Zero Based Budgeting Emerged To Overcome The Limitations Of Incremental Budgets Accounting Essay

Zero Based Budgeting Emerged To Overcome The Limitations Of Incremental Budgets Accounting Essay Zero-based budgeting emerged to overcome the limitations of incremental budgets. This approach requires that all activities are justified and prioritized before decisions are taken relating to the amount of resources allocated to each activity. Besides adopting a zero-based approach zero-base budgeting also focuses on programmes or activities instead of functional departments based on line-items which is a feature of traditional budgeting. Programmes normally relate to various activities undertaken by municipal or government organizations. Zero-based budgeting works from the premise that projected expenditure for existing programmes should start from base zero, with each years budgets being compiled as if the programmes were being launched for the first time. The budgetees should present their requirements for appropriations in such a fashion that all funds can be allocated on the basis of cost-benefit or some similar kind of evaluative analysis. The cost-benefit approach is an attempt to ensure value of money, it question long-standing assumptions and serves as a toll for systematically examining and perhaps abandoning any unproductive projects. Thats why more and more non-profit making organizations, including Oxfam Hong Kong, consider using Zero-based budgeting as an approach to judge a best solution of the organizations. Background of Oxfam Hong Kong Oxfam Hong Kong is one of non-profit making organizations. It is an independent international development and humanitarian organization working against poverty and related injustice. It recognized that much poverty is caused by injustice and that poverty alleviation requires economic, social and structural change. It worked with people facing poverty and with partner organizations on development, humanitarian, policy advocacy and public education programmes. How zero-based budgeting could be used at Oxfam Hong Kong Most organizations, including Oxfam Hong Kong, may use incremental budgeting system for their budgetary process. However, this approach has a serious drawback. The budgetary process for coming year usually uses previous budget allocation as a basis of allocation. That may incurred increase or decrease in budget for the coming year based on the budget allocation. It is because the percentage of allocation is without full examination of this allocation basis. Incremental budgeting system assumes that the situation will continue in the same way. Zero-based budgeting could be used to remedy this serious drawback in incremental budgeting system. The best suitable activities in Zero-based budgeting To use zero-based budgeting as an approach, some activities are very suitable to use. For example: Limited resource of labours Oxfam Hong Kong is a non-profit making organization that it is always faced with limited resource of labours because major labours are volunteers that it often has not salaries. To organize an activity such as donation of poverty countries, it is a large project that it needs a lot of human resource. The allocation of resource is very important if the organization is faced with limited resource of labours. Zero-based budgeting can efficiently allocate resource of each department. Zero-based budgeting will define and evaluate decision packages of human resource and appropriate allocation by ranking of decision packages. Judgment of consignment or in-house Oxfam Hong Kong always creates a lot of activities about the donation of poverty countries. To encourage more donations, the organization always produces some souvenirs to donators. The souvenirs are also a part of cost that Oxfam Hong Kong will be considered to produce by consignment or in-house processing. It is because Oxfam Hong Kong would likely choose inexpensive method. It is very suitable to use zero-based budgeting to the identification. Although incremental budgeting system or activity-based budgeting can determine the cost of production by consignment or in-house processing, it only use department as a base which is less accurate than zero-based budgeting. It is because zero-based budgeting is based on activity which is more accurate than incremental budgeting system or activity-based budgeting. The advantages of Zero-based budgeting More and more non-profit organizations choose Zero-based budgeting rather than Incremental budgeting for their decision making because Zero-based budgeting has following advantages which Incremental budgeting is ignored. Inappropriate activities are not undertaken Traditional budgeting trends to extrapolate the past by adding a percentage increase to the current year. Zero-based budgeting avoids the deficiencies of incremental budgeting and represents a move towards the allocation of resources by need or benefit. Thus, unlike traditional budgeting the level of funding is not taken for granted. For example, when Oxfam Hong Kong has limited resource such as labour hour, the allocation of resources is being very important. Then Zero-based budgeting can help Oxfam Hong Kong to select the best solution of the allocation by ranking of decision packages. Finally, inappropriate solutions are not adopted. Enhance motivation The documentation of decision packages also leads to a deeper staff and management knowledge of all the operation and activities of the organization and can enhance communication, participation and therefore motivation. Oxfam Hong Kong can indirectly motivate the staff. It is because all departments especially management department in Oxfam Hong Kong need to communicate with other departments to make a consensus of the decision packages. Concerning value for money Zero-based budgeting focuses attention on outputs in relation to value for money. Through this value for money approach, inefficient and obsolete operations are identified so that wastage can be eliminated and a more efficient allocation of resources to activities and departments can be achieved. Therefore, Oxfam Hong Kong can indirectly reduce the cost of selection of decision because the wastage is reduced and the allocation of resource is being efficient. Problem of Zero-based budgeting Actually, no method is perfect. Zero-based budgeting also exists problems that Oxfam Hong Kong should be faced. More costly and time consuming The preparation of decision packages can generate a great volume of paperwork especially for a large project or activity and will require a considerable management skill. Therefore, Oxfam Hong Kong should be provided more training and education about concepts of application of Zero-based budgeting to the management department because Zero-based budgeting must be clearly understood by managers at various levels to be successfully implemented. The running cost is directly increased. Also, Zero-based budgeting will requires gathering, analysis and evaluation of large amounts of data that the management department faced with much workload and it is very time consuming. Problems of identifying ranking packages Subjective judgment and political pressure are unavoidable in ranking packages and allocation of resources and may create departmental conflicts. Different types and natures of activities across different departments, particularly with qualitative rather than quantitative benefits, may give rise to the problem of ranking. Oxfam Hong Kong is confused of the decision packages because it is difficult to define decision units and decision packages and sometimes subjective judgment is needed. Also, management may be exaggerated skews the results if it is unreliable. Then, the decision packages are became inaccurate. Relationship between management and staff deterioration The questioning attitude of zero-based budgeting is not always acceptable to staff or management because they may view it as a threat to their existing implied rights. For example, management department and accounting department have different ideas of decision packages. Each department does not agree with the other side ideas. The cooperation and motivation among the management and staff may deteriorate. Therefore, it may influence the relationship of each department in Oxfam Hong Kong. http://www.oxbridgewriters.com/essays/accounting/zero-based-budgeting.php http://www.finweb.com/financial-planning/pros-and-cons-of-zero-based-budgeting.html http://www1.cimaglobal.com/Documents/ImportedDocuments/fm_nov07_p48-53.pdf

How Children’s Literature Can Be Both Didactic and Entertaining Essay

Literature talks about significant human experiences which arouses a noble feeling of pleasure. A form of literature should have permanence, artistry, spirituality, suggestiveness and universality like a children’s literature. It may be in the form of novels, poems, stories, and others use only language to convey the subject . Children’s literature speaks of people’s challenges but more imaginary than that of an adult and it awakes the innocent mind of a child to explore to the world of fantasy and reality- the start of his training on distinguishing facts from fallacies and developing his mind to acquire the good out of the context of a children’s literature. Children’s literature connects imagination and life to prepare a child to be a grown-up. C. S. Lewis states that literature adds to reality, it does not simply describe it. It enriches the necessary competencies that daily life requires and provides; and in this respect, it irrigates the deserts that our lives have already become. It helps a child gain knowledge on both what he is experiencing and from his reading. Some forms of literature can be didactic and some can be entertaining. It is didactic in a way that it instructs people on what to do, introduces facts and information, tremendously inclined to teach or moralize and sometimes a disadvantage or it kills a reader’s enjoyment. In layman’s term , we call that being a killjoy. A piece of writing is not didactic even if it is educational when it is more focused on artistic qualities. It is entertaining because it amuses you of things you haven’t seen before, draws your attention of something you want or dreams but in real life you can’t- so it becomes an outlet of your imagination,pleases your entirety and diverts your interest to something exciting. According to Cyril Connolly, â€Å"While thought exists, words are alive and literature becomes an escape, not from, but into living. † Your surname 2 Children’s literature is didactic and entertaining. Here are some that we will discuss on matters regarding the commonalities of giving information and at the same time giving the reader a dose of merriment. We will cite three: Hana’s Suitcase, Paper Bag Princess and Charlotte’s Web. Hana’s Suitcase is about two children in the hand of the Nazi’s basically George and Hana. It sets focus on Hana Brady, an ordinary girl on about 10 years of age,who perished in a concentration camp of the Nazi’s set in Czechoslovakia. An age of annihilation where the Jews were imprisoned and eventually killed. Paper Bag Princess is about a Princess Elizabeth who was about to marry Prince Ronald but the latter was kidnapped by a dragon. Courageously but naked she eventually rescues the prince wearing only a paper bag. She won by flattering the dragon because the dragon does perform all sorts of stunts ending in exhaustion. But after helping the him, the prince insults the princess and she realizes that she was better off without a prince. They did not live happily ever after. Charlotte’s Web is about a spider who helps Wilbur, a pig, from being killed by his owner. She devices a plan on how to divert the attention of the owner in Wilbur’s favor. Fern acts as a liaison between the human world and the animal world . When Charlotte was about to die, Wilbur returns the favor by taking care of her eggs. Hana’s Suitcase is didactic because it conceptualizes on an idea about discrimination on Jews and talks about some history of Czechoslovakia set in the 1900’s. A girl who is the same as her peer suffers an unjust experience. Children received the story with the greatest interest. This serves as instrument that provoked them to understand the evil of intolerance and racism at their young age. Hana’s suitcase is filled with the love and thoughts of thousands of children. It may appear empty, but it is once again, miraculously, packed – with life and joy. It arouses the mind of the children to think positively out of the context of the sad ending of the story. It is entertaining because it shows a historical setting and us, being in a contemporary are being amused by the changes in the course of history. Aside from that, trifles- insignificant yet Your surname 3 significant in this story, traces in the suitcase triggers us surprised and excitement on what will happen next in the story. Paper Bag Princess is didactic in a way that it teaches us to be courageous, willing to sacrifice ourselves for the needy and at the same time teaches us to balance the heart and the mind. If others cannot appreciate the help that you did, let them because good deeds need not to be rewarded by words of mortal but in God’s kingdom. It is entertaining because it shows the comic side of the story by the dragon’s character. It affects our sense of humor by the antics done by a dragon. Usually we think of a dragon as merciless, cannibal and ferocious beings but this time the author serves a different attack on a character supposedly unlike by children. Another thing is the character of Princess Elizabeth, where a princess should be modest, tactful, graceful and educated but in this story a princess is brave like a knight , witty and dirty as needed for the development of the story’s childish side. The characteristic of being didactic in Charlotte’s Web is shown on giving the moral of the story that a friend in need is a friend in indeed. It teaches us that life is easy with friends. Your facade or outside appearance is not a hindrance for doing good. Just like in the story a spider may look tough and scary but she proves that she can also be as nice and beautiful in the way of the heart. The entertainment on Charlotte’s Web lies on giving the character justice by putting animals as lead. A pig is characterized by being foul-smelling, unorganized, filthy and a spider as an organized and self-centered being , but we are entertained by the fact that the story creates a different side of each- a pig being empathic and a spider being friendly. Every farm animal has a character of its own that resembles a human being that is kind, compassionate and helpful to other beings. Hana’s Suitcase, Paper Bag Princess and Charlotte’s Web denotes a higher level of giving a child what he needs to progress in terms of acquisition of ideas expressed by these literature. It is Your surname 4 not only for the kids but for all ages, These three just focus on children especially on characters to establish an easy and clear connection to reality and the contemporary without lessening the value that it has to offer . Hana bears the quality of humility, Elizabeth being courageous and Charlotte being compassionate. Three young individuals that changes a person’s life because of their actions in the story. They have a major role in forming a young mind to be a law-abiding citizen, to be a model to others, just like what they did. They may be fictional but their character’s aren’t. Each of us has a capacity to change the world having the chance to do so. A piece of literature can be didactic and at the same time entertaining and educational depending on how a person relate himself to it. It only requires the awakening of your hidden individuality to perceive what a literature wants you to visualize and eventually take into action whatever good you have acquired from a children’s literature. Children’s literature satisfies a particular human need. It allows the embodiment of ideas to become a concrete one and eventually be applied to the good of humanity in forms of acts and other activities that will promote human welfare. Your surname Works Cited Munsch, R. (1985). Paper Bag Princess. San Diego: Annick Press.

How the Columbian Exchange Changed Our World Forever

Products like potatoes, tomatoes, chocolate and tobacco have become part of our everyday life. However, only since the discovery of America by Christopher Columbus these products had been brought to our regions. After this discovery, the Columbian exchange started: products were transported from the New World to the Old World and vice versa. This exchange had an enormous influence on the world: without the Columbian exchange, the world would not be the same as the one we know today. In his essay, Charles C. Mann (2007) called the exchange the most important event after the death of the dinosaurs. Firstly, the Columbian exchange dramatically transformed the American ecological environment. Charles C. Man (2007) explained that, due to the success of Rolfe’s tobacco plantation in Jamestown, English earthworms had been transported from the Old World to the New World. As the worms were extinct on the American mainland, these invertebrates caused a lot of damage to the ecosystem when they ate the foliage beneath the trees. When it rained, all the nutrients, which had been stored in the litter, were leached away. As a consequence, many trees died because they needed these nutrients. As a result, the landscape became more open than it had been before. However, the worms were not the only ones responsible for the drastic change in the American landscape. Besides the worms, the colonists themselves transformed the original landscape by shipping their domestic animals to the NewShow MoreRelatedImpact Of The Columbian Exchange909 Words   |  4 PagesThe Columbian Exchange was a n event that was very impactful on modern day. The Columbian Exchange was the widespread trade of plants, animals, guns, and diseases. It occured between the Americas, Africa, and Europe. Examples of products that the Americas contributed are turkey, squash, and potatoes. Examples of products that Europe contributed are horses, sugar, and smallpox. Columbian exchange was a huge impact on our modern day world because it changed war and hunting, it introduced new ingredientsRead MoreThe Development Of Exploration And The Industrial Revolution1168 Words   |  5 Pagesâ€Å"Reformation† and â€Å"Enlightenment†. This was a time where nations became established and grew increasingly curious of the world around them. Several technological and intellectual advances occurred during this era. Early modern history began with the â€Å"Exploration† period and ended with the â€Å"Industrial Revolution†. To begin with, exploration began when countries began to ponder the world around them more. In Portugal (1415), Prince Henry wanted to travel to Northern Africa so that Portugal could cut theRead MoreThe Struggle Of The Church969 Words   |  4 PagesRenaissance popes. But a man by the name of Martin Luther was able to escape the unfortunate faith of some of the earlier religious reformers. And because of the strong beliefs that he had, both the religious, and political character of Europe changed forever. Martin Luther was born in Germany in 1483. Here, he attended school, and in this era, it was a fascinating time to learn. People were being taught about the fascinating discoveries of Christopher Columbus, and inventions like the printing pressRead MoreThe Mexican Exchange, Bombing Of Hiroshima, And The Events That Took Place Essay2212 Words   |  9 Pagesdoubt whether or not the Colombian exchange, bombing of Hiroshima, and the events that took place in 1968 impacted our world history forever because everyone agrees these three events were extremely impactful. Early The Colombian exchange The Columbian Exchange (also sometimes known as The Great Exchange) has been one of the most significant events in the history of world ecology, agriculture, and culture. The term is used to describe the enormous widespread exchange of plants, animals, foods, humanRead MoreInfluence Of Science And Religion1564 Words   |  7 Pagessystem where leaders had a tremendous amount of power and were able to exert a lot of influence on the way society developed. As formal scientific pursuits became more common, and many commonly held religious beliefs were questioned, the religious world was in turmoil. The divine right of kings and church leaders, and the new focus on science, led to discoveries that seemed to contradict the bible, which, to that point, was said to be the literal word of God. Development in humanity became less dependentRead MoreThe Slavery Of The United States1451 Words   |  6 Pageshorrible beatings that were among the worst hardships of slavery. While I do think that fighting back was the right thing for Douglass to do, I don’t think that his choice to fight back was the most meaningful turning point to his emancipation. Learning how to read and write was what set Douglass apart from the other slaves that he was amongst, and what led him to learn about the better opportunities in the North and inspired him to risk everything to escape to where he could live a free life as a freeRead MoreSlaverys Global Impact and Economic Justifications, Yesterday and Today2490 Words   |  10 PagesJustifications, Today and Yesterday Slavery existed in some form in every region of the world. During the earliest civilizations, slave labor built nations and empires in Europe, Egypt, Greece, Asia and Africa. Thousands of years later, the Portuguese, Dutch and English realized the profit value that a market in human capital would provide. Africans were exported from their homeland to the New World under the most miserable conditions imaginable. Prof. Marcus Rediker, author of The Slave Ship

•The Strategy Of Other Companies For Facing The Wal-Mart

†¢ The Strategy of other companies for facing the Wal-Mart Threat. 1-Force Wal-Mart points are explicitly acknowledged widely. With its size and access to capital, Wal-Mart can maintain even low-shop performance over the long term when you move to the area, a luxury not granted many small businesses, based on the family. Distribution and supply chain enables the efficient retailer to offer very low prices, which is difficult for competitors to match. In wide variety products - especially in shops offering both the grocery and general merchandise - generates traffic and supports storage-stop shopping and one of the consumer experiences. And, the culture-oriented companies to control costs, which include reliance on low-cost and part-time,†¦show more content†¦Mimics this approach, described by Porter (1980) Focus - a low-cost strategy. Empirical research supports the effectiveness of this approach among the selected small retailers, especially those that operate in hostile environments and intensely competitive (Maggie and Rubach, 1996/1997). Strategy 2: Focus--Differentiation Wal-Mart simply cannot meet the needs of our customers. - One approach to successfully compete against the big box requires a recognition that costs must be kept under control, but the costs are low (low prices) cannot serve as an effective basis for competition. Retailers and the adoption of concentration - a strategy of differentiation to avoid price competition and competition on the basis of other factors such as quality, choice, convenience, and service. There is increasing evidence that a number of smaller competitors Wal-Mart employ this approach effectively against the big box (McWilliams, 2007a). - It can also be an excellent specialization approach to combating a large box. Stores like Wal-Mart are the master of the breadth, not depth. This is due to smaller margins; supermarkets are usually able to carry only the products most in demand. Smaller retailers can pick status through the implementation of the relevant product lines or items that are not great boxers. Examples can be found inShow MoreRelatedOperational Planning for Wal-Mart1747 Words   |  7 PagesOperational Planning for Wal-Mart Introduction The first Wal-Mart was opened in Rogers, Arkansas, in 1962. By 1969 it was incorporated into Wal-Mart Stores, Inc., and in 1972 went public on the New York Stock Exchange. The company grew steadily across the United States, and by 1990 was the nations largest retailer. In 1991 and 1994, Wal-Mart moved into Mexico and Canada respectively. By 1997 it was incorporated into the Dow Jones Industrial Average. As of 2005, Wal-Mart has stores in the UnitedRead MoreCross Cultural Perspectives1102 Words   |  5 PagesCross Cultural Perspectives Cross Cultural Perspectives Wal-Mart is one of the largest corporations and private employers in the United States, and one of the most admired companies in America as reported by Fortune Magazine (â€Å"Fortune 500†, 2012). Netting billions of dollars in profits each year, there are not many other retailers who can compete with them. They give millions back in donations to non-profit companies around the country each year, yet put mom-and-pop establishments out ofRead MoreWal-Mart Case Analysis956 Words   |  4 PagesWal-Mart – Case Analysis Situational Analysis Wal-Mart is an American publicly incorporated large retail company founded by Sam Walton in 1962. The secret of Wal-Mart’s tremendous success is its ability to provide an immense number of merchandise from electronics to pharmaceutical goods at a discounted price all in one store. As the largest employer in the world, Wal-Mart enjoys an estimated 20% of the retail grocery business. Recently, after years of disappointing investors, sharesRead More1. Identify and Evaluate the Strategies That Wal-Mart Has Historically Pursued to Create and Sustain a Competitive Advantage.1587 Words   |  7 PagesBANJO MGT 4199 1. Identify and evaluate the strategies that Wal-Mart has historically pursued to create and sustain a competitive advantage. Answer: Wal-Mart’s pursuit and ability to sustain a competitive advantage has allowed the company to make use of many strategies. One of the strategies that Wal-Mart has made use of is the Expansion strategy. The company realized that building a new store will allow for increase market share value. The company opened new locations in the community with 5Read MoreReport on Case Study: Walmart Japan1210 Words   |  5 PagesCASE STUDY: Wal-Mart in Japan Question 1: How would you characterize Wal-Mart’s approach to global management? 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The management of employees, structures, and financial resources includes the development and establishment of effective compensation strategy. Actually, the lack of a sound compensation system has negative impacts on the companys ability to recruit and retain competent and best-qualified employeesRead MoreReport on Case Study: Walmart Japan1210 Words   |  5 PagesCASE STUDY: Wal-Mart in Japan Question 1: How would you characterize Wal-Mart’s approach to global management? The trademark of Wal-Mart’s global management approach focuses on 3 main strategies: low price, best value, large selection of goods high quality service. Being the world’s largest retailer, Wal-Mart will enter the international market by providing a wide variety of products at a lower price than its domestic competitors. In addition, one of the common strategies of Wal-Mart is to partnerRead More Wal-Mart Case Study Essay1116 Words   |  5 PagesWal-Mart Case Study Case Review and Recommendations As we have reviewed and studied the strategy, culture, finances and the challenges and successes at Wal-Mart, there are many strategies we see that the company must undertake to hold its dominate position and drive further growth. Herein, we define our top four. These core strategies include: rebuild and recreate its reputation in the face of recent challenges; continue to show price leadership; improve the customer experience; and drive

Burning Hope Survivors of the Jewish Holocaust - 1170 Words

Those who survived are here to tell the tragic and devastating history of their lives. The survivors have shared brutal but yet realistic stories from each of their experiences before, during, and after the Holocaust. History shall never repeat itself in the manner of racism, murder, and fear of our leaders. The burning hope of those who were involved still generates an enormous sadness upon the many who have heard the horror of the Holocaust. There was a sense of peace and prosperity among those established in the European area. Their lives were comparable to the life of the average American today. There were religious, speech, and physical freedoms still available to those who wanted them. Children laughed, families were united, and†¦show more content†¦Upon arrival at a concentration camp, victims did not realized what these â€Å"camps† consisted of. Some say that they didn’t exist. Others knew exactly what occurred at these camps from gossip or friends tha t had escaped. Uniforms were issued to each individual according to the crime they had committed. A yellow triangle placed on the uniform displayed that you were Jewish. Pink triangles displayed homosexuality. Triangles with a brown tint exhibited gypsies. Red triangles paraded communism. Triangles that were green displayed that a prisoner was a criminal. A double lined electric barbed fence surrounded all camps in Europe. Snipers then sat in stands to view the camp from above. At night they would use spotlights to guard the surroundings. Scattered around the grounds would be about a dozen soldiers marching the premises looking and scavenging around for mishap. It was as if the people within the camp were animals, restrained and punished when committing a wrongdoing. â€Å"When someone would disobey or not listen to a guard, we would be forced to strip down to the nude and roll around in hot coals until the body bled from everywhere. Once this was complete, you either died from infection or suffered severe burns.† (David 91). Seven million were forced to work at a concentration camp during the Holocaust. This boosted the economy because this was unpaid labor. Concentration camps existed because the Nazis couldn’t just exterminate all Jews orShow MoreRelatedJewish Literature And The Holocaust899 Words   |  4 PagesHolocaust literature is one of the emerging field in literature during the second half of the twentieth century. Several Holocaust survivors wrote about the atrocities they witnessed and their experiences during the incarceration. The word â€Å"Holocaust† encompasses images of death, horror, and inhumanity. Although many survivors find it difficult to talk aabout their experience, some of the took an oath to use their pen to protest against such horrible genocide and to make sure that this would neverRead MoreNazi Death Camps in the Night by Elie Wiesel833 Words   |  4 Pagesof 1944 and 1945. Elie and his family of 4 ar e optimistic when Germany begins to take power. Germany invades Hungary, then arrives in Elie’s town. The Nazi’s begin to take over the Jews by limiting their freedom. Jews are eventually deported. The Jewish people are crowded into wagons where they are shipped to Auschwitz. He is separated from his mother and sister. Over the course of the book, Elie and his father are sent to two different concentration camps. Their final concentration camp is BuchenwaldRead MoreEssay on Holocaust: The Unforgettable1569 Words   |  7 Pageshistory of the Holocaust is taught systematically in all school systems throughout America and most of the known-world. The atrocities committed by Nazi-Germany are well-known and are likely to never be forgotten. The proof behind Hitler’s Final Solution is undeniable. However, with the rise of Holocaust deniers comes the grave danger of forgetting the truth behind the Holocaust, and dooming ourselves to repeating history once again. Holo caust deniers claim that certain events of the Holocaust never happenedRead MoreEssay on Nightfather by Carl Friedman834 Words   |  4 PagesRunning and screaming. Burning and freezing. The survivors of the Holocaust have been through it all. Their stories describe each and every detail of the horrendous events they experienced. Although the book Nightfather is fiction, the stories described depict the actual Holocaust exactly. By dissecting the time period of Carl Friedman’s Nightfather, a reader can understand the elements of fiction and realize the impact of history on fictional literature. This book takes place sometime during theRead MoreSchindlers List Essay1473 Words   |  6 PagesSix million Jewish residents of Eastern Europe were exterminated during the Holocaust of the 1940’s. Families were taken out of their homes and put into ghettos, which were large prison type establishments that housed dozens of people in one small apartment. They were then separated from their families, men to the left and women to the right, and were placed in concentration camps, where most of them were killed and cremated. In 1993, Steven Spielberg directed a film, Schindler’s List, which depictedRead MoreEssay on The History and Hardships of the Jewish People1441 Words   |  6 PagesSince the beginning of the Judaism, the Jewish people have been subject to hardships and discrimination. They have not been allowed to have a stabile place of worship and have also faced persecution and atrocities that most of us can not even imagine. Three events that have had a big imp act on the Jewish faith were the building and destruction of the First Great Temple, the Second Great Temple and the events of the Holocaust. In this paper, I will discuss these three events and also explain and giveRead MoreThe Holocaust : The World s Perspective Essay1455 Words   |  6 Pageswhole story of the Holocaust, they only know of bits and pieces. Most people know that Hitler rose to command and had a strong dislike of specific groups of people, which consequently began the Holocaust. The Holocaust changed the whole world’s perspective. Our fellow human were tortured, starved, and burned alive for being different from society. I wrote this essay to show that there is always another side to a story. Now I give you â€Å"The Holocaust Revealed†. The Holocaust began in January ofRead MoreThe Holocaust : Its Causes And How It Was Carried Out1497 Words   |  6 PagesDestiny Corbitt Shawn Underell The Holocaust 21 February 2016 The Holocaust The holocaust is one of the memorable events in history and it is important to know some of its causes and how it was carried out. The Holocaust is a controlled torture that killed roughly six million Jews by the Nazi government, led by Adolf Hitler. Apart from the Jews, other groups considered inferior or anti-establishment such as Poles, Romans and gypsies were also killed. There were several reasons for these grisly murdersRead MoreThe Train Car As A Symbol Of The Extermination1337 Words   |  6 Pagesthe case of the Holocaust, symbols are used to materially express the nearly unfathomably reality of its events. But, what do we do with often emotionally charged perceptions of history? Symbols can be used as evidence, and as a way to connect the past to the present commemorating the time period in which they encapsulate. But symbols are culturally created, as objects are assigned a meaning often during but more importantly after events have passed. In the case of the Holocaust, the train car Read MoreWhy Is The Killing Of A Million A Lesser Crime?1440 Words   |  6 Pagesthe killing of a million a lesser crime than the killing of an individual?† -Raphael Lemkin referring to genocides. Genocides are organized exterminations committed with intent to destroy a whole group based on religion, ethnicity, and race. The Holocaust, the Armenian genocide, Darfur, and the Rwanda genocide were all terrible events in history, but why did they occur? The form of genocide had existed since the perception of superiority and inferiority was known. As a superior group gains more

Chapter 20 Free Essays

Chapter 20 Free Essays string(85) " by debt is not only contributing the property to the partnership but also the debt\." Chapter 20 Forming and Operating Partnerships Solution Manual Discussion Questions: 1. [LO 1] What is a flow-through entity, and what effect does this designation have on how business entities and their owners are taxed? Flow-through entities are entities that are not taxed on the entity level; rather, these entities are taxed on the owner’s level. These types of entities conduct a regular business; however, the income earned and deductions allowed are passed to the owners of these flow-through entities, and the owners are taxed on the amount allocated to them. We will write a custom essay sample on Chapter 20 or any similar topic only for you Order Now Thus, flow-through entities provide a way for income and deductions to be taxed only once instead of twice. 2. [LO 1] What types of business entities are taxed as flow-through entities? The two main business entities that are taxed as flow-through entities are partnerships and S corporations. Partnerships are taxed under Subchapter K and consist of general partnerships, limited partnerships, and limited liability companies (LLC). S corporations are taxed under Subchapter S. Both these types of business entities are treated as flow-through entities and are taxed accordingly. 3. LO 1] Compare and contrast the aggregate and entity concepts for taxing partnerships and their partners. The aggregate concept treats partnerships more like a conglomeration of individual owners. Each partnership is viewed as an aggregation of the partners’ separate interests in the assets and liabilities of the partnership. For example, each partner, rather than the partnership, pays tax on their indivi dual share of partnership income. The entity concept treats partnerships more like a corporation. Each partnership is an entity separate from its partners. For example, the artnership decides on which tax method to use and which tax elections to make rather than the individual partners. 4. [LO 2] What is a partnership interest, and what specific economic rights or entitlements are included with it? A partnership interest is an equity interest in a partnership. This interest is created through a transfer or sale of cash, property, or services in exchange for an equity interest in the partnership. A partnership interest gives each partner certain rights or entitlements. The two main economic rights are a capital interest and profit interest in the partnership. A capital interest is the right for a partner to receive a share of the partnership assets during liquidation. A profit interest is the right or obligation for a partner to receive a share of the future income or losses of the partnership. 5. [LO 2] What is the rationale for requiring partners to defer most gains and all losses when they contribute property to a partnership? The rationale for requiring partners to defer most gains and losses when contributing property to a partnership is twofold. First, the IRS desires that entrepreneurs have a way to start their own business without having to pay any taxes upfront. Second, the partners are considered still owning the property they have contributed to the partnership. While they don’t own the property outright, each partner has a small percentage of the property contributed in her/his partnership interest she/he exchanged for. This second reasoning helps further support the idea that partnerships follow the aggregate concept. 6. [LO 2] Under what circumstances is it possible for partners to recognize gain when contributing property to partnerships? Partners have the potential of recognizing gain on the contribution of property when the property contributed is secured by debt. In determining whether gain must be recognized, the partner must assess the cash deemed to have received from the partnership distribution compared with the tax basis of the partner’s partnership interest prior to the deemed distribution. This happens if the assumption of the partner’s liabilities is in excess of the partner’s basis of the contributed property. If the cash deemed to have received exceeds the tax basis, then a gain must be recognized. This circumstance occurs due to the negative basis created for the partner, which is not allowed under partnership tax law. . [LO 2] What is inside basis and outside basis, and why are they relevant for taxing partnerships and partners? An inside basis, in relation to partnerships, is the basis the partnership takes in the assets that the partnership holds. An outside basis, in relation to partnerships, is the tax basis each partner has in the partnership. The inside basis is necessary to compute the gain/loss recogn ized on all property sold by the partnership. The outside basis is necessary to compute the gain/loss recognized on the partnership interest when sold. For tax purposes, the inside basis is similar to the basis the partner had in the property prior to contribution. On the other hand, the outside basis corresponds not only to the contributed property, but also to the debt and income/losses of the partnership. 8. [LO 2] What is recourse and nonrecourse debt, and how is each generally allocated to partners? Recourse debt is debt for which partners are considered to have an economic risk of loss. This type of debt partners are legally liable for and must satisfy personally if the partnership cannot. An example of recourse debt is accounts payable. Nonrecourse debt is debt for which no partners are considered to have an economic risk of loss in. This is a debt for which partners are not legally liable for. An example of nonrecourse debt is a mortgage. In regards to a partnership’s debt, recourse debt is allocated to those partners that have the ultimate responsibility of paying the debt. The debt is allocated to the partners that have an economic risk of loss. On the other hand, nonrecourse debt is generally allocated to the partners according to their profit sharing ratios. Despite the partners not being legally liable for some debt, all debt is allocated to adjust the outside basis of the partners. 9. [LO 2] How does the amount of debt allocated to a partner affect the amount of gain a partner recognizes when contributing property secured by debt? A partner that contributes property secured by debt is not only contributing the property to the partnership but also the debt. You read "Chapter 20" in category "Papers" In calculating the outside basis of the partner, the partner must take her/his tax basis in the property and decrease her/his basis by the amount of the property’s debt. Next, the property’s debt is allocated to each partner according to who is ultimately responsible for it or by each partner’s profit-sharing ratio. If the partner is not allocated enough debt, the partner’s outside basis will become negative and a gain must be recognized. Thus, a partner can only avoid gain by obtaining enough of the partnership debt to keep her/his basis at least above zero. 10. [LO 2] What is a tax-basis capital account, and what type of tax-related information does it provide? A tax-basis capital account is an equity account that is created for each partner of the partnership. This account is measured using the tax accounting rules. The account reflects tax basis of any capital contributions (i. e. , property and cash), capital distributions, and future earnings and losses allocated to that partner. Additionally, a tax-basis capital account can provide more tax-related information for each partner. For instance, each partner’s share of inside basis of the partnership’s assets can be calculated by adding the partner’s share of debt to her/his capital account. Furthermore, if a partner acquires her/his interests by contributing property tax-free, then the partner’s outside basis will be equal to that partner’s share of partnership inside basis. 11. [LO 2] Distinguish between a capital interest and a profits interest, and explain how partners and partnerships treat when exchanging them for services provided. A partnership interest can be broken down into two distinct rights: (1) capital interest and (2) profits interest. To become a partner in a partnership, you will receive at least one of these rights. A capital interest is the right to receive a share of the partnership assets at liquidation. A profits interest is the right to share in the future earnings and losses of the partnership. While these rights are given to most partners that contribute cash or property, special rules exist when these rights are given to partners in exchange for services. When a partner receives a capital interest in exchange for services rendered to the partnership, the partner must treat the liquidation value of the capital interest as ordinary income. Further, the tax basis for the partner will be equivalent to the amount of ordinary income recognized. The holding period for this tax basis will begin on the date the capital interest is received. From the partnership’s perspective, the partnership can deduct or capitalize the value of the capital interest depending upon the type of services rendered. This is determined on a fact and circumstance basis. Additionally, the amount deducted by the partnership is allocated to the non-service partners as consideration for effectively transferring a portion of their capital interest to the service partner. When a partner receives a profit interest in exchange for services rendered to the partnership, the partner has no immediate tax impact because they have no liquidation value at the time they are received. Thus, the non-service partners will not receive any deductions for the additional partner to the partnership. As the partnership makes future profits and losses, the service partner will be allocated her/his portion of these losses according to the profit sharing ratios. The debt allocated to non-service partners must also be redistributed with the additional service partner receiving her/his portion of debt. Therefore, the tax basis of a service partner with only a profit interest will either be zero or the portion of debt the partner is allocated. 12. [LO 2] How do partners who purchase a partnership interest determine the tax basis and holding period of their partnership interests? When a partner purchases a partnership interest, the initial tax basis for the partner is a determined by taking the cost basis of the interest the partner purchased and adding to this basis any debt allocated to the partner’s interest. The holding period for this purchased interest will begin on the date that the partner purchased the partnership interest. 3. [LO 3] Why do you think partnerships, rather than the individual partners, are responsible for making most of the tax elections related to the operation of the partnership? The responsibility for the partnership, not the partners, to make the majority of tax elections regarding the operation of the partnership is twofold. First, partnerships can consist of many different partners ranging from two to hundreds. The hassle to obtain every partner’s approval on what elections to make would be very time consuming. The costs would more than likely outweigh the benefits in performing this function. Second, in many partnerships only a few partners are actively involved in the management of the partnership. The limited partners have ownership to obtain a tax advantage on their own personal returns. Thus, the entity concept would appear more reasonable when dealing with the actual operations of the partnership. 14. [LO 3] If a partner with a taxable year-end of December 31 is in a partnership with a March 31 taxable year-end, how many months of deferral will the partner receive? Why? A partner with a calendar year end will receive nine months of deferral in her/his partnership interest that has a March 31 year end. A partner must report the income or loss of the partnership not at the partner’s year end but at the partnership’s year end. Thus, the first year of the partnership will be reported by the partner on her/his return which includes the partnership’s year end, which allows the partner to defer the first nine months of income or loss from the partnership into the succeeding tax year. 15. [LO 3] In what situation will there be a common year-end for the principal partners when there is no majority interest taxable year? The principal partner test states that the required tax year is the taxable year all the principal partners have in common. A principal partner is a partner that owns at least 5 percent interest in the partnership profits and capital. For the principal partner test to pass and not the majority interest test, the partnership must consists of numerous partners that (1) own less than 5 percent profit and capital interest and (2) have a variety of fiscal year ends. For example, if four partners with a calendar year end owned 10 percent and 20 additional partners with differing fiscal year ends owned less than 5 percent, then the majority test would not pass, but the principal partners test would. 6. [LO 3] Explain the least aggregate deferral test for determining a partnership’s year end and discuss when it applies. The least aggregate deferral test is the last resort test that a partnership must follow when figuring out the partnership year end. The first test is the majority interest test. The second test is the principal partners test. If these two tests don’t apply, along with the exception to elect an alternative year end, then the least aggregate deferral test goes into effect. The least aggregate deferral test selects the tax year which provides the partner group as a whole the smallest amount of aggregate tax deferral. This is calculated by taking each partner’s months of deferral under the potential tax year and weighting it with the partner’s profit interest percentage. Then, each partner’s weighted totals are summed up to come up with an aggregate deferral number. The potential tax year that produces the smallest aggregate deferral must be the one chosen by the partnership. 17. [LO 3] When are partnerships eligible to use the cash method of accounting? Under the tax accounting rules, a partnership with a corporate partner must use the accrual method of accounting unless the following exception applies. A partnership with a corporate partner is eligible to use the cash method of accounting when the partnership has average gross receipts over the past three taxable years less than or equal to $5 million. 18. [LO 4] What is a partnership’s ordinary business income (loss) and how is it calculated? Through the course of business, partnerships create income or losses. Some of these items are considered to affect a specific partner or groups of partners differently. Thus, these separately-stated items must be reported on a partner-by-partner basis. Then, after adjusting the partnership’s business income (loss) for these separately-stated items, the partnership reports the remaining amount of business income (loss) to ordinary business income (loss). The total amount will be allocated to each partner according to the special allocation rules agreed upon or else based upon the profit sharing ratios of the partnership. 19. [LO 4] What are some common separately stated items, and why must they be separately stated to the partners? Separately-stated items must be taken out of ordinary income (loss) because these items either (1) relate only to a specific partner in the partnership or (2) the item is taxed differently for each partner depending upon the entity of the partner and the partner’s current tax situation. The following is a partial list of items that are separately stated on a partnership return. 1. Short-term capital gains (losses) 2. Long-term capital gains (losses) 3. Section 1231 gains (losses) 4. Charitable contributions 5. Dividends 6. Interest income 7. Guaranteed payments 8. Net earnings (losses) from self-employment . Tax-exempt income 10. Net rental real estate income (loss) 11. Investment interest expense 12. Section 179 deductions 20. [LO 4] Is the character of partnership income/gains and expenses/losses determined at the partnership or partner level? Why? In keeping with the entity concept, the character of all income/gains and expenses/losses is determined at the partnership level . Despite the chance that specific items would change character depending upon the partner who holds them, the IRS has decided to unify the character of all items by looking at the character from the partnership’s perspective. Thus, partnerships are required to file a 1065 return along with all partners’ K-1s to help audit the amounts and character that show up on the individual partner’s return. 21. [LO 4] What are guaranteed payments and how do partnerships and partners treat them for income and self-employment tax purposes? Guaranteed payments are similar to cash salary payments for services provided. The idea behind a guaranteed payment is for a partner to receive a fixed amount of income no matter the profit (loss) for the partnership’s taxable year. Thus, on the partnership level, hey are treated like a salary payment to an unrelated party. The partnership deducts the guaranteed payment in computing the partnership’s ordinary business income (loss). On the partner level, the partner that receives a guaranteed payment must account for the guaranteed payment as a separately-stated item that is taxed as ordinary income. Further, the partner must include the amount of the guar anteed payment in computing self-employment income for tax purposes. This amount is included no matter if the partner is a general partner, limited partner, or LLC member. 22. LO 4] How do general and limited partners treat their share of ordinary business income for self-employment tax purposes? In determining how different partners treat their share of ordinary business income, the IRS assesses the involvement the partner has in the partnership. General partners are considered to be actively involved in the management of the partnership. Thus, the general partner’s share of ordinary business income is treated as trade or business income and is subject to self-employment tax. Conversely, limited partners are generally not actively involved with managing the partnership. The limited partner’s share of ordinary business income is treated as investment income and not subject to self-employment tax. Both types of partners must treat guaranteed payments as income relating to self-employment; however, the ordinary business income depends on the type of partner. 23. [LO 4] What challenges do LLCs face when deciding whether to treat their members’ shares of ordinary business income as self-employment income? Due to the lack of authoritative ruling that exists for LLCs, members must decide on their own whether to include ordinary business income as self-employment income or not. A proposed regulation gave us clarity on this matter; however, the regulation was withdrawn. Members of an LLC should still review this proposed regulation to understand the stance the IRS is trying to take and whether they will take an aggressive or conservative stance for their specific situation. The proposed regulation helped clarify that if an LLC member is involved in the operations of the LLC, the member should treat the ordinary business income as self-employment income. The regulation listed the following three criteria that would demonstrate active involvement in the LLC: (1) personally liable for the debt of the LLC as an LLC member, (2) authority to contract on behalf of the LLC, or (3) participate in more than 500 hours in the LLC’s trade or business during the taxable year. If any one of these requirements is met, then the LLC member would be more associated as a general partner and should more than likely account for the ordinary business income as self-employment income. 24. [LO 4] How much flexibility do partnerships have in allocating partnership items to partners? Partnerships have a great deal of flexibility in determining how to allocate partnership items to partners, both separately-stated and non-separately stated items. The determining factors must be (1) the partners agree upon the allocations and (2) the allocations have substantial economic effect. The second factor is put into place to make sure the allocations are being accomplished for a business objective and not just to reduce or avoid taxes. While both of these items need to be met for a special allocation of a partnership item, certain items have mandatory allocations to specific partners. For example, contributed property built-in gain (loss) must be allocated to the partner who contributed the property when the property is sold. Any additional gain (loss) will be allocated according to the partnership agreement. Overall, if the partnership has no mandatory allocations or does not specify and meet the requirements for special allocations, the partnership will allocate according to the capital or profit interest. 25. [LO4] What are the basic tax-filing requirements imposed on partnerships? While a partnership does not pay taxes, the IRS still requires all partnerships to file an information return to the IRS – Form 1065 (U. S. Return of Partnership Income). This form must be filed by the 15th day of the 4th month of the partnership’s year end. For calendar year end partnerships, the form must be filed by April 15th. An extension is available to file by the due date of the original return and provides the partnership an additional five months to file Form 1065. The extension must be filed on Form 7004. The tax return that must be filed by all partnerships consists of a detailed calculation of the partnerships ordinary business income (loss) on page 1 of Form 1065. On page 3 of Form 1065, Schedule K must be filled out which lists the ordinary business income (loss) along with any separately-stated items. This schedule is an aggregate of each partner’s share of items both separately-stated and non-separately stated. In addition, each partner’s proportion of the above items is reported on a Schedule K-1. A Schedule K-1 for every partner must be filed with Form 1065, and each individual partner will receive her/his own Schedule K-1 from the partnership. 26. [LO 5] In what situations do partners need to know the tax basis in their partnership interests? Partners should always keep track of the tax basis in their partnership interest; however, certain situations require partners to actually know their tax basis. These situations include when a partner sells her/his partnership interest or when a partner receives a distribution from the partnership. The main reasoning is to help the partner figure out the amount of gain which s/he most report on her/his current tax return. 27. [LO 5] Why does a partner’s tax basis in her partnership need to be adjusted annually? A partner’s tax basis needs to be adjusted annually for the following three reasons. First, a partner does not want to double count any income/gain from the partnership when she/he sells her/his partnership interest or receive a distribution from the partnership. Second, the IRS does not want partners to double count any expenses/losses from the partnership in a similar situation from above. Last, partners want to make sure they adjust for tax-exempt income and non-deductible expenses, so these items will not ultimately be taxed or deducted at the time of selling a partnership interest or receiving a distribution from the partnership. 28. [LO 5] What items will increase a partner’s basis in her partnership interest? The following items will increase a partner’s basis and must be adjusted for on an annual basis in the order given. 1. Actual and deemed cash contributions to the partnership 2. Partner’s share of ordinary business income 3. Partner’s share of separately-stated income/gain items and 4. Partner’s share of tax-exempt income 29. [LO 5] What items will decrease a partner’s basis in her partnership interest? The following items will decrease a partner’s basis and must be adjusted for on an annual basis in the order given. These items will be adjusted after all the increases to a partner’s basis have been taken into effect. 1. Actual and deemed cash distributions from the partnership 2. Partner’s share of non-deductible expenses (fines, penalties, etc. ) 3. Partner’s share of ordinary business losses and 4. Partner’s share of separately-stated expenses/loss items 30. [LO 6] What hurdles (or limitations) must partners overcome before they can ultimately deduct partnership losses on their tax returns? While a partnership can create an ordinary business loss, the individual partners potentially will not be able to deduct the entire amount in the year of the loss. The partner must overcome three loss limitation rules before the deduction is available. If the loss does not pass any of the limitations, then the loss is suspended indefinitely under that specific hurdle. The three loss limitations are (1) the tax basis limitation, (2) the at-risk loss limitation, and (3) the passive activity loss limitation. First, a partner is not able to take any losses that exceed the tax basis of the partner, the partner’s outside basis. This limitation prevents partners from taking losses beyond their investment or basis in their partnership interests. Second, a partner cannot take any losses that exceed the at-risk amount for the partner. The at-risk amount is generally the same as the partner’s tax basis, except that it excludes the partner’s share of nonrecourse debt. This limit still includes recourse debt and qualified nonrecourse debt. Finally, in the case of a passive participant in a partnership, losses cannot be taken if the loss exceeds the amount of passive income reported by the partner. Passive losses such as losses from rental activities or losses allocated to a limited partner can only be offset with passive gains. 31. [LO 6] What happens to partnership losses allocated to partners in excess of the tax basis in their partnership interests? Losses that are allocated to partners that exceed the partner’s tax basis cannot be used during the current taxable year. The excess loss will be suspended and carried forward indefinitely until the partner has sufficient basis to utilize the losses. A partner would be able to increase her/his tax basis by (1) making a capital contribution, (2) guaranteeing more partnership debt, or (3) helping the partnership become more profitable. Once the partner’s tax basis is positive, the losses previously suspended can be used. 32. [LO 6] In what sense is the at-risk loss limitation rule more restrictive than the tax basis loss limitation rule? While the at-risk loss limitation and tax basis loss limitation are basically the same, one difference exists between the two different hurdles a partner must overcome when faced with losses. The at-risk loss limitation only accounts for those items that the partner is at risk for. The major item that is not included under the at-risk calculation but is included in the tax basis is nonrecourse debt. As a note, qualified nonrecourse debt is still considered to be part of the partner’s at-risk calculation. 33. [LO 6] How do partners measure the amount they have at risk in the partnership? A partner will measure her/his partnership at-risk amount by looking at what items affect the partner’s economic risk of loss. In most cases, items included in the at-risk amount would include cash contributed, tax basis of property contributed, recourse debt, qualified nonrecourse debt, and any other adjustments to the partner’s tax basis excluding nonrecourse debt. Nonrecourse debt is considered a part of the tax basis but not a part of the at-risk basis since the partner does not have an economic risk of loss for this type of debt. 34. [LO 6] In what order are the loss limitation rules applied to limit partner’s losses from partnerships? The order of the hurdles a partner must pass for the loss limitation rules are (1) tax basis loss limitation, (2) at-risk loss limitation, and (3) passive activity loss limitation. As the losses exceed the limitation in each hurdle, the suspended losses will be carried forward indefinitely within each group until enough basis or income is generated to cover these losses. Once the loss has passed all three limitations, the partner can use the loss as a deduction on her/his own personal return. 35. [LO 6] How do partners determine whether they are passive participants in partnerships when applying the passive activity loss limitation rules? According to the Code, a partner is considered to be a passive participant if the activity conducted is a trade or business and the partner does not materially participate in the activity. The IRS has made it clear that those participants in rental activities and limited partners within a partnership are automatically considered to be passive participants. Further, regulations help clarify whether a partner would be considered a material participant. If the partner meets any of the conditions below, then the partner would be a material participant and the activity would not be considered a passive activity to the partner. . The individual participates in the activity more than 500 hours during the year. | 2. The individual’s activity constitutes substantially all of the participation in such activity by individuals. | 3. The individual participates more than 100 hours during the year and the individual’s participation is not less than any other individual’s parti cipation in the activity. | 4. The activity qualifies as a â€Å"significant participation activity† (individual participates for more than 100 hours during the year) and the aggregate of all other â€Å"significant participation activities† is greater than 500 hours for the year. | 5. The individual materially participated in the activity for any 5 of the preceding 10 taxable years. | 6. The activity involves personal services in health, law, accounting, architecture, and so on, and the individual materially participated for any three preceding years. | 7. Taking into account all the facts and circumstances, the individual participates on a regular, continuous, and substantial basis during the year. | 36. [LO 6] Under what circumstances can partners with passive losses from partnerships deduct their passive losses? A partner may deduct the passive losses she/he has generated from a partnership under three circumstances. First, a passive loss is not deductible until the taxpayer generates current year passive income in the activity producing the loss. Second, a passive loss is not deductible until the taxpayer generates current year passive income from another passive activity the taxpayer is involved with. Last, a passive loss will not be deductible unless the taxpayer sells the activity that has produced the passive loss. In this case, the taxpayer will report a gain or loss on the sale and can use the passive loss to offset this or any other source of income ( i. . , active income, portfolio income, or other passive income). Problems 37. [LO 2] Joseph contributed $22,000 in cash and equipment with a tax basis of $5,000 and a fair market value of $11,000 to Berry Hill Partnership in exchange for a partnership interest. a. What is Joseph’s tax basis in his partnership interest? b. What is Berry Hill’s basis in the equipment? a. $27,000. Joseph’s tax basis is considered to be his outside basis in the partnership. The tax basis includes the $22,000 in cash and his original basis in the equipment, $5,000. Joseph’s holding period for his outside basis would depend upon the holding period of the assets contributed. If property contributed is a capital or Section 1231 asset, the holding period for that portion of the partnership interest includes the holding period of the contributed property. Otherwise, the holding period of the partnership interest begins on the date it is received. b. $5,000. Berry Hill Partnership’s basis in the equipment is a carryover basis from the partner who contributed the equipment. The basis in the equipment plus the basis in the cash will give us Berry Hill Partnership’s inside basis. The holding period for the equipment carries over to the Berry Hill Partnership from Joseph. 38. [ LO 2] Lance contributed investment property worth $500,000, purchased three years ago for $200,000 cash, to Cloud Peak LLC in exchange for an 85 percent profits and capital interest in the LLC. Cloud Peak owes $300,000 to its suppliers but has no other debts. a. What is Lance’s tax basis in his LLC interest? b. What is Lance’s holding period in his interest? c. What is Cloud Peak’s basis in the contributed property? d. What is Cloud Peak’s holding period in the contributed property? a. $455,000. Lance’s basis in his LLC interest is made up of the $200,000 basis of the investment property he transferred to the LLC and his $255,000 share of the LLC debt (85% x $300,000). Because LLC general debt obligations are treated as nonrecourse debt, Lance’s profit sharing ratio is used to allocate a portion of the LLC debt to him. b. Three years. Because Lance contributed a capital asset, the holding period of the contributed assets â€Å"tacks onto† his partnership interest. c. $200,000. The LLC takes a carryover basis in the contributed property. d. Three years. The LLC inherits Lance’s holding period in the contributed property. 9. [ LO 2] Laurel contributed equipment worth $200,000, purchased 10 months ago for $250,000 cash and used in her sole proprietorship, to Sand Creek LLC in exchange for a 15 percent profits and capital interest in the LLC. Laurel agreed to guarantee all $15,000 of Sand Creek’s accounts payable, but she did not guarantee any portion of the $100,000 nonrecourse mortgage securing Sand Creek’s office building. Other than the accounts payable and mortgage, Sand Creek does not owe any debts to other creditors. a. What is Laurel’s initial tax basis in her LLC interest? b. What is Laurel’s holding period in her interest? c. What is Sand Creek’s initial basis in the contributed property? d. What is Sand Creek’s holding period in the contributed property? a. $280,000. Laurel’s basis in her LLC interest is made up of the $250,000 basis in the equipment (no depreciation was taken on the equipment prior to the contribution because it was acquired and contributed within the same calendar year) Laurel contributed, her $15,000 share of accounts payable that she guaranteed, and her $15,000 share of the nonrecourse mortgage securing Sand Creek’s office building (15% x $100,000). Laurel’s profits sharing ratio is used to allocate a portion of the mortgage to her because it is nonrecourse debt. b. Laurel’s holding period begins the day the LLC interest is acquired because the asset she contributed is not a capital or Section 1231 asset. The equipment is not a Section 1231 asset because it was used in a trade or business for one year or less. c. $250,000. The LLC takes a carryover basis in the contributed property. d. Ten months. Laurel’s holding period is included in the LLC’s holding period regardless of the nature of the property Laurel contributed. 0. [LO 2] {Planning}Harry and Sally formed the Evergreen partnership by contributing the following assets in exchange for a 50 percent capital and profits interest in the partnership: Harry:Basis Fair Market Value Cash$ 30,000$ 30,000 Land100,000120,000 Totals$ 130,000$ 150,000 Sally: Equipment used in a business200,000150,000 Totals$ 200,000$ 150,000 a. How much gain or loss will Harr y recognize on the contribution? b. How much gain or loss will Sally recognize on the contribution? c. How could the transaction be structured a different way to get a better result for Sally? . What is Harry’s tax basis in his partnership interest? e. What is Sally’s tax basis in her partnership interest? f. What is Evergreen’s tax basis in its assets? g. Following the format in Exhibit 20-2, prepare a tax basis balance sheet for the Evergreen partnership showing the tax capital accounts for the partners. a. $0. Generally, partners recognize gain on property contributed to a partnership only when the cash they are deemed to receive from debt relief exceeds their basis in the partnership prior to the deemed distribution. Harry did not have any debt relief. . $0. Partners may never recognize loss when property is contributed to a partnership even when they are relieved of debt. c. Sally should consider selling the property to the partnership rather than contribut ing it. By selling the property, she could recognize the $50,000 built-in loss on the equipment. d. $130,000. Harry’s basis in his partnership interest is simply the combined tax basis in the cash and land he contributed to the partnership. e. $200,000. Sally’s basis in her partnership interest equals $200,000 basis in the equipment she contributed. f. $330,000. The partnership’s basis in its assets equals the sum of the partners’ bases in the cash ($30,000), in the land ($100,000), and in the equipment ($200,000). g. The partnership’s tax basis balance sheet would appear as follows: Evergreen PartnershipTax Basis Balance Sheet| | Tax Basis| Assets:| | Cash| $30,000| Equipment| 200,000| Land| 100,000| Totals| $330,000| Capital:| | Capital-Harry| 130,000| Capital-Sally| 200,000| Totals| $330,000| 41. [LO 2] Cosmo contributed land with a fair market value of $400,000 and a tax basis of $90,000 to the Y Mountain partnership in exchange for a 25 percent profits and capital interest in the partnership. The land is secured by $120,000 of nonrecourse debt. Other than this nonrecourse debt, Y Mountain partnership does not have any debt. a. How much gain will Cosmo recognize from the contribution? b. What is Cosmo’s tax basis in his partnership interest? a. $0. As reflected in the table below, Cosmo does not recognize any gain because the $120,000 of cash he is deemed to receive from debt relief does not exceed his basis in Y Mountain prior to this deemed distribution. Description| Cosmo| Explanation| (1) Basis in contributed Land| $90,000| | 2) Nonrecourse mortgage in excess of basis in contributed land| $30,000| Nonrecourse debt basis is allocated only to Cosmo | (3) Remaining nonrecourse mortgage | $22,500| 25% x [120,000 – (2)]| (4) Relief from mortgage debt| ($120,000)| | Cosmo’s initial tax basis in Y Mountain| $22,500| (1) + (2) + (3) + (4) | b. $22,500 as indicated in the table above. 42. [LO2] When High Horizon LLC was formed, Maude contributed the follow ing assets in exchange for a 25 percent capital and profits interest in the LLC: Maude:Basis Fair Market Value Cash$ 20,000$ 20,000 Land*100,000200,000 Totals$ 120,000$ 220,000 *Nonrecourse debt secured by the land equals $160,000 James, Harold and Jenny each contributed $220,000 in cash for a 25% profits and capital interest. a. How much gain or loss will Maude and the other members recognize? b. What is Maude’s tax basis in her LLC interest? c. What tax basis do James, Harold, and Jenny have in their LLC interests? d. What is High Horizon’s tax basis in its assets? e. Following the format in Exhibit 20-2, prepare a tax basis balance sheet for the High Horizon LLC showing the tax capital accounts for the members. . $0. None of the members recognize gain because their debt relief was not in excess of their bases in their LLC interest prior to any debt relief. See table below: Description| Maude| Other Members| Explanation| (1) Basis in contributed Land| $100,000| | | (2) Cash contributed| $20,000| $220,000| | (3) Nonrecourse mortgage in excess of basis in contributed land| $60,000| | Nonrecourse deb t basis is allocated only to Maude | (4) Remaining nonrecourse mortgage | $25,000| $25,000| 25% x [160,000 – (3)]| (5) Relief from mortgage debt| ($160,000)| | | Each member’s initial tax basis in the LLC| $45,000| $245,000| (1) + (2) + (3) + (4) + (5)| b. $45,000. See table in part a. above. c. $245,000 each. See table in part a. above. d. $780,000. High Horizon takes a $120,000 carryover basis in the assets Maude contributes and a $660,000 in the total cash the other three members contributed. e. High Horizon’s tax basis balance sheet would appear as follows: High Horizons, LLCTax Basis Balance Sheet| | Tax Basis| Assets:| | Cash| $680,000| Land| 100,000| Totals| 780,000| Liabilities and Capital:| | Mortgage debt| 160,000| Capital-Maude| (40,000)| Capital-James| 220,000| Capital-Harold| 220,000| Capital-Jenny| 220,000| Totals| 780,000| Note that the members’ tax capital accounts are equal to their bases in the LLC interests less their individual shares of LLC debt. 43. [LO2] Kevan, Jerry, and Dave formed Albee LLC. Jerry and Dave each contributed $245,000 in cash. Kevan contributed the following assets: Kevan:Basis Fair Market Value Cash$ 15,000$ 15,000 Land*120,000230,000 Totals$ 135,000$ 245,000 *Nonrecourse debt secured by the land equals $210,000 Each member received a one-third capital and profits interest in the LLC. . How much gain or loss will Jerry, Dave and Kevan recognize on the contributions? b. What is Kevan’s tax basis in his LLC interest? c. What tax basis do Jerry and Dave have in their LLC interests? d. What is Albee LLC’s tax basis in its assets? e. Following the format in Exhibit 20-2, prepare a tax basis balance sheet for the Albee LLC showing the tax capital accounts for the members. W hat is Kevan’s share of the LLC’s inside basis? f. If the lender holding the nonrecourse debt secured by Kevan’s land required Kevan to guarantee 33. 3 percent of the debt and Jerry to guarantee the remaining 66. 67 percent of the debt when Albee LLC was formed, how much gain or loss will Kevan recognize? g. If the lender holding the nonrecourse debt secured by Kevan’s land required Kevan to guarantee 33. 33 percent of the debt and Jerry to guarantee the remaining 66. 67 percent of the debt when Albee LLC was formed, what are the members’ tax bases in their LLC interests? a. $0. None of the members recognize gain because their debt relief was not in excess of their bases in their LLC interest prior to any debt relief. See table below: Description| Kevan| Other Members| Explanation| (1) Basis in contributed Land| $120,000| | | (2) Cash contributed| $15,000| $245,000| | (3) Nonrecourse mortgage in excess of basis in contributed land| $90,000| | Nonrecourse debt basis is allocated only to Kevan | (4) Remaining nonrecourse mortgage | $40,000| $40,000| 33. 3% x [$210,000 – (3)]| (5) Relief from mortgage debt| ($210,000)| | | Each member’s initial tax basis in the LLC| $55,000| $285,000| (1) + (2) + (3) + (4)+ (5)| b. $55,000. See table in part a. above. c. $285,000 each. See table in part a. above. d. $625,000. Albee, LLC takes a $135,000 carryover basis in the assets Kevan contributes and a $490,000 in the total cash the other two members contributed. e. Albee, LLC’s tax basis balance sheet would appear as follows: Albee , LLCTax Basis Balance Sheet| | Tax Basis| Assets:| | Cash| $505,000| Land| 120,000| Totals| 625,000| Liabilities and Capital:| | Mortgage debt| 210,000| Capital-Kevan| (75,000)| Capital-Jerry| 245,000| Capital-Dave| 245,000| Totals| 625,000| Note that the members’ tax capital accounts are equal to their bases in the LLC interests less their individual shares of LLC debt. . $5,000. See table below: Description| Kevan| Jerry| Dave| Explanation| (1) Basis in contributed Land| $120,000| | | | (2) Cash contributed| $15,000| $245,000| $245,000| | (3) Mortgage Guarantee | $70,000| $140,000| $0| 33. 33% x $210,000 for Kevan and 66. 67% x $210,000 for Jerry| (4) Relief from mortgage debt| ($210,000)| | | | (5) Gain Recognized| $5,000| $0| $0| [(1)+ (2)+ (3) + (4)]| E ach member’s initial tax basis in the LLC| $0| $385,000| $245,000| (1) + (2) + (3)+ (4) + (5)| g. Kevan’s basis is $0, Jerry’s basis is $385,000, and Dave’s basis is $245,000. See the table in part f. above. 44. [LO2] {Research} Jim has decided to contribute some equipment he previously used in his sole proprietorship in exchange for a 10 percent profits and capital interest in Fast Choppers LLC. Jim originally paid $200,000 cash for the equipment. Since then, the tax basis in the equipment has been reduced to $100,000 because of tax depreciation, and the fair market value of the equipment is now $150,000. a. Must Jim recognize any of the potential  § 1245 recapture when he contributes the machinery to Fast Choppers? {Hint: See  § 1245(b)(3). } b. What cost recovery method will Fast Choppers use to depreciate the machinery? {Hint: See  § 168(i)(7). } c. If Fast Choppers were to immediately sell the equipment Jim contributed for $150,000, how much gain would Jim recognize and what is its character? {Hint: See  § 1245 and 704(c). } a. According to Section 1245(b)(3), recapture potential on property contributed to a partnership is only recognized to the extent any gain is recognized from the contribution of property. Because Jim was not relieved of any debt in the transaction, he will not recognize gain from the contribution under Section 721. Therefore, Jim does not recognize any of the Section 1245 recapture potential on the equipment at the time of contribution. b. According to Section 168(i)(7), a transferee partnership will step into the shoes of the transferor partner for purposes of depreciating contributed equipment. In this situation, Fast Choppers will continue to depreciate the equipment using the same method instituted by Jim over the remaining useful life of the equipment. In other words, the annual depreciation calculation will proceed as if the property were still held by Jim. c. Under Section 704(c), all $50,000 of gain recognized from the sale of the equipment would be allocated to Jim because this gain was built-in at the time the equipment was contributed. Moreover, the Section 1245 recapture potential remains with the equipment after the contribution; as a result, all $50,000 of gain recognized (the lesser of the $50,000 gain recognized or the $100,000 depreciation taken) must be characterized as Section 1245 recapture income. 45. [LO2] {Research} Ansel purchased raw land three years ago for $200,000 to hold as an investment. After watching the value of the land drop to $150,000, he decided to contribute it to Mountainside Developers LLC in exchange for a 5 percent capital and profits interest. Mountainside plans to develop the property and will treat it as inventory, like all of the other real estate it holds. a. If Mountainside sells the property for $150,000 after holding it for one year, how much gain or loss does it recognize, and what is the character of its gain or loss? {Hint: See  §724. } b. If Mountainside sells the property for $125,000 after holding it for two years, how much gain or loss does it recognize, and what is the character of the gain or loss? . If Mountainside sells the property for $150,000 after holding it six years, how much gain or loss is recognized, and what is the character of the gain or loss? a. According to Section 724(c), recognized losses on assets that were capital assets in the hands of contributing partners are treated as capital losses up to the amount of loss buil t into the assets at the time they were contributed if they are sold within a five year period beginning on the date of contribution. Thus, Mountainside Developers will recognize a $50,000 loss characterized as a capital rather than an ordinary loss. b. In this instance, Mountainside Developers will recognize a $75,000 loss from the sale of the land. The built-in loss at the time the land was contributed or $50,000 will be characterized as a capital loss, and the remaining $25,000 loss will be characterized as an ordinary loss per Section 724(c). c. Because Mountainside Developers held the land as inventory for more than five years, it will recognize a $50,000 ordinary loss per Section 724(c). 46. [LO2] {Research} Claude purchased raw land three years ago for $1,500,000 to develop into lots and sell to individuals planning to build their dream homes. Claude intended to treat this property as inventory, like his other development properties. Before completing the development of the property, however, he decided to contribute it to South Peak Investors LLC when it was worth $2,500,000, in exchange for a 10 percent capital and profits interest. South Peak’s strategy is to hold land for investment purposes only and then sell it later at a gain. a. If South Peak sells the property for $3,000,000 four years after Claude’s contribution, how much gain or loss is recognized and what is its character? {Hint: See  § 724. } b. If South Peak sells the property for $3,000,000 five and one-half years after Claude’s contribution, how much gain or loss is recognized and what is its character? a. Under Section 724(b), any gain or loss on contributed property that was treated as inventory by the contributing partner and sold by the partnership during the five year period beginning on the date of contribution is treated as ordinary gain or loss. Thus, the entire $1,500,000 gain from the sale of the land will be treated as ordinary gain. b. Section 724(b) only applies if contributed property is sold during the five year period beginning on the date of contribution. Because South Peak sold the land after the expiration of this time period and held the land as investment property, it should recognize $1,500,000 of capital gain. 47. [LO2] {Research} Reggie contributed $10,000 in cash and a capital asset he had held for three years with a fair market value of $20,000 and tax basis of $10,000 for a 5 percent capital and profits interest in Green Valley LLC. a. If Reggie sells his LLC interest thirteen months later for $30,000 when the tax basis in his partnership interest is still $20,000, how much gain does he report and what is its character? b. If Reggie sells his LLC interest two months later for $30,000 when the tax basis in his partnership interest is still $20,000, how much gain does he report and what is its character? {Hint: See Reg.  §1. 1223-3} a. Reggie sold his LLC interest, a capital asset, for $30,000 when he had a basis in the LLC interest of $20,000. Thus, he will recognize a $10,000 capital gain. The capital gain is treated as a long-term capital gain because he has held his LLC interest for more than twelve months. In this situation, the holding period of his LLC interest at the date he contributed property is irrelevant. b. Under Reg.  §1. 223-3(b)(1), the holding period of Reggie’s LLC interest is based on the relative fair market value of the property he contributed. Since two-thirds of the value of the property he contributed was a capital asset held for three years, two- thirds of his LLC interest is treated as being held for three years and the remaining one-third of his LLC interest has a h olding period that begins on the date of contribution. Under Reg.  §1. 1223-3(c)(1), two-thirds or $6,667 of the resulting $10,000 capital gain from the sale will be treated as long-term capital gain and the remaining one-third or $3,333 will be treated as short-term capital gain. 8. [LO2] Connie recently provided legal services to the Winterhaven LLC and received a 5 percent interest in the LLC as compensation. Winterhaven currently has $50,000 of accounts payable and no other debt. The current fair market value of Winterhaven’s capital is $200,000. a. If Connie receives a 5 percent capital interest only, how much income must she report, and what is her tax basis in the LLC interest? b. If Connie receives a 5 percent profits interest only, how much income must she report, and what is her tax basis in the LLC interest? c. If Connie receives a 5 percent capital and profits interest, how much income must she report, and what is her tax basis in the LLC interest? a. Connie reports $10,000 of ordinary income or 5 percent of the LLC’s capital of $200,000. Her basis in the LLC interest is also $10,000. b. Connie will not report any income but will have a basis in the LLC interest equal to her share of the LLC’s debt. Because the LLC’s debt is a nonrecourse debt, it must be allocated to her using Connie’s profits interest. Thus, her basis in the LLC equals $2,500 or 5 percent of the LLC’s $50,000 accounts payable. c. Connie reports $10,000 of ordinary income or 5 percent of the LLC’s capital of $200,000. Her basis in the LLC is $12,500 consisting of the $10,000 of income she recognizes for the receipt of her capital interest and her $2,500 share of the LLC’s nonrecourse accounts payable. 49. [LO2] Mary and Scott formed a partnership that maintains its records on a calendar-year basis. The balance sheet of the MS Partnership at year-end is as follows: Basis Fair Market Value Cash $ 60 $ 60 Land 60180 Inventory 72 60 $192 $300 Mary$ 96 $150 Scott 96 150 192 $300 At the end of the current year, Kari will receive a one-third capital interest only in exchange for services rendered. Kari’s interest will not be subject to a substantial risk of forfeiture and the costs for the type of services she provided are typically not capitalized by the partnership. For the current year, the income and expenses from operations are equal. Consequently, the only tax consequences for the year are those relating to the admission of Kari to the partnership. a. Compute and characterize any gain or loss Kari may have to recognize as a result of her admission to the partnership. . Compute Kari’s basis in her partnership interest. c. Prepare a balance sheet of the partnership immediately after Kari’s admission showing the partners’ tax capital accounts and capital accounts stated at fair market value. d. Calculate how much gain or loss Kari would have to recognize if, instead of a capital interest, she only received a profits interest. a. Kari will recognize one-third of the fair market value of the partnership’s capital or $100 as ordinary income. b. Kari’s basis in her partnership interest will be equal to the amount of income she reports or $100. . Immediately after Kari’s admission into the partnership the partnership’s balance sheet will appear as follows: MS PartnershipBalance Sheet| | Tax Basis| 704(b)/FMV| Assets:| | | Cash| $60| 60| Land| 60| 180| Inventory| 72| 60| Totals| $192| 300| Capital:| | | Capital-Mary| 46| 100| Capital-Scott| 46| 100| Capital-Kari| 100| 100| Totals| $192| $300| Essentially, the tax capital and 704(b) capital accounts for both Scott and Mary are reduced by their $50 share of the $100 compensation expense the partnership will deduct for the capital interest Kari receives. d. If Kari only receives a profits interest, she will not recognize any income until she receives a profits allocation from the partnership. 50. [LO2] Dave LaCroix recently received a 10 percent capital and profits interest in Cirque Capital LLC in exchange for consulting services he provided. If Cirque Capital had paid an outsider to provide the advice, it would have deducted the payment as compensation expense. Cirque Capital’s balance sheet on the day Dave received his capital interest appears below: Assets: Basis Fair Market Value Cash$ 150,000 $ 150,000 Investments200,000700,000 Land150,000250,000 Totals$ 500,000$1,100,000 Liabilities and capital: Nonrecourse Debt100,000100,000 Lance*200,000500,000 Robert*200,000500,000 Totals $ 500,000 $ 1,100,000 *Assume that Lance’s basis and Robert’s basis in their LLC interests equal their tax basis capital accounts plus their respective shares of nonrecourse debt. a. Compute and characterize any gain or loss Dave may have to recognize as a result of his admission to Cirque Capital. b. Compute each member’s tax basis in his LLC interest immediately after Dave’s receipt of his interest. c. Prepare a balance sheet for Cirque Capital immediately after Dave’s admission showing the members’ tax capital accounts and their capital accounts stated at fair market value. d. Compute and characterize any gain or loss Dave may have to recognize as a result of his admission to Cirque Capital if he receives only a profits interest. e. Compute each member’s tax basis in his LLC interest immediately after Dave’s receipt of his interest if Dave only receives a profits interest. a. The tax consequences of giving Dave both a 10 percent capital and profits interest are summarized in the following table: Description| Dave| Lance| Robert| Explanation| (1) Beginning Basis in LLC| $0| $250,000| $250,000| $200,000 tax basis capital account + [. 5 x $100,000 nonrecourse debt]| (2) Ordinary Income | $100,000| | | Liquidation Value of Capital Interest (. 1 x $1,000,000 fair market value of LLC capital)| (3) Ordinary Deduction| | ($50,000)| ($50,000)| Capital Shift from Non-Service Partners. (2) x . 5| (4) Increase in Debt Allocation| $10,000| | | [$100,000 nonrecourse debt x 10% profit sharing ratio]| (5) Decrease in Debt Allocation| | (5,000)| (5,000)| (4) x . | (6) Ending Basis in LLC| $110,000| $195,000| $195,000| (1) + (2) + (3) + (4) + (5)| As indicated in line (2) of the table above, Dave recognizes $100,000 of ordinary income. b. As indicated in line (6) of the table above, the member’s tax bases in the LLC interests immediately after Dave is admitted are as follows: $110,000 for Dave and $195,000 for Lance and Robert. c. Immediately after Dave’s admission into the LLC, the LLC’s balance sheet will appear as follows: Cirque, LLCBalance Sheet| | Tax Basis| 704(b/)FMV| Assets:| | | Cash| $150,000| $150,000| Land| 200,000| 700,000| Inventory| 150,000| 250,000| Totals| $500,000| $1,100,000| Capital:| | | Nonrecourse Debt| $100,000| 100,000| Capital-Lance| 150,000| 450,000| Capital-Robert| 150,000| 450,000| Capital-Dave| 100,000| 100,000| Totals| $500,000| $1,100,000| d. The tax consequences of giving Dave only a 10 percent profits interest are summarized in the following table: Description| Dave| Lance| Robert| Explanation| (1) Beginning Basis in LLC| $0| $250,000| $250,000| $200,000 tax basis capital account + [. 5 x $100,000 nonrecourse debt]| (2) Ordinary Income| $0| | | Dave does not recognize any income because he only receives a profits interest. | 3) Increase in Debt Allocation| $10,000| | | [$100,000 nonrecourse debt x 10% profit sharing ratio]| (4) Decrease in Debt Allocation| | (5,000)| (5,000)| (3) x . 5| (5) Ending Basis in LLC| $10,000| $245,000| $245,000| (1) + (2) + (3) + (4) | Dave does not recognize any income because he only received a profits interest. e. As reflected in line (5) of the table above, Dave’s basis is $10,000, Lance’s basis is $245,000, and Robert’s basis is $245,000. 51. [LO 2] Last December 31, Ramon sold the 10 percent interest in the Del Sol Partnership that he had held for two years to Garrett for $400,000. Prior to selling his interest, Ramon’s basis in Del Sol was $200,000 which included a $100,000 share of nonrecourse debt allocated to him. a. What is Garrett’s tax basis in his partnership interest? b. If Garrett sells his partnership interests three months after receiving it and recognizes a gain, what is the character of his gain? Garrett’s basis in his partnership interest is equal to the $400,000 amount he paid for it plus his $100,000 share of partnership debt or $500,000. a. Because Garrett purchased his partnership interest, his holding period for the interest begins on the date the interest was purchased. As a result, he only has a three month holding period before the partnership interest is sold. This means his capital gain from the sale of his partnership interest will be short-term capital gain. 52. [LO 3] Broken Rock LLC was recently formed with the following members: Name| Tax Year End| Capital/Profits %| George Allen| December 31| 33. 33%| Elanax Corp. | June 30| 33. 33%| Ray Kirk| December 31| 33. 34%| What is the required taxable year-end for Broken Rock LLC? George Allen and Ray Kirk together own more than 50 percent of the profits and capital of Broken Rock. Because both George and Ray have a December 31 year end, December 31 is majority interest taxable year and is also the required year end for Broken Rock. 53. [LO 3] Granite Slab LLC was recently formed with the following members: Name| Tax Year End| Capital/Profits %| Nelson Black| December 31| 22. 0%| Brittany Jones| December 31| 24. 0%| Lone Pine LLC| June 30| 4. 5%| Red Spot Inc. | October 31 | 4. 5%| Pale Rock Inc. | September 30 | 4. 5%| Thunder Ridge LLC| July 31 | 4. 5%| Alpensee LLC| March 31 | 4. 5%| Lakewood Inc. | June 30| 4. 5%| Streamside LLC| October 31 | 4. 5%| Burnt Fork Inc. October 31 | 4. 5%| Snowy Ridge LP| June 30| 4. 5%| Whitewater LP| October 31| 4. 5%| Straw Hat LLC| January 31 | 4. 5%| Wildfire Inc. | September 30 | 4. 5%| What is the required taxable year-end for Granite Slab LLC? Because none of the partners with the same year end together own more than 50 percent of the capital and profits of Granite Slab, there is no majority interest taxable year. Howeve r, Nelson Black and Brittany Jones are principal partners because they individually own 5 percent or more of the profits and capital of Granite Slab. Moreover, they both have a December 31 year end. Therefore, the required year end of the partnership is the year end of the principal partners or December 31. 54. [LO 3] Tall Tree LLC was recently formed with the following members: Name| Tax Year End| Capital/Profits %| Eddie Robinson| December 31| 40%| Pitcher Lenders LLC| June 30| 25%| Perry Homes Inc. | October 31 | 35%| What is the required taxable year-end for Tall Tree LLC? Tall Tree does not have a majority interest taxable year because no partner or group of partners with the same year end owns more than 50 percent of the profits and capital interests in Tall Tree. Also, because all three principal partners in Tall Tree have different year ends, the principal partner test is not met. As a result, Tall Tree must decide which of three potential year ends, December 31, June 30, or October 31, will provide its members the least aggregate deferral. The table below illustrates the required computations: Possible Year Ends| 12/31 Year End| 6/30 Year End| 10/31 Year End| Members| % How to cite Chapter 20, Papers