Posted: December 19th, 2016

If the IRS ultimately disagrees with Richard and Assoc special allocation, how will it likely reallocate the taxable and tax-exempt interest among the members?

  1. Richard and two friends from law school recently formed Richard and Associates as a limited liability

partnership (LLP). Income from the partnership will be split equally among the partners. The

partnership will generate fee income primarily from representing clients in bankruptcy and foreclosure

matters. While some attorney friends have suggested that partners’ earnings will be self-employment

income, other attorneys they know from their local bar association meetings claim just the opposite.

After examining relevant authority, explain how you would advise Richard and Associates on this

matter.

  1. a) Is Richard and Assoc proposed special allocation acceptable under current tax rules? Why or

why not? [Hint: See Reg. §1.704-1(b)(2)(iii)(b) and §1.704-1(b)(5) Example (5).]

  1. b) If the IRS ultimately disagrees with Richard and Assoc special allocation, how will it likely

reallocate the taxable and tax-exempt interest among the members? [Hint: See Reg. §1.704-

1(b)(5) Example (5)(ii).]

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