week 5

Lance contributed investment property worth $617,500, purchased three years ago for $427,500 cash, to Cloud Peak LLC in exchange for an 85 percent profits and capital interest in the LLC. Cloud Peak owes $312,500 to its suppliers but has no other liabilities. a. What is Lance's tax basis in his LLC interest? Explanation a. $693,125. Lance's basis in his LLC interest is made up of the $427,500 basis of the investment property he transferred to the LLC and his $265,625 share of the LLC debt (85% × $312,500). 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. Lance contributed investment property worth $617,500, purchased three years ago for $427,500 cash, to Cloud Peak LLC in exchange for an 85 percent profits and capital interest in the LLC. Cloud Peak owes $312,500 to its suppliers but has no other liabilities. b. What is Lance's holding period in his interest? Explanation b. Three years. Because Lance contributed a capital asset, the holding period of the contributed assets "tacks onto" his partnership interest. Lance contributed investment property worth $617,500, purchased three years ago for $427,500 cash, to Cloud Peak LLC in exchange for an 85 percent profits and capital interest in the LLC. Cloud Peak owes $312,500 to its suppliers but has no other liabilities. c. What is Cloud Peak's basis in the contributed property? Explanation c. $427,500. The LLC takes a carryover basis in the contributed property. Lance contributed investment property worth $617,500, purchased three years ago for $427,500 cash, to Cloud Peak LLC in exchange for an 85 percent profits and capital interest in the LLC. Cloud Peak owes $312,500 to its suppliers but has no other liabilities. d. What is Cloud Peak’s holding period in the contributed property?

Explanation d. Three years. The LLC inherits Lance’s holding period in the contributed property. This year, Darrel's distributive share from Alcove Partnership includes $11,000 of interest income, $2,200 of dividend income, and $54,000 ordinary business income. a.  Assume that Darrel materially participates in the partnership. How much of his distributive share from Alcove Partnership is potentially subject to the net investment income tax? Explanation a. If Darrel materially participates in the business, the ordinary income is not passive to him and should not be subject to the net investment income tax. The $11,000 of interest income and the $2,200 of dividend income are potentially subject to the net investment income tax. This year, Darrel's distributive share from Alcove Partnership includes $11,000 of interest income, $2,200 of dividend income, and $54,000 ordinary business income. b.  Assume that Darrel does not materially participate in the partnership. How much of his distributive share from Alcove Partnership is potentially subject to the net investment income tax? Explanation b. If Darrel is not a material participant in the partnership, the $11,000 of interest income, the $2,200 of dividend income, and the $54,000 of ordinary business income are potentially subject to the net investment income tax. Mustafa's tax basis in his partnership interest at the beginning of the year was $12,000. If his share of the partnership liabilities increased by $6,500 during the year and his share of partnership income for the year is $2,500, what is his tax basis in his partnership interest at the end of the year? Explanation $21,000 as computed in the table below: Description Total Amount Beginning tax basis $ 12,000 Increase in partner’s share of 6,500

its S election terminated due to excessive passive income? If so, in what year? All became S corporations at the beginning of year 1. Note: Leave no answer blank. Select "NA" if no effect. b. Hanson Corporation Year Gross Receipts Passive Investment Income Corporate Earnings and Profits 1 $ 1,434,800 $ 266,200 $ 140,759 2 703,580 219,200 103,200 3 853,320 199,600 103,200 4 835,280 229,200 82,400 5 1,004,545 276,590 82,400 Explanation b.No; NA Hanson Corporation will not have its S election terminated because it did not have passive income in excess of 25 percent of its gross receipts for three consecutive years (even though it had C corporate earnings and profit for all of those years). Year Gross Receipts Passive Investment Income Passive Income % of Gross Receipts Corporate Earnings and Profits 1 $ 1,434,800 $ 266,200 18.55% $ 140,759 2 $ 703,580 $ 219,200 31.15% $ 103,200 3 $ 853,320 $ 199,600 23.39% $ 103,200 4 $ 835,280 $ 229,200 27.44% $ 82,400 5 $ 1,004,545 $ 276,590 27.53% $ 82,400 Assume the following S corporations, gross receipts, passive investment income, and corporate earnings and profit. Will any of these corporations have its S election terminated due to excessive passive income? If so, in what year? All became S corporations at the beginning of year 1. Note: Leave no answer blank. Select "NA" if no effect. c.  Jelena Corporation Year Gross Receipts Passive Investment Income Corporate Earnings and Profits 1 $ 1,005,898 $ 264,400 $ 0 2 707,000 314,880 0 3 803,335 414,770 0 4 902,450 364,870 0 5 678,000 304,777 0 Explanation c. No; NA

Jelena Corporation will not be subject to the excess passive income test because it does not have any C corporate earnings and profit. Assume the following S corporations, gross receipts, passive investment income, and corporate earnings and profit. Will any of these corporations have its S election terminated due to excessive passive income? If so, in what year? All became S corporations at the beginning of year 1. Note: Leave no answer blank. Select "NA" if no effect. d.  Nazmul Corporation Year Gross Receipts Passive Investment Income Corporate Earnings and Profits 1 $ 1,105,010 $ 266,000 $ 740 2 998,800 248,000 640 3 802,750 246,000 540 4 807,000 230,570 440 5 754,800 216,000 340 Explanation d. Yes, Year 6 Nazmul Corporation will have its S election terminated as of day 1 of year 6 because it had passive income in excess of 25 percent of its gross receipts, and it had C corporation earnings and profits for three consecutive years (years 3, 4, and 5). To avoid this problem, Nazmul could have distributed its minimal earnings and profit. Year Gross Receipts Passive Investment Income Passive Income percentage of Gross Receipts Corporate Earnings and Profits 1 $ 1,105,010 $ 266,000 24.07% $ 740 2 $ 998,800 $ 248,000 24.83% $ 640 3 $ 802,750 $ 246,000 30.64% $ 540 4 $ 807,000 $ 230,570 28.57% $ 440 5 $ 754,800 $ 216,000 28.62% $ 340 Harriet, Herm, and Ronde formed an S corporation called Innovet. Harriet and Herm both contributed cash of $37,600 to get things started. Ronde was a bit short on cash but had a parcel of land valued at $92,100 (basis of $75,200) that he decided to contribute. The land was encumbered by a $54,500 mortgage. What tax bases will each of the three have in his or her stock of Innovet? Explanation Harriet and Herm have a basis equal to the cash they contributed ($37,600). Ronde's $20,700 basis is computed by starting with the $75,200 basis of the property contributed and then subtracting the $54,500 mortgage that Ronde was relieved of when he contributed the property to the corporation. Wood Corporation was a C corporation in 2021 but elected to be taxed as an S corporation in 2022. At the end of 2021, its earnings and profits were