The BCD Partnership plans to distribute cash of $20,000 to partner Brad at the e
ID: 2339781 • Letter: T
Question
The BCD Partnership plans to distribute cash of $20,000 to partner Brad at the end of the tax year. The partnership reported a loss for the year, and Brad’s share of the loss is $10,000. At the beginning of the tax year, Brad’s basis in his partnership interest, including his share of partnership liabilities, was $15,000. The partnership expects to report substantial income in future years.What ordering rules are used to calculate Brad’s ending basis in his partnership interest? How much gain or loss will Brad report for the tax year? Will the deduction for the $10,000 loss be suspended? Why or why not? Could any planning opportunities be used to minimize any negative tax ramifications of the distribution? Explain.
Explanation / Answer
1. Ordering rules:
Reduce basis by distributions; increase basis by income items and contributions; and then losses deducted to the extent of remaining basis
2. $ 5,000 gain
3. Yes loss of$ 10,000 is to be suspended because losses cannot be deductible to pay off shareholders
4. Yes there are planning opportunities to minimize negative tax ramifications of the distribution are as under:
a. Tax diversification: Diversifying investments in different types of accounts can diversify tax risk and create more flexibility to optimally select the most tax efficient method of liquidating assets.
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