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  3. on march 1, 2020, mr. eve and ms. frank each contr

On March 1, 2020, Mr. Eve and Ms. Frank each contributed $75,000 cash to the...

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Accounting

On March 1, 2020, Mr. Eve and Ms. Frank each contributed $75,000 cash to the newly-formed EF Partnership in exchange for 50% interests in the partnerships profits and losses. Mr. Eve and Ms. Frank are both general partners who spend significant time working in the partnership. After its formation, EF Partnership immediately borrowed $90,000 recourse debt from a local bank, with repayment due in 2022.

In November 2020, Mr. Eve and Ms. Frank estimate with reasonable certainty that EF Partnerships 2020 operating loss will be ($140,000). However, EF has started to generate positive cash flow over the latter half of 2020, with significant profits expected in 2021 and beyond. As such, Mr. Eve and Ms. Frank are each considering withdrawing their initial $75,000 investments in EF partnership before the end of 2020.

What tax planning advice would you offer Mr. Eve and Ms. Frank regarding the tax implications of their plan to withdraw their initial investments in 2020? (Hint: under the partnership basis ordering rules, when adjusting partnership basis for annual activities, basis reductions due to distributions are taken into account before basis reductions due to partnership losses). Clearly explain your answer and support it with calculations.

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