| Course | ACC-6060 Federal Taxation |
|---|---|
| Module | Module 6 |
| Paper type | Module 6 written assignment: partnership tax |
| Length | About 731 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | Master of Science in Accounting |
| Updated | October 2026 |
Free sample paper for ACC 6060 Module 6
Cash, a Mortgaged Building and a Brewhouse: Forming and Running Riverline Brewing as a Partnership
Student Name
Master of Science in Accounting, Thomas Edison State University
ACC-6060: Federal Taxation
Mentor Name
Month Day, Year
Cash, a Mortgaged Building and a Brewhouse: Forming and Running Riverline Brewing as a Partnership
Introduction
Section 721 generally lets a partner contribute property for an ownership interest without recognizing gain or loss. The partner's outside basis starts with the basis of what was contributed, and the partnership takes the contributed property at the partner's basis, its inside basis. Liabilities complicate both: a partner relieved of a debt is treated as receiving cash, and every partner's share of partnership debt is treated as a contribution of cash (Spilker et al., 2019). Pass-through firms now account for most U.S. business income (Cooper et al., 2016), and Mackie-Mason and Gordon (1997) showed that taxes influence whether firms organize in corporate or noncorporate form.
Part A: Formation
Ben is relieved of $80,000 of debt but takes back a one-third share, a net deemed distribution of $53,333. Because that is less than his $110,000 basis, he recognizes no gain; a net relief greater than basis would have produced gain. The LLC's inside basis is $290,000: cash of $120,000, the building at $110,000 and the equipment at $60,000. The partners' outside bases also total $290,000, apart from rounding, because the mortgage is counted once on each side. Ben's and Chris's holding periods tack onto the property they gave.
| Member | Contributed | Fair value | Basis | Liability relieved | Share of $80,000 mortgage | Outside basis |
|---|---|---|---|---|---|---|
| Ana Ruiz | Cash | $120,000 | $120,000 | None | $26,667 | $146,667 |
| Ben Okafor | Building with $80,000 mortgage | 200,000 | 110,000 | 80,000 | 26,667 | 56,667 |
| Chris Lund | Brewing equipment | 120,000 | 60,000 | None | 26,667 | 86,667 |
Built-In Gain
The building carries $90,000 of built-in gain and the equipment $60,000. Section 704(c) requires the LLC to allocate that pre-contribution gain to Ben and Chris if the property is sold, and to adjust depreciation so that Ana is not taxed on gain that arose before she joined.
Formation also has holding period and depreciation effects. Ana's interest has a holding period beginning on the contribution date, while Ben's and Chris's include the time they held the building and equipment. The LLC continues depreciating the building and equipment from the contributors' remaining bases, using their methods, rather than starting fresh at fair value.
Part B: The First Year's Income
The guaranteed payment is deductible by the LLC and is ordinary income to Chris whether or not the LLC is profitable; he reports it with his share. Because all three members work in the business, their shares are also subject to self-employment tax, along with Chris's guaranteed payment.
Section 704(b) allows partners to agree to allocations that differ from their capital shares if the allocations have substantial economic effect, meaning they follow the partners' capital accounts and liquidation rights. Riverline's operating agreement allocates everything equally, so no special allocation issue arises, but if Chris later received a larger share of profits as an incentive, the agreement would need capital account maintenance and liquidation provisions to support it.
| 2024 | LLC | Ana | Ben | Chris |
|---|---|---|---|---|
| Income before guaranteed payment | $150,000 | | | ||
| Guaranteed payment to Chris as brewmaster | (60,000) | | | $60,000 | |
| Ordinary business income, one-third each | 90,000 | $30,000 | $30,000 | 30,000 |
| Charitable contributions, separately stated | 3,000 | 1,000 | 1,000 | 1,000 |
| Cash distribution | 20,000 | 20,000 | | |
Part C: Outside Basis at Year End
Ana's basis rises by her $30,000 share and falls by the $1,000 charitable item and the $20,000 distribution, ending at $155,667; the distribution is tax free because it is less than basis. Ben ends at $85,667 and Chris at $115,667. The guaranteed payment does not change Chris's basis, because it is paid to him rather than allocated.
If Riverline had instead lost $240,000 in 2024, $80,000 per member, Ben could deduct only $56,667, his basis, and would carry the rest forward until his basis rises. Each partner must also pass the at-risk rules and, for members who do not materially participate, the passive loss rules before deducting a loss.
Self-employment tax adds to the members' cost of operating as a partnership. Chris will pay self-employment tax on his $60,000 guaranteed payment and his $30,000 share, and Ana and Ben on their shares, because all three take part in running the brewery. A member who stays out of the brewery's operations would usually report a share as passive income instead.
| Member | Opening basis | Share of income | Charitable item | Distribution | Ending basis |
|---|---|---|---|---|---|
| Ana Ruiz | $146,667 | $30,000 | ($1,000) | ($20,000) | $155,667 |
| Ben Okafor | 56,667 | 30,000 | (1,000) | None | 85,667 |
| Chris Lund | 86,667 | 30,000 | (1,000) | None | 115,667 |
References
Cooper, M., McClelland, J., Pearce, J., Prisinzano, R., Sullivan, J., Yagan, D., Zidar, O., & Zwick, E. (2016). Business in the United States: Who owns it, and how much tax do they pay? Tax Policy and the Economy, 30(1), 91-128. https://doi.org/10.1086/685594
Mackie-Mason, J. K., & Gordon, R. H. (1997). How much do taxes discourage incorporation? Journal of Finance, 52(2), 477-506. https://doi.org/10.1111/j.1540-6261.1997.tb04810.x
Spilker, B. C., Ayers, B. C., Outslay, E., Weaver, C. D., Barrick, J. A., Robinson, J. R., & Worsham, R. G. (2019). Taxation of individuals and business entities. McGraw-Hill Education.
Reading the ACC 6060 Module 6 assignment instructions
The partnership module tests how a business taxed as a partnership is formed, run and distributed. Expect problems on partnership formation, gain recognition when liabilities exceed basis, inside and outside basis, holding periods, ordinary income and separately stated items on Schedule K-1, guaranteed payments, self-employment tax, distributions and the basis, at-risk and passive limits on losses. Your problems may also ask about special allocations or a sale of an interest. Riverline and its three members are teaching composites. Expect formation, operations and distributions in the same set. Some versions also ask about a sale of a partnership interest or hot assets.
How this ACC 6060 Module 6 example is built
The introduction states the formation rules and how liabilities enter basis. Part A computes outside basis for three members in one table, tests the member who contributed mortgaged property for gain and reconciles inside to outside basis, then explains Section 704(c). Part B allocates the first year's income, separates the guaranteed payment and a separately stated item and addresses self-employment tax. Part C carries outside basis to year end and shows how basis, then the at-risk and passive rules, would limit a loss. Tables carry every member's basis from formation to year end, and the loss scenario at the end shows how the three limits apply in order. The final paragraph names the at-risk test.
ACC 6060 Module 6 rubric: what earns full marks
Partnership problems are worth 7 points of the final grade and are marked line by line. For this module, mentors check correct treatment of contributions and liabilities, outside and inside basis, allocations of ordinary income and separately stated items, treatment of guaranteed payments and basis adjustments for income, deductions and distributions. Recognizing Section 704(c) and the order of loss limits shows depth. Tables that reconcile inside and outside basis make work easy to verify and support partial credit. A reconciliation of inside to outside basis, and a clear separation of guaranteed payments from distributive shares, demonstrate command of the topic. Credit is given for showing each step. Showing each member's outside basis in a table, from formation to year end, gives the mentor a single place to verify every adjustment.
Common ACC 6060 Module 6 mistakes, and how to avoid them
The usual errors are forgetting to add each partner's share of partnership liabilities to outside basis, ignoring liability relief on contributed property, treating guaranteed payments as distributions and reducing basis by the guaranteed payment. Start with a basis table and reconcile it to the partnership's balance sheet. Apply loss limits in order: basis, at-risk, then passive. Track each partner's share of liabilities as it changes; it moves basis even when no cash changes hands. Remember that a distribution reduces basis but is taxable only if cash exceeds basis. Keep a running basis table for each partner through the year. A free first sample of your own ACC-6060 Module 6 problems is available on request.
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ACC 6060 Module 6 questions, answered
Where can I find a free ACC 6060 Module 6 sample paper?
Riverline Brewing's 2024 problems are above: formation with a mortgaged building, inside and outside basis, income allocation with a guaranteed payment and year-end basis.
Does a partner recognize gain when contributing property with a mortgage?
Only if the net liability relief, the debt assumed minus the partner's share of it, exceeds the partner's basis in all contributed property.
What is the difference between inside and outside basis?
Inside basis is the partnership's basis in its assets; outside basis is each partner's basis in the partnership interest.
How are guaranteed payments taxed?
They reduce the partnership's income and count as ordinary income for the partner who receives them, normally with self-employment tax, even in a loss year.
What limits a partner's deduction of partnership losses?
Outside basis first, then the at-risk rules, then the passive activity rules; disallowed amounts carry forward.