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Problem 1

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

Land 100,000 140,000

Liability encumbering land (20,000)

Totals $ 130,000 $ 150,000

Sally:

Equipment used in a business 200,000 150,000

Totals $ 200,000 $ 150,000

The land contributed by Harry was encumbered by a $20,000 recourse liability which was assumed by the partnership.

Answer the following questions. Clearly show your work and label your answers.

a. How much gain or loss will Harry 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?

d. What is Harrys tax basis in his partnership interest?

e. What is Sallys tax basis in her partnership interest?

f. What is Evergreens tax basis in its assets? Be specific. What is Evergreens tax basis in each asset?

Problem 2

SS Corporation is an S Corporation. SS has always been an S corporation and has no C Corporation E & P. SS Corporations financial records for 2021 show the following:

Gross receipts from sales $680,000

Cost of goods sold (460,000)

Operating expenses (96,800)

Interest on State of Tennessee Bond 2,000

Key person life insurance premium (3,000)

Section 1231 loss on sale of equipment (13,500)

Charitable contribution (1,500)

Distribution (legal dividend) to shareholders (10,000)

SS Corporation has a $140,000 balance in its accumulated adjustment account (AAA) on January 1, 2020.

Mr. S owns 10 percent of the stock of SS Corporation. During the year he received a $1,000 dividend from the corporation.

Required:

A. Compute SS Corporations book (financial accounting) income.

B. Compute SS Corporations taxable income (including both ordinary business income and separately-stated items).

C. Compute SS Corporations ordinary business income.

D. Compute Mr. Ss share of S Corporations ordinary business income and separately stated items.

E. If Mr. Ss adjusted basis in his S corporation stock was $20,000 at the beginning of the year, compute his adjusted basis at the end of the year. Assume that SS Corporations debt did not change during the year.

F. How would your basis computation change if SS Corporations debt at the end of the year was $50,000 more than its debt at the beginning of the year?

G. Compute the ending balance (12/31/2021) in SS Corporations accumulated adjustments account (AAA).

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