Exam 10: Partnerships: Formation, Operations, and Basis

Harry's basis in his partnership interest was $10,000 at the beginning of the tax year. For the year, his share of the partnership's loss was $8,000, and he also received a distribution of $4,000. Harry can deduct an $8,000 loss, and he recognizes a gain of $2,000 on the distribution of cash in excess of his remaining basis.

An examination of the RB Partnership's tax books provides the following information for the current year. Operating (ordinary) income before guaranteed payments \ 300,000 Long-term capital gain 6,000 Guaranteed payment to Rachel for services 30,000 Cash distributions to Rachel (20,000) Interest on Colorado state bonds (exempt interest income) 2,000 Charitable contributions made by partnership (10,000) Decrease in partnership liabilities from 1/1-12/31 (20,000) Rachel is a 30% general partner in partnership capital, profits, and losses. Assume that the adjusted basis of her partnership interest is $60,000 at the beginning of the year, and she shares in 30% of the partnership's liabilities for basis purposes. a. What is Rachel's adjusted basis for the partnership interest at the end of the year? How much income must Rachel report on her tax return for the current year? What deductions b. might be available? What is the character of the income and what types of tax might apply to it?

George and James are forming the GJ Partnership. George contributes $600,000 cash and James contributes nondepreciable property with an adjusted basis of $400,000 and a fair market value of $750,000. The property is subject to a $150,000 liability, which is transferred into the partnership and is shared equally by the partners for basis purposes. George and James share in all partnership profits equally except for any precontribution gain, which must be allocated according to the statutory rules for built-in gain allocations. a. What is James's adjusted tax basis for his partnership interest immediately after the partnership is formed? b. What is the partnership's adjusted basis for the property contributed by James? c. If the partnership sells the property contributed by James for $800,000, how is the tax gain allocated between the partners?

The partnership agreement might provide, for example, that the first $40,000 of ordinary income is allocated to Partner A. Allocating income in this manner is an example of a separately stated item.

The primary purpose of the partnership agreement is to document the various tax elections made by the partners regarding items such as depreciation methods, treatment of research and experimental costs, and the § 754 election.

Carli contributes land to the newly formed CD Partnership in exchange for a 30% interest. The land has an adjusted basis and fair market value of $300,000 and is subject to a liability of $100,000, which the partnership assumes. None of this liability is repaid at year-end. At the end of the year, the partnership owes payables of $20,000. Assume that all liabilities are allocated proportionately to the partners. Total partnership income for the year is $400,000. What is Carli's basis in her partnership interest at the end of the year?

Match each of the following statements with the terms below that provide the best definition. -Business purpose

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

DDP Partnership reported gross income from operations of $125,000, a long-term capital gain of $5,000, a short-term capital loss of $2,000, and a charitable contribution of $5,000. On its Schedule K, the partnership reports ordinary business income of $120,000, a long-term capital gain of $5,000, and a short-term capital loss of $2,000.

George received a fully vested 10% interest in partnership capital and a 20% interest in future partnership profits in exchange for services rendered to the GHP, LLC not a publicly traded partnership interest). The future profits of the partnership are subject to normal operating risks. George will report ordinary income equal to the fair market value of the profits interest, but the capital interest will not be currently taxed to him.

Molly is a 30% partner in the MAP Partnership. During the current tax year, the partnership reported ordinary income of $200,000 before any permitted deduction for guaranteed payments and distributions to partners. The partnership made an ordinary cash distribution of $20,000 to Molly and made guaranteed payments to partners Molly, Amber, and Pat of $20,000 each $60,000 total guaranteed payments). How much will Molly's adjusted gross income increase as a result of these items?

Sarah contributed fully depreciated $0 basis) property valued at $50,000 to the RSTU Partnership in exchange for a 25% interest in partnership capital and profits. During the first year of partnership operations, RSTU had net taxable income of $200,000 and tax-exempt income of $4,000. The partnership distributed $10,000 cash to Sarah. Her share of partnership recourse liabilities on the last day of the partnership year was $20,000. What is Sarah's adjusted basis outside basis) for her partnership interest at the end of the tax year?

Match each of the following statements with the terms below that provide the best definition. -Required taxable year

The inside basis is defined as a partner's basis in the partnership interest.

If a partnership allocates losses to the partners, the partners first applies the passive loss limitations, then the basis limitation, and finally the at-risk limitations. If all three hurdles are met, a partner may deduct the loss.

To meet the substantial economic effect tests, a partnership's allocations of income and deductions to the partners are required to be proportionate to the partners' percentage ownership of partnership capital.

Meredith is a passive 30% member of the MNO LLC. She is not a managing member and she does not participate in any activities of the LLC. Her interest is more in the nature of an investment. In the current year, Meredith's distributive share of income from the LLC was $50,000. In addition, she received a guaranteed payment of $40,000 for the use of her capital. Assume that her income from other sources exceeds $500,000. How much of Meredith's LLC income will be subject to the self-employment SE) tax and the net investment income NII) tax? Disregard the additional Medicare tax on upper-income taxpayers.)

Morgan and Kristen formed an equal partnership on August 1 of the current year. Morgan contributed $60,000 cash and land with a basis of $18,000 and a fair market value of $40,000. Kristen contributed equipment with a basis of $42,000 and a value of $100,000. Kristen and Morgan both have a basis of $100,000 in their partnership interests.

AmCo and BamCo form the AB General Partnership at the start of the current year with a land contribution by BamCo and a cash contribution by AmCo. BamCo's contributed property is subject to a recourse mortgage assumed by the partnership. BamCo has an 80% interest in AB's profits and losses. The land has been held by BamCo for the past 6 years as an investment. It will be used by AB as an operating asset in its parking lot business. Which of the following statements is correct?

Xena and Xavier form the XX LLC. Xena contributes cash of $20,000, land basis = $40,000; fair market value = $25,000), equipment basis = $0; fair market value = $35,000), and inventory basis = $30,000; fair market value = $40,000). Xavier contributed $120,000 of cash. How much is the partnership's basis in the land, equipment, and inventory, and how much is Xena's basis in the partnership interest?