Exam 9: Forming and Operating Partnerships

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

KBL, Incorporated, AGW, Incorporated, Blaster, Incorporated, Shiny Shoes, Incorporated, and a group of 24 individuals form Shoes Galore General Partnership on October 11, 20X9. Now, Shoes Galore must adopt its required tax year-end. The partners' year-ends, profits interests, and capital interests are reflected in the table below. Given this information, what tax year-end must Shoes Galore use, and what rule requires this year-end?

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 25percent profits and capital interest and a $5,000 outside basis, (2) Joe, a member with a 45percent profits and capital interest and a $10,000 outside basis, and (3) Jack, a member with a 30percent profits and capital interest and a $2,000 outside basis. The following items were reported on Styling's Schedule K for the year: ordinary income of $100,000, Section 1231 gain of $15,000, charitable contributions of $25,000, and tax-exempt income of $3,000. In addition, Styling received an additional bank loan of $12,000 during 20X8. What is Jane's tax basis after adjustment for her share of these items?

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 $3,000, inventory with an FMV and tax basis $5,000, and a building with an FMV of $8,000 and adjusted basis of $10,000. Additionally, the building is secured by a $10,000 mortgage.Peter-cash of $5,000, accounts payable with an FMV and tax basis of $19,000, and land with an FMV and tax basis of $20,000.Sarah-cash of $2,000, accounts receivable with an FMV and tax basis of $1,000, and equipment with an FMV of $26,000 and adjusted basis of $4,000. Also, the equipment is secured by a $23,000 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 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. When it was formed, the partners received equal profits and capital interests, and the following items were contributed by each partner:Troy-cash of $3,000, inventory with an FMV and tax basis of $5,000, and a building with an FMV of $22,000 and adjusted basis of $10,000. Additionally, the building was secured by a $10,000 nonrecourse mortgage.Peter-cash of $5,000, accounts payable of $12,000 (recourse debt for which each partner becomes equally responsible), and land with an FMV of $27,000 and tax basis of $20,000.Sarah-cash of $2,000, accounts receivable with an FMV and tax basis of $1,000, and equipment with an FMV of $40,000 and adjusted basis of $3,500. Sarah also contributed a $23,000 nonrecourse note payable secured by the equipment.What is each partner's outside basis, and how much gain (loss) must the partners recognize in 20X9, when Picture Perfect was formed?

Nonrecourse debt is generally allocated according to the profit-sharing ratios of the partnership.

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?

Which person would generally be treated as a material participant in an activity?

Gerald received a one-third capital and profit (loss) interest in XYZ Limited Partnership (LP). In exchange for this interest, Gerald contributed a building with an FMV of $17,000. His adjusted basis in the building was $8,500. In addition, the building was encumbered with a $5,100 nonrecourse mortgage that XYZ LP assumed at the time the property was contributed. What is Gerald's outside basis immediately after his contribution?

The main difference between a partner's tax basis and at-risk amount is that qualified nonrecourse financing is not included in the at-risk basis amount.

XYZ, LLC, has several individual and corporate members. Abe and Joe, individuals with 4/30 year-ends, each have a 23percent profits and capital interest. RST, Incorporated, a corporation with a 6/30 year-end, owns a 4percent profits and capital interest, while DEF, Incorporated, a corporation with an 8/30 year-end, owns a 4.9percent profits and capital interest. Finally, 30 other calendar year-end individual partners (each with less than a 2percent profits and capital interest) own the remaining 45percent of the profits and capital interests in XYZ. What tax year-end should XYZ use, and which test or rule requires this year-end?

Jerry, a partner with 30 percent 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 $49,000. His current-year Schedule K-1 reported an ordinary loss of $14,000, long-term capital gain of $4,100, qualified dividends of $3,100, $1,600 of non-deductible expenses, a $21,000 cash contribution, and a reduction of $5,100 in his share of partnership debt. What is Jerry's adjusted basis in his partnership interest at the end of the year?

Jay has a tax basis of $20,000 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-$9,000, (2) qualified nonrecourse debt-$1,000, and (3) nonrecourse debt-$1,100. There were no changes to the debt allocated to Jay during the tax year. If Jay is allocated a $21,000 loss for the current year, how much of the loss will be suspended under the tax basis and at-risk limitations?

In each of the independent scenarios below, how does the partner or partnership determine its holding period in the property received? a. A partner contributes property in exchange for a partnership interest. b. The partnership receives contributed property. c. A partner contributes services in exchange for a partnership interest. d. A partner purchases a partnership interest from an existing partner.