Exam 9: Forming and Operating Partnerships

TQK,LLC, provides consulting services and was formed on 1/31/X5. Aaron and ABC, Incorporated, each hold a 50percent capital and profits interest in TQK. If TQK averaged $29,000,000 in annual gross receipts over the last three years, what accounting method can TQK use for X9?

Greg, a 40percent partner in GSS Partnership, contributed land to the partnership in exchange for his partnership interest when the partnership was formed. At the time, his basis in the land was $30,000 and its FMV was $133,000. Three years after the partnership was formed, GSS Partnership decided to sell the land to an unrelated party for $150,000. When the land is sold, how much of the gain should be allocated to each partner of GSS Partnership if Sam and Steve are each 30percent partners?

Partnership tax rules incorporate both the entity and aggregate approaches.

Explain why partners must increase their tax basis for their share of partnership taxable and nontaxable income or gain and reduce their basis by their share of partnership deductible and nondeductible expenses or losses.

Partners adjust their outside basis by adding nondeductible expenses and subtracting any tax-exempt income to avoid being double taxed.

What form does a partnership use when filing an annual informational return?

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 $3,100, inventory with an FMV and tax basis $5,100, and a building with an FMV of $8,100 and adjusted basis of $10,100. Additionally, the building is secured by a $10,100 mortgage.Peter-cash of $5,100, accounts payable with an FMV and tax basis of $19,100, and land with an FMV and tax basis of $20,100.Sarah-cash of $2,100, accounts receivable with an FMV and tax basis of $1,100, and equipment with an FMV of $26,100 and adjusted basis of $4,100. Also, the equipment is secured by a $23,100 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.

On 12/31/X4, Zoom, LLC, reported a $60,000 loss on its books. The items included in the loss computation were $30,000 in sales revenue, $15,000 in qualified dividends, $22,000 in cost of goods sold, $50,000in charitable contributions, $20,000 in employee wages, and $13,000 of rent expense. How much ordinary business income (loss) will Zoom report on its X4 return?

On June 12, 20X9, Kevin, Chris, and Candy Corporation came together to form Scrumptious Sweets General Partnership. Now, Scrumptious Sweets must decide which tax year-end to use. Kevin and Chris have calendar year-ends, and each holds a 35percent profits and capital interest. However, Candy Corporation has a September 30 ^th year-end and holds the remaining 30percent profits and capital interest. What tax year-end must Scrumptious Sweets adopt, and what rule mandates this year-end?

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 $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.

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.

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.

In X1, Adam and Jason formed ABC, LLC, a car dealership in Kansas City. In X2, Adam and Jason realized they needed an advertising expert to assist in their business. Thus, the two members offered Cory, a marketing expert, a one-third capital interest in their partnership for contributing his expert services. Cory agreed to this arrangement and received his capital interest in X2. If the value of the LLC's capital equals $180,000 when Cory receives his one-third capital interest, which of the following tax consequences does not occur in X2?

A partner can generally apply passive activity losses against passive activity income for the year.

Lloyd and Harry, equal partners, form the Ant World Partnership. During the year, Ant World had the following revenue, expenses, gains, losses, and distributions: Given these items, what amount of ordinary business income (loss) and what separately stated items should be allocated to each partner for the year?

What type of debt is not included in calculating a partner's at-risk amount?

Jerry, a partner with 30percent capital and profits interest, received his Schedule K-1 from Plush Pillows, LP. At the beginning of the year, Jerry's tax basis in his partnership interest was $50,000. His current-year Schedule K-1 reported an ordinary loss of $15,000, long-term capital gain of $3,000, qualified dividends of $2,000, $500 of non-deductible expenses, a $10,000 cash contribution, and a reduction of $4,000 in his share of partnership debt. What is Jerry's adjusted basis in his partnership interest at the end of the year?

Tom is talking to his friend Bob, who has an interest in Freedom, LLC, about purchasing his LLC interest. Bob's outside basis in Freedom, LLC, is $9,500. This includes his $2,400 one-fourth share of the LLC's debt. Bob's 704(b) capital account is $16,500. If Tom bought Bob's LLC interest for $16,000, what would Tom's outside basis be in Freedom, LLC?

On 12/31/X4, Zoom,LLC, reported a $58,500 loss on its books. The items included in the loss computation were $29,000 in sales revenue, $14,000 in qualified dividends, $21,000 in cost of goods sold, $49,000 in charitable contributions, $19,000 in employee wages, and $12,500 of rent expense. How much ordinary business income (loss) will Zoom report on its X4 return?