Exam 10: Partnerships: Formation, Operations, and Basis

ACME Partnership has had the following gross receipts since its formation: $21.8 million in 2019, $24.6 million in 2020, $28.8 million in 2021, $23 million in 2022, and $32 million in 2023. ACME is not a tax shelter. Partner Meile, Inc. is a C corporation. In which tax years 2019 to 2023) must ACME use the accrual method?

Which one of the following statements is true regarding a partner's personal liability for partnership assets?

Matching Match each of the following statements with the numbered terms below that provide the best definition. -Disguised sale

The RGBY LLC operating agreement provides that 50% of depreciation expense is allocated to Red, and all remaining income including the remaining 50% of depreciation) is allocated equally among the four partners. Before guaranteed payments and depreciation, RGBY's net income is $120,000 for the year. RGBY's depreciation expense is $20,000, and it paid a guaranteed payment to Yellow of $8,000. Assume that all allocations and payments meet the substantial economic effect rules. After all deductions and special allocations are taken into account, Red is allocated a net deduction of $15,500 from the partnership.

Matching Match each of the following statements with the numbered terms below that provide the best definition. -Entity concept

MNO Partnership has three equal partners. Moon, Inc. and Neptune, Inc. each have fiscal years ending March 31. Omega uses the calendar year. MNO's required taxable year-end is March 31 under the majority partner rule.

Brad is a 40% member in the BB LLC. At the beginning of the tax year, his capital account showed a balance of $120,000. In this case, his capital account equals his basis in the LLC interest excluding his share of the LLC's debts. His prior year-end Schedule K-1 showed recourse debt guaranteed by Brad) and nonrecourse debt of $10,000 and $20,000, respectively. During the current year, BB reported net ordinary income of $200,000 and nondeductible expenses of $2,000. There were no distributions during the year. At the end of the year, Brad's current year Schedule K-1 showed recourse guaranteed) and nonrecourse debt of $20,000 and $30,000, respectively. How much is Brad's basis in the LLC interest at the end of the year?

Which of the following allocations is most likely to meet the substantial test in the substantial economic effect rules? Assume all economic effect tests are met.)

Which of the following is not a requirement of the substantial economic effect test?

At the beginning of the tax year, Zach's basis for his partnership interest and his amount at risk in the partnership was $30,000. His share of partnership items for the year consisted of tax-exempt interest income of $2,000 and an ordinary loss of $44,000. He also received a distribution of $20,000 cash from the partnership during the year. He is an active general partner and has no passive income or business losses from other sources. For the tax year, Zach will report:

Belinda owns a 30% profit and loss interest in the BOW LLC, and her basis in the interest is $30,000 excluding her share of the LLC's liabilities. Belinda guarantees a $40,000 LLC debt. Remaining liabilities not guaranteed by any of the LLC members) are $100,000. Belinda's basis in the LLC is $100,000.

Rebecca is a limited partner in the RST Partnership, which is not publicly traded. Her allocable share of RST's passive ordinary losses from a nonrealty activity for the current year is $60,000). Rebecca has a $40,000 adjusted basis outside basis) for her interest in RST before deduction of any of the passive losses). Her amount "at risk" is $30,000 before deduction of any of the passive losses). She also has $25,000 of passive income from other sources. She has no business losses for the year from other sources. How much of her $60,000) allocable RST loss can Rebecca deduct on her current-year tax return?

Match each of the following statements with the terms below that provide the best definition. -Organizational costs

Match each of the following statements with the terms below that provide the best definition. -Schedule M-1

Concerning a partnership's Form 1065, which of the following statements is not true?

An example of the aggregate concept underlying partnership taxation is the fact that the partners rather than the partnership) pay tax on partnership income.

Match each of the following statements with the terms below that provide the best definition. -Inside basis

Matching Match each of the following statements with the numbered terms below that provide the best definition. -Limited liability company

The sum of the partners' ending basis amounts equals the partners' ending capital account balances. These amounts are shown on the partnership's Schedule K.

Harry and Sally are considering forming a partnership. Both taxpayers use the calendar year and are cash basis taxpayers. The partnership will not be a tax shelter. The partners are uncertain as to whether the partnership should use the cash or accrual method of accounting. Moreover, the idea of a tax deferral in the first year of operations has led them to consider using a June 30 fiscal year-end for the partnership. As their tax adviser, identify the issues that must be considered in selecting an accounting method and tax year for the partnership.