reallocated pursuant to the alternate test for economic effect.
Question 13 - True or False (circle one): an IRC §734(b) adjustment typically benefits the partners already in the partnership, and is usually initiated by those existing partners.
Question 14 - Chester is considering the purchase of Michael's 25% interest in Mezza Holding, LLC for $3.2 million. Mezza holds a portfolio of commercial real estate that was acquired late in 2007, right before the bottom dropped out on the real estate market. Currently, the portfolio has a collective FMV that is roughly 70% of the adjusted tax basis in the assets, and the $3.2 million offering price represents roughly 70% of Michael's outside tax basis in the interest (i.e., his outside tax basis is over $4.5 million).
True or False (circle one): if Chester purchases Michael's interest, an IRC §743(b) basis step-down will result even if the partnership does not affirmatively make a §754 election.
Question 15 - True or False (circle one): a §754 election, and an accompanying positive §743(b) adjustment (mirroring the gain recognized by the seller), would increase the outside tax basis of an acquiring partner's interest.
Question 16 - True or False (circle one): the purpose of the revaluation provisions of the §704(b) regulations is to insure that existing partners have sufficient tax basis to deduct allocated tax losses.
Question 17 - True or False (circle one): the purpose of IRC §751(a) is to insure that the non-selling (i.e., remaining) partners immediately recognize their share of any ordinary income embedded in the partnership.
Question 18 - True or False (circle one): the contribution of an asset with a FMV of $140 and an adjusted tax basis of $100 will create a disparity between the aggregate outside tax bases of the partners' interests and the aggregate inside tax bases of partnership assets.
Question 19 - Which ONE of the following Code provisions would NOT be relevant in computing the overall tax effects upon the sale of a partnership interest where 1) hot assets are held by the partnership, 2) a valid IRC §754 election is in place, and 3) the partnership has debt:
a) IRC §742
b) IRC §752
c) IRC §751(a)
d) IRC §743(b)
e) IRC §732
f) IRC §755
Question 20 - On January 1, 2016, Matthews will receive a liquidating distribution from LMN, GP, in complete redemption of his 1/3 interest. LMN holds cash and 20 separate parcels of land as investments. In general, the 3 partners have outside tax basis that is roughly equally to 50% of the Fair Market Value of the interests, owing mostly to the significant increase in the value of the land over the last 15 years. Inside the partnership, the relationship between tax basis and value of the various parcels differs, although the average relationship is the same 50% that exists outside the partnership (simple math, of course).
Matthews is receptive to receiving cash, properties, or a combination of both in exchange for his interest, as long as the total value received is equal to the negotiated value agreed to by all three partners.
Assuming that Matthews and the remaining partners agree to a distribution of cash (exclusively) in exchange for the interest, which ONE of the following is NOT correct:
a) Matthews will recognize gain upon the redemption of his interest
b) A §754 election would be advantageous for the remaining partners
c) Assuming a §754 election will be made in 2016, there will be a positive §743(b) adjustment
d) Assuming a §754 election will be made in 2016, there will be a positive §734(b) adjustment
Now instead assume that Matthews and the remaining partners agree to a distribution of two parcels of land plus a de minimis amount of "true-up" cash in exchange for the interest. The two parcels to be distributed have tax basis that is equal to roughly 80% of their value. Which TWO of the following are NOT correct:
a) Matthews will recognize gain upon the redemption
b) A §754 election would be advantageous for the remaining partners.
c) Assuming a §754 election will be made in 2016, there will be a positive §734(b) adjustment
d) Assuming a §754 election will be made in 2016, there will be a negative §734(b) adjustment
Question 21 - Match the following code or regulatory sections with their overall concepts:
____ Defines the amount of the adjustment to the inside tax basis of partnership assets upon the sale or exchange of an interest when a 754 election is in effect.
____ The regime under which nonrecourse debt is allocated to Partners.
____ The regime which defines the amount (if any) of ordinary income recognized by a partner upon a complete redemption of the partner's interest.
____ Recasts contributions and distributions, otherwise un-taxed pursuant to IRC §§ 721 and 731, as a sale of an asset from a partner to a partnership.
a. IRC §707(a)(2)(B)
b. Reg. 1.752-3
c. IRC §743(b)
d. IRC §751(b)
Question 22 - Jon contributes land with a FMV of $18,000 and an adjusted tax basis of $4,000 to ETS, LLC. The LLC also assumes Jon's $10,000 mortgage on the land concurrent with the contribution. In exchange for his net $8,000 contribution (i.e., $18k - $10k), Jon receives a 20% interest in all LLC items. The LLC agreement does not require that the members restore negative capital accounts.
In addition to the mortgage assumed by Jon, the LLC has an additional $14k mortgage (borrowed by the partnership) on an additional parcel of land acquired by the partnership. Which of the following represents Jon's share of total debt allocated to him immediately after formation?
a) $9,600
b) $4,800
c) $10,800
d) $2,400
Question 23 - Which ONE of the following is NOT a significant component of the Disguised Sale body of law?
a) Rebuttable presumptions under Regs. 1.707-3
b) Entrepreneurial risk
c) Otey v. Commissioner
d) Nonqualified indebtedness (a/k/a Anticipatory Debt)
e) "Speculative Compensatory Transfers" as defined in IRC Section 707(a)(2)(B)
Question 24 - True or False (circle one): Distributions from a partnership to a partner that occur at least two years after an initial contribution by that same partner are never relevant in an assessment of whether a disguised sale might have occurred (with respect to that partner).
Question 25 - Peggy will contribute land parcel P to NOP, LLC on January 1, 2016 in exchange for a 20% interest in all LLC items. The land is worth $1 million and has an adjusted tax basis in Peggy's hands of $200k. NOP, LLC intends to construct a commercial office building on land parcel P, using equity from other LLC members as well as debt borrowed from a traditional lender.
The terms of the LLC agreement provided that Peggy is to receive a $900k cash distribution on or after January 1, 2019.
It is now your turn to insert assumptions and facts into this story. Provide 3 factual assumptions that - if present on January 1, 2016 - would offer a strong defense that the land contribution followed by the $900k distribution at least 3 years later should not be recast as a sale pursuant to IRC §707(a)(2)(B). (Note there are many "correct" answers here....simply looking for taxpayer-friendly facts that would preclude disguised sale treatment):
Question 26 - C contributes cash of $1,000 to Cobra, GP. D contributes land with a FMV of $2,800 and an adjusted tax basis of $1,700. The land is secured by debt of $2,200, which D borrowed on the land 5 years ago (accordingly disregard any potential disguised sale issues). Cobra assumes the debt in connection with D's contribution.
Both C and D are general partners in Cobra. Pursuant to the partnership agreement, profits and losses are to be allocated 40% to C and 60% to D. List C and D's allocable shares of the partnership liability.
Question 27 - On January 1, 2016, Cici will contribute depreciable property Y to Newco, LLC in exchange for a 40% interest. Y has a FMV of $20,000, an adjusted tax basis of $6,000, and a remaining depreciable life of 4 years straight line. Tami contributes $30,000 in cash in exchange for a 60% interest. Both Cici and Tami share in all LLC items in proportion to their respective 40%/60% interests.
Part 1 - Assuming the LLC agreement prescribes the use of the Traditional Method for purposes of allocations under IRC §704(c), Cici's allocable share of tax depreciation for 2016 will be: $____________.
Part 2 - True or False (circle one): Use of the Remedial Allocation Method would result in a greater share of tax depreciation being allocated to Cici.
Question 28 -IRC §751(b) operates to insure that distributee partners that are leaving the partnership report their share of ordinary income or loss upon exit. For example, in looking at the balance sheet below (which is the exact balance sheet from Module 9), a distribution of $120 in cash to A would result in $70 of gain, with $40 of that being ordinary and $30 capital. The $40 being A's deemed exchange of hot assets (i.e., his 1/3 share of the A/R) for cash.
And B and C would recognize their $40 shares (each) of ordinary income upon the collection of the A/R.
If we instead assume that A will receive the entire A/R portfolio (valued at $120) in complete redemption of his interest, answer the following:
Ordinary income upon the distribution of the A/R to A ________ ________ ________
Ordinary income upon the collection of the A/R by A ________ ________ ________
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Adj. Basis
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FMV
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Cash
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120
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120
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Accounts Receivable
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0
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120
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Equipment (assume no recapture)
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30
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120
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Total Assets
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150
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360
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Capital - A
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50
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120
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Capital - B
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50
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120
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Capital - C
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50
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120
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Total Capital
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150
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360
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Question 29 - The Raphan decision dealt primarily with the allocation of ________________ for tax basis purposes.
Bonus Question - Assuming a partnership already has an IRC §754 election in effect, explain how a debt guarantee by a partner might lead to an IRC §734(b) adjustment:
Attachment:- Assignment Files.rar