Exam 9: Forming and Operating Partnerships

J&J, LLC, was in its third year of operations when J&J decided to expand the number of members from two, A and B, with equal profits and capital interests, to three members, A, B, and C. The third member, C, will contribute her financial expertise to the LLC in exchange for a one-third capital interest in J&J. Given the balance sheet below reflecting the financial position of J&J on the date member C is admitted, what are the tax consequences to members A, B, and C, and to J&J, when C receives her capital interest? If, instead, member C receives a one-third profits interest, what would be the tax consequences to members A, B, and C, and to J&J?

Tim, a real estate investor, Ken, a dealer in securities, and Hardware, Incorporated, a retail lumber store, form a partnership called HKT, LP. HKT is in the home-building business. Tim recently purchased his interest in HKT, while the other partners purchased their interests several years ago. During X3, HKT reports a $12,000 gain from the sale of a stock in a wholesale lumber company it purchased in X1 for investment purposes. Which of the following statements best represents how their portion of the gain should be reported to the partner?

Which of the following statements regarding capital and profits interests received for services contributed to a partnership is false?

Under general circumstances, debt is allocated from the partnership to each partner in the following manner:

Which of the following items is subject to the net investment income tax when a partner is not a material participant in the partnership?

Which of the following does not adjust a partner's basis?

Any losses that exceed the tax basis of a partner in their partnership interest are suspended and carried forward for 20 years.

If a taxpayer sells a passive activity with suspended passive activity losses from prior years, what type of income can generally be offset by the suspended passive losses in the year of sale?

The character of each separately stated item is determined at the partner level.

On January 1, X9, Gerald received his 50 percent profits and capital interest in High Air, LLC, in exchange for $3,200 in cash and real property with a $4,200 tax basis secured by a $3,200 nonrecourse mortgage. High Air reported a $16,200 loss for its X9 calendar year. How much loss can Gerald deduct, and how much loss must he suspend if he only applies the tax basis loss limitation?

Frank and Bob are equal members in Soxy Socks, LLC. When forming the LLC, Frank contributed $60,000 in cash and $60,000 worth of equipment. Frank's adjusted basis in the equipment was $45,000. Bob contributed $60,000 in cash and $60,000 worth of land. Bob's adjusted basis in the land was $20,000. On 3/15/X4, Soxy Socks sells the land Bob contributed for $68,000. How much gain (loss) related to this transaction will Bob report on his X4 return?

Under proposed regulations issued by the Treasury Department, in which of the following situations should an LLC member be treated as a general partner for self-employment tax purposes?

Kim received a one-third profits and capital interest in Bright Line, LLC, in exchange for legal services she provided. In addition to her share of partnership profits or losses, she receives a $30,000 guaranteed payment each year for ongoing services she provides to the LLC. For X4, Bright Line reported the following revenues and expenses: sales-$150,000, cost of goods sold-$90,000, depreciation expense-$45,000, long-term capital gains-$15,000, qualified dividends-$6,000, and municipal bond interest-$3,000. How much ordinary business income (loss) will Bright Line allocate to Kim on her Schedule K-1 for X4?

Which of the following statements is true when property is contributed in exchange for a partnership interest?

Partnerships may maintain their capital accounts according to which of the following rules?

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 $10,000. This includes his $2,500 one-fourth share of the LLC's debt. Bob's 704(b) capital account is $17,000. If Tom bought Bob's LLC interest for $17,000, what would Tom's outside basis be in Freedom, LLC?

This year, Reggie's distributive share from Almonte Partnership includes $8,000 of interest income, $4,000 of dividend income, and $60,000of ordinary business income. A. Assume that Reggie materially participates in the partnership. How much of his distributive share from Almonte Partnership is potentially subject to the net investment income tax? B. Assume that Reggie does not materially participate in the partnership. How much of his distributive share from Almonte Partnership is potentially subject to the net investment income tax?

Which of the following statements regarding the process for determining a partnership's tax year-end is true?

What is the rationale for the specific rules partnerships must follow in determining a partnership's taxable year-end?

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