MODULE 35 TAXES: PARTNERSHIPS 551

18. (d) The requirement is to determine Arch's share of Gilroy should report for 2008 as total income from
the JK Partnership'S ordinary income for 2009. A partner- the part-
ship functions as a pass-through entity and its items of in- $22,000
come and deduction are passed. through to partners accord-
ing to their profit and loss sharing ratios, which may differ lbQQQ
from the ratios used to divide capital. Here, Arch's distribu- $:H.OOQ
tive share of the partnership's ordinary income is $40,000 x
75% = $30,000. Note that Arch will be taxed on his $30,000
distributive share of ordinary income even though only
$5,000 was distributed to him.
19. (c) The requirement is to determine whether the
statements regarding partners' guaranteed payments are
correct. Guaranteed payments made by a partnership to
partners for services rendered are an ordinary deduction in
computing a partnership's ordinary income or loss from
trade or business activities on page 1 of Form 1065. Part-
ners must report the receipt of guaranteed payments as ordi-
nary income (self-employment income) and that is why the
payments also must be separately listed on Schedule K and
Schedule K-l.
20. (b) The requirement is to determine the correct
statement regarding a partnership'S election of a deprecia-
tion method. The method used to depreciate partnership
property is an election made by the partnership and may be
any method approved by the IRS. The partnership is not
restricted to using the same method as used by its "principal
partner." Since the election is made at the partnership level,
and not by each individual partner, partners are bound by
whatever depreciation method that the partnership elects to
use.
21. (c) The requirement is to determine the correct
statement regarding guaranteed payments to partners. Guar-
anteed payments are payments made to partners for their
services or for the use of capital without regard to the
amount of the partnership'S income. Guaranteed payments
are deductible by the partnership in computing its ordinary
income or loss from trade of business activities, and must be
reported as self-employment income by the partners receiv-
ing paymen~.
22. (c) The requirement is to determine the total amount
of partnership income that is taxable to Dale in 2008. A
partnership functions as a pass-through entity and its items
of income and deduction are passed through to partners on
the last day of the partnership's taxable year. Income and
deduction items pass through to be reported by partners even
though not actually distributed during the year. Here, Dale
is taxed on his $50,000 distributive share of partnership in-
come for 2008, even though $23,000 was not received until
2009. The $10,000 interest-free loan does not effect the
pass-through of income for 2008, and the $10,000 offset
against Dale's distributive share of partnership income for
2009 will not effect the pass-through of that income in 2009.
23. (d) The requirement is to determine the amount of
the partnership'S capital gain from the sale of securities to be
allocated to Carr. Normally, the entire amount of precon-
tribution gain would be allocated to Carr. However, in this
case the allocation to Carr is limited to the partnership'S
recognized gain resulting from the sale, $47,000 selling
price - $35,000 basis = $12,000.
24. (c) The requirement is to determine the amount that
nership. Gilroy's income will consist of his share of the
partnership's ordinary income for the fiscal year ending
June 30, 2008 (the partnership year that ends within his
year), plus the twelve monthly guaranteed payments that he
received for that period of time.
25% x $88,000
12 x $ 1,000
Total income
25. (b) The requirement is to determine Allan's distribu-
tive share of the partnership income. In a family partner-
ship, services performed by family members must first be
reasonably compensated before income is allocated accord-
ing to the capital interests of the partners. Since Edward's
services were worth $40,000, Allan's distributive share of
partnership income is ($100,000 - $40,000) x 50% =
$30,000.
26. (c) The requirement is to determine Curry's initial
basis for the 50% partnership interest received in exchange
for a contribution of property subject to a $12,000 mortgage
that was assumed by the partnership. Generally, no gain or
loss is recognized on the contribution of property in ex-
change for a partnership interest. As a result, Curry's initial
basis for the partnership interest received consists of the
$30,000 adjusted basis of the land contributed to the partner-
ship, less the net reduction in Curry's individual liability
resulting from the partnership'.s assumption of the $12,000
mortgage. Since Curry received a 50% partnership interest,
the net reduction in Curry's individual liability is $12,000 x
50% = $6,000. As a result, Curry's basis for the partnership
interest is $30,000 - $6,000 = $24,000.
27. (a) The requirement is to determine Jones' initial
basis for the 50% partnership interest received in exchange
for a contribution of cash of $45,000. Since partners are
individually liable for their share of partnership liabilities, an
increase in partnership liabilities increases a partner's basis
in the partnership by the partner's share of the increase.
Jones' initial basis consists of the $45,000 of cash contrib-
uted, increased by the increase in Jones' individual liability
resulting from the partnership's assumption of Curry's
mortgage ($12,000 x 50% = $6,000). Thus, Jones' initial
basis for the partnership interest is $45,000 + $6,000 =
$51,000.
28. (b) The requirement is to determine the total amount
includible in Flagg's 2009 tax return as a result of Flagg's
50% interest in the Decor Partnership. Decor's net business
income of $45,000 would be reduced by the guaranteed
payment of $7,500, resulting in $37,500 of ordinary income
that would pass through to be reported on partners' returns.
Here, Flagg's share of the includible income would be
$37,500 x 50% = $18,750.
29. (c) The requirement is to determine Miles's tax
basis for his 50% interest in the Decor Partnership on De-
cember 31, 2009. The basis for a partner's partnership inter-
est is increased by the partner's distributive share of partner-
ship income that is taxed to the partner. Here, Decor's net
business income of $45,000 would be reduced by the guar-
anteed payment of $7,500, resulting in $37,500 of ordinary
income that would pass through to be reported on partners'
returns and increase the basis of their partnership interests.
Here, Miles's beginning tax basis for the partnership interest
of $200,000 would be increased by Miles's distributive
share of ordinary income ($37,500 x 50% = $18,750), to
$218,750.