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.

Required:
a. What ordering rules are used to calculate Bradâs ending basis in his partnership interest?
b. How much gain or loss will Brad report for the tax year?
c. Will the deduction for the $10,000 loss be suspended? Why or why not?
d. Could any planning opportunities be used to minimize any negative tax ramifications of the distribution? Explain.

Answer 1

See below

Step-by-step explanation:

a.

The rules used here is called the ordering rules. It can also be called reduce basis distribution.

b.

For the tax year report , the gain would be $5,000

c.

The deduction for the loss of $10,000 could be suspended or put on hold.

The reason is that losses are not deductible to pay off shareholders

d.

It is true that there are planning opportunities, which could mitigate the negative tax ramifications of the distribution as are under tax diversification. Here, it will open more room for flexibility in order to optimally the most tax efficient method of liquidating assets.