authorities for case memo 403566

Abe and Brenda formed the AB Partnership ten years ago as a general partnership and have been very successful with the business. However, in the current year, economic conditions caused them to lose significant amounts, but they expect the economy and their business to recover and return to profitable operations by next year or the year after. Abe manages the partnership and works full time. Brenda has a full time job as an accountant at an annual salary of $39,000, but she also works in the partnership occasionally. She estimates that she spent about 120 hours working in the partnership this year. Abe has a 40% profits interest, a 50% loss interest and a basis in the partnership interest on December 31st (before this year’s operations). The partnership has no liabilities at December 31st. Neither Abe nor Brenda currently has other investments. The AB Partnership incurs the following amounts during the year.

Ordinary loss $100,000

SEC 1231 Gain 10,000

Tax Exempt Muni Bond Income 14,000

Long Term Capital Loss 14,000

Short Term Capital Loss 136,000

Early next year, the AB Partnership is considering borrowing $100,000 from a local bank to be secured by a mortgage on a building owned by the partnership with $150,000 FMV.

Required: Prepare a presentation to be made to Abe and Brenda discussing this matter. Points to include in your discussion include:

What amounts should Abe and Brenda report on their income tax returns for the current year from the AB Partnership?

What are their bases in the partnership after taking all transactions into account?

What planning ideas would you suggest for Brend