Daniel and Wendy formed the XYZ Partnership 8 years ago as a general partnership and have done very well with the business. In this current year, however, economic conditions caused them to lose substantial amounts, but they expect the economy and their business to return to profitable operations within the next 2 years. Daniel manages the partnership business and works in it full-time. Wendy has a full-time job as an accountant for a $53,000 annual salary, but she also works in the partnership occasionally. She estimates that she spent about 120 hours working in the partnership this year. Daniel has a 40% profits interest, a 50% loss interest, and a basis in his partnership interest on December 31 (before considering this year’s operations) of $90,000. Wendy has a 60% profits interest, a 50% loss interest, and a basis of $108,000 on December 31 (before considering this year’s operations). The partnership has no liabilities at December 31. Neither Daniel nor Wendy currently has other investments. The XYZ Partnership incurs the following amounts during the year:
|
Ordinary loss |
$75,000 |
|
Sec. 1231 gain |
$7,500 |
|
Tax-exempt municipal bond income |
$10,500 |
|
Long-term capital loss |
$10,500 |
|
Short-term capital loss |
$102,000 |
Early next year, the XYZ Partnership is considering borrowing $75,000 from a local bank to be secured by a mortgage on a building owned by the partnership with $112,500 FMV.
Answer the following questions:
- What amounts should Daniel and Wendy report on their income tax return for the current year from the XYZ Partnership?
- What are their bases in their partnership interests after taking all transactions into effect?
- What happens to any losses they cannot deduct in the current year?
- What planning opportunities are presented by the need to borrow money early next year?
- What planning ideas would you suggest for Wendy?
