Question

reat West Boating Ventures is a limited partnership formed to purchase and operate a fishing boat. The partnership was formed by two partners, I and L, who each contributed $150,000 cash to form the partnership. The partnership then borrowed $800,000 on a nonrecourse loan from an unrelated bank, and purchased a boat. The two partners share all items of partnership income, gain, loss and deduction equally. a. Over the partnership’s first 3 years of operations, it reported net losses of ($580,000), allocated equally between the two partners. It also made principal payments against the nonrecourse loan of $50,000. Assuming no distributions or additional contributions were made to or by the partners over that period, what will be the partners’ tax bases in their partnership interests at the end of year 3? b. Assume that at the beginning of year 4, I sells her interest in the partnership to L for $25,000 cash (plus assumption of I’s share of the partnership’s nonrecourse debt). How will the sale affect I’s taxable income for year 4? c. How would your answer to part b change if the nonrecourse loan had been used to purchase real estate rather than a fishing boat?

Answer 1

A) tax basis $235,000,

Explanation:

Initial capital comtribution	150000
Share of partnership nonrecourse liability	400000
Share of payments for NR liability	(25000)
Share of total loss in 3 years	(290000)
Tax basis, end of year 3	235000

B)

Sales proceed ($25000 cash + $375000(i.e. 400000-25000 paid)shares of NR liability)	400000
Tax basis in partnership interest	(235000)
Gain on sale of partnership interest	165000
Less Code Sec. 465 carryforward loss from year 1 to 3	(140000)
Net increase in I’s taxable income	25000

C)I’s taxable income in the year of sale would be increased by $165000 because there would be no carryforward under Code Sec. 465.

PLEASE DO GIVE POSITIVE RATING.