Exam 20: Forming and Operating Partnerships

Adjustments to a partner's outside basis are made annually to prevent double taxation on the sale of a partnership interest or at the time of a partnership distribution.

Styling Shoes, LLC, filed its 20X8 Form 1065 on March 15, 20X9. Styling had three members with the following ownership interests and tax bases at the beginning of 20X8: (1)Jane, a member with a 25 percent profits and capital interest and a $8,000 outside basis, (2)Joe, a member with a 45 percent profits and capital interest and a $13,000 outside basis, and (3)Jack, a member with a 30 percent profits and capital interest and a $5,000 outside basis. The following items were reported on Styling's Schedule K for the year: ordinary income of $106,000, Section 1231 gain of $18,000, charitable contributions of $28,000, and tax-exempt income of $6,000. In addition, Styling received an additional bank loan of $15,000 during 20X8. What is Jane's tax basis after adjustment for her share of these items?

If a partner participates in partnership activities on a regular, continuous, and substantial basis, then the partnership's activities with respect to this individual partner are not considered passive.

Bob is a general partner in Fresh Foods Partnership and is trying to determine if the income reported on his K-1 should be classified as passive or active trade or business income. List three different criteria that, if met, would allow Bob to treat the income from Fresh Foods as active trade or business income.

Does adjusting a partner's basis for tax-exempt income prevent double taxation?

Which of the following statements exemplifies the entity theory of partnership taxation?

If partnership debt is reduced and a partner is deemed to receive a cash distribution, what impact does the deemed distribution have on the partner if it is in excess of her tax basis?

John, a limited partner of Candy Apple, LP, is allocated $35,000 of ordinary business loss from the partnership. Before the loss allocation, his tax basis is $25,000 and his at-risk amount is $15,000. John also has ordinary business income of $25,000 from Sweet Pea, LP, as a general partner and ordinary business income of $8,800 from Red Tomato as a limited partner. How much of the $35,000 loss from Candy Apple can John deduct currently?

A partner's tax basis or at-risk amount can be increased by making capital contributions, by paying off partnership debt, or by increasing the profitability of the partnership.

A partnership with a C corporation partner must always use the accrual method as its accounting method.

Which of the following statements regarding a partner's basis adjustments is true?

Clint noticed that the Schedule K-1 he just received from ABC Partnership included a $20,000 ordinary business loss allocation. His tax basis in ABC at the beginning of ABC's most recent tax year was $10,000. Comparing the Schedule K-1 he recently received from ABC with the Schedule K-1 he received from ABC last year, Clint noted that his share of ABC partnership debt changed as follows: recourse debt increased from $0 to $2,000, qualified nonrecourse debt increased from $0 to $3,000, and nonrecourse debt increased from $0 to $3,000. Finally, the Schedule K-1 Clint recently received from ABC reflected a $1,000 cash contribution he made to ABC during the year.Clint is not a material participant in ABC Partnership, and he received $10,000 of passive income from another investment during the same year he received the loss allocation from ABC. How much of the $20,000 loss from ABC can Clint deduct currently, and how much of the loss is suspended because of the tax basis, at-risk, and passive activity loss limitations?

On March 15, 20X9, Troy, Peter, and Sarah formed Picture Perfect General Partnership. This partnership was created to sell a variety of cameras, picture frames, and other photography accessories. The following items were contributed by each partner in exchange for a one-third capital and profits interest:Troy-cash of $3,400, inventory with an FMV and tax basis $5,400, and a building with an FMV of $8,400 and adjusted basis of $10,400. Additionally, the building is secured by a $10,400 mortgage.Peter-cash of $5,400, accounts payable with an FMV and tax basis of $19,400, and land with an FMV and tax basis of $20,400.Sarah-cash of $2,400, accounts receivable with an FMV and tax basis of $1,400, and equipment with an FMV of $26,400 and adjusted basis of $4,400. Also, the equipment is secured by a $23,400 note payable.What is the partnership's inside basis in each asset? How much gain or loss must Picture Perfect recognize? Prepare Picture Perfect's balance sheet reflecting the partners' capital accounts on both a tax basis and 704(b)/FMV basis.

Ruby's tax basis in her partnership interest at the beginning of the partnership's tax year was $13,000. The following items were included in her Schedule K-1 from the partnership for the year: Determine what amounts related to these items Ruby will report on her tax return assuming her tax basis and at-risk amount are equal and that she is a material participant in the partnership's activities. Further, assume that Ruby and her husband, Gerald, are not involved in any other trade or business and that they file a joint return every year.

Jay has a tax basis of $14,000 in his partnership interest at the beginning of the partnership tax year. The following amounts of partnership debt were allocated to Jay and are included in his beginning-of-the-year tax basis: (1)recourse debt-$3,000, (2)qualified nonrecourse debt-$1,000, and (3)nonrecourse debt-$500. There were no changes to the debt allocated to Jay during the tax year. If Jay is allocated a $15,000 loss for the current year, how much of the loss will be suspended under the tax basis and at-risk limitations?

Ruby's tax basis in her partnership interest at the beginning of the partnership's tax year was $14,225. The following items were included in her Schedule K-1 from the partnership for the year: Determine what amounts related to these items Ruby will report on her tax return assuming her tax basis and at-risk amount are equal and that she is a material participant in the partnership's activities. Further, assume that Ruby and her husband, Gerald, are not involved in any other trade or business and that they file a joint return every year.

At the end of Year 1, Tony had a tax basis of $40,000 in Tall Ladders, Limited Partnership. Tony has a 20 percent profits interest in Tall Ladders. For Year 2, Tall Ladders will pay Tony a $10,000 guaranteed payment for extra services he provides to the partnership. Given the following income statement and balance sheet from Tall Ladders, what is Tony's adjusted tax basis at the end of Year 2?

Frank and Bob are equal members in Soxy Socks, LLC. When forming the LLC, Frank contributed $44,000 in cash and $44,000 worth of equipment. Frank's adjusted basis in the equipment was $29,000. Bob contributed $44,000 in cash and $44,000 worth of land. Bob's adjusted basis in the land was $36,000. On 3/15/X4, Soxy Socks sells the land Bob contributed for $66,000. How much gain (loss)related to this transaction will Bob report on his X4 return?

The term "outside basis" refers to the partnership's basis in its assets, whereas the term "inside basis" refersto an individual partner's basis in her partnership interest.

Frank and Bob are equal members in Soxy Socks, LLC. When forming the LLC, Frank contributed $50,000 in cash and $50,000 worth of equipment. Frank's adjusted basis in the equipment was $35,000. Bob contributed $50,000 in cash and $50,000 worth of land. Bob's adjusted basis in the land was $30,000. On 3/15/X4, Soxy Socks sells the land Bob contributed for $60,000. How much gain (loss)related to this transaction will Bob report on his X4 return?