Exam 14: Forming and Operating Partnerships

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 1/3 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 1/3 capital interest,which of the following tax consequences does not occur in X2?

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

What is the difference between the aggregate and entity theory of partnership taxation? Provide two examples of how partnership tax rules reflect the aggregate theory and two examples of how they reflect the entity theory.

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

In what order are the loss limitations for partnerships applied?

TQK,LLC provides consulting services and was formed on 1/31/X5.Aaron and ABC,Inc.each hold a 50% capital and profits interest in TQK.If TQK averaged $27,000,000 in annual gross receipts over the last three years,what accounting method can TQK use for X9?

Peter,Matt,Priscilla,and Mary began the year in the PMPM General Partnership sharing profits,losses,and capital equally.They each had a tax basis at the beginning of the year of $3,000,$10,000,$8,000,and $11,000 respectively.Early in the year,Mary provided general consulting services to the partnership and received an additional 15 percent profits,losses,and capital interest in the partnership.The liquidation value of her additional interest was $45,000.Later the same year,the partnership received cash contributions of $25,000 from Peter and Matt that it used to repay the partnership's $35,000 recourse debt.According to state law,the partners shared responsibility for this debt in accordance with their loss sharing ratios.What is each partner's tax basis after adjustment for these transactions?

KBL,Inc.,AGW,Inc.,Blaster,Inc.,Shiny Shoes,Inc.,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? $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Shoes Galore Partnership }$ Year-End Profits Capital KBL, Inc. 1/31 25\% 25\% AGW, Inc. 1/31 20\% 20\% Blaster, Inc 3/31 4\% 4\% Shiny Shoes, Inc. 6/30 3\% 3\% 24 Individuals 12/31 2\% each (48\% total) 2\% each (48\% total )

John,a limited partner of Candy Apple,LP,is allocated $30,000 of ordinary business loss from the partnership.Before the loss allocation,his tax basis is $20,000 and at-risk amount is $10,000.John also has ordinary business income of $20,000 from Sweet Pea,LP as a general partner and ordinary business income of $5,000 from Red Tomato,as a limited partner.How much of the $30,000 loss from Candy Apple can John deduct currently?

How does a partnership make a tax election for the current year?

Which of the following statements regarding the rationale for adjusting a partner's basis is false?

Lloyd and Harry,equal partners,form the Ant World Partnership.During the year,Ant World had the following revenue,expenses,gains,losses,and distributions: Cost of Goods Sold \ 85,000 Cash Distribution to Harry \1 5,000 Municipal Bond Interest \1 ,500 Short-Tern Capital Gairs \ 4,500 Errployee Wages \4 0,000 Rent \1 0,000 Charitable Contributions \ 25,000 Sales \ 175,000 Repairs and Maintenance \ 5,000 Long-Tern Capital Gains \ 12,000 Fines and Penalties \5 ,000 Guararteed Payment to Lloyd \ 25,000 Given these items,what amount of ordinary business income (loss)and what separately-stated items should be allocated to each partner for the year?

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

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

Illuminating Light Partnership had the following revenues,expenses,gains,losses,and distributions: Sales \ 60,000 Long-Term Capital Gain \ 8,000 Qualified Dividends \ 5,000 Cost of Goods Sold \ 60,000 Employee Wages \ 15,000 Guaranteed Payment to Managing Partner \ 25,000 Municipal Bond Interest \ 5,000 Section 179 Expense \ 10,000 MACRS Depreciation \ 8,000 Section 1231 Gains \ 3,000 Fines and Penalties \ 1,500 Given these items,what is Illuminating Light's ordinary business income (loss)for the year?

Jordan,Inc.,Bird,Inc.,Ewing,Inc.,and Barkley,Inc.formed Nothing-But-Net Partnership on June 1ˢᵗ,20X9.Now,Nothing-But-Net 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 Nothing-But-Net use and what rule requires this year-end?   Nothing-But-Net Partrership Year-End Profits Capital Jordar, Inc. 4/30 45\% 25\% Bird, Inc. 9/30 25\% 25\% Ewing, Inc. 10/31 0\% 25\% Barkley, Irce 12/31 30\% 25\%  

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

What is the correct order for applying the following three items to adjust a partner's tax basis in his partnership interest: (1)Increase for share of ordinary business income,(2)Decrease for share of separately stated loss items,and (3)Decrease for distributions?

A partner can generally apply passive activity losses against passive activity income for the 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? TALL LADDERS, LP Income Statement Year 2 Sales COGS Gross Profit Interest Income Dividends Long Term Capital Gain Other Income Total Other Income MACRS Depreciation Guaranteed Payments Charitable Contribution Fines and Penalties Other Expenses Total other Expenses Net Income (Loss) 65,000 47,000 18,000 3,000 5,000 10,006 33000 20,000 10,000 10,000 4,500 8,500 53,000 2,000 TALL LADDERS, LP Balance Sheet Year 1 Year 2 Assets 120,000 270,000 Nonrecourse Liabilities 50,000 180,000 Partner's Capital 70,000 90,000