[Anonymous]

Hi all, I believe that there is an error with the following Wiley REG question. I would appreciate your thoughts on this. Here it is:

Gilroy, a calendar-year taxpayer, is a partner in the firm of Adams and Company which has a fiscal year ending June 30. The partnership agreement provides for Gilroy to receive 25% of the ordinary income of the partnership. Gilroy also receives a guaranteed payment of $1,000 monthly which is deductible by the partnership. The partnership reported ordinary income of $88,000 for the year ended June 30, 2011, and $132,000 for the year ended June 30, 2012. How much should Gilroy report on his 2011 return as total income from the partnership.

a. $25,000

b. $30,000

c. $34,000

d. $39,000

The correct answer is apparantly “C”. I disagree, here’s why:

The problem states that Gilroy receives a “guaranteed payment monthly of $1,000 that is DEDUCTIBLE BY THE PARTNERSHIP”. In other problems that include “guaranteed payments”, the guaranteed payments are deducted from the partnerships income first, before the distributions are computed. My opinion is that the answer should be $31,000. For example:

$88,000 – $12,000 guaranteed payment = $76,000.

$76,000 * 25% = $19,000

Gilroy’s share = $19,000 + $12,000 = $31,000

Therefore I contend that the correct answer is $31,000 and NOT any of the answer choices provided by Wiley.

I could be wrong, but in similar problems, guaranteed partner payments are deducted from ordinary income before each partners share is computed.

Any thoughts on this?…

[youngd8]

They stated, “The Partnership REPORTED ordinary income of $88,000 for the year ended June 30, 2011.”

I'm not sure why you would deduct guaranteed payment from this as they already gave you what the ordinary income was.

Going by your method, you're just washing out the guaranteed payment because you subtracted from ordinary income, then you added back, which is making partner not realize any income.

[Anonymous]

Since it states that the guaranteed payments are deductible you need to add them back to the $88K. This gives you income of $100K. 25% is $22K. Add the $22K plus guaranteed payments of $12 and you end up with $34K.

I hope that makes sense…..

[Anonymous]

Hi guys, this is helpful, thanks.

I was under the impression that the guaranteed payment had not yet been deducted.

[WeWillSee]

25% of $100K is $25K….

Guaranteed payments (which are essentially like salary expenses to the partnership) have already been deducted from the partnerships income at the end of the year if they are saying the ordinary income is being “reported”. If it hadn't been deducted yet I would assume they would say that Ordinary income was $XX including garanteed payments of $X paid to Partner A or something along those lines.

This questions is very straightforward, I know it's hard not to over think them sometimes

$88,000 *25% = $22,000

$1000 * 12 = $12,000

---

Income reported by partner $34,000

[Anonymous]

WeWillSee, you are correct. Now that I read what I typed it does not make sense…. I typed it wrong and do not see how to edit!

Thanks

[Anonymous]

@Wewilsee, the question is very simple. With REG I get more tripped up with the language used, than the actual material itself.

[WeWillSee]

@Amber I'm was thinking maybe you were thinking something different than you were typing – happens to me all the time

@ Charlie – I'm having the same issue with Audit (which i am studying for now) – but I'm a tax person so that's probably why!

[Anonymous]

@Wewillsee, I worked in audit 3 years, never tax…maybe we can switch brains for these exams 😀

[Author]

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