Exam 10: Partnerships: Formation, Operation, and Basis

Tara and Robert formed the TR Partnership four years ago. Because they decided the company needed some expertise in multimedia presentations, they offered Katie a 1/3 interest in partnership capital and profits if she would come to work for the partnership. On July 1 of the current year, the unrestricted partnership interest (fair market value of $25,000) was transferred to Katie. How should Katie treat the receipt of the partnership interest in the current year?

On a partnership's Form 1065, which of the following statements is not true?

Justin and Kevin formed the equal JK Partnership during the current year, with Justin contributing $60,000 in cash and Kevin contributing land (basis of $40,000, fair market value of $30,000) and equipment (basis of $0, fair market value of $30,000). Kevin recognizes a $20,000 gain on the contribution and his basis in his partnership interest is $60,000.

TEC Partners was formed during the current tax year. It incurred $10,000 of organizational expenses, $80,000 of startup expenses, $200,000 of syndication costs, and $5,000 of transfer taxes to retitle property contributioned by a partner. Which of the following statements is correct regarding these payments?

The partnership reports each partner's share of income to the partner in a single amount on Form 1099.

The MOP Partnership is involved in leasing heavy equipment under long-term leases of five years or more. Patricia has an adjusted basis for her partnership interest on January 1 of the current year of $600,000, consisting of the following: During the year, the partnership has an operating loss of $1.2 million and distributes $60,000 of cash to Patricia. Partnership liabilities were the same at the end of the tax year, and the nonrecourse debt is not "qualified nonrecourse debt." If she owns a 60% share of partnership profits, capital, and losses, and is a material participant in the partnership, how much of her share of the operating loss can Patricia deduct? What Code provisions could cause a suspension of the loss?

Which one of the following statements regarding partnership taxation is incorrect?

Victor is a 40% owner (member) of Real Properties R Us, LLC (RPRU). During the current tax year, RPRU reported a loss from rental real estate activities of ($200,000) which is treated as a passive loss. Victor is a material participant in RPRU and meets the active participation requirements for rental real estate activities. His modified AGI is $120,000. In addition, Victor has passive income from other sources of $60,000. Assuming Victor meets the basis and at risk limitations, what amount of the RPRU loss may Victor deduct under the passive loss rules?

Greg and Justin are forming the GJ Partnership. Greg contributes $500,000 cash and Justin contributes nondepreciable property with an adjusted basis of $200,000 and a fair market value of $550,000. The property is subject to a $50,000 liability, which is also transferred into the partnership and is shared equally by the partners for basis purposes. Greg and Justin share in all partnership profits equally except for any precontribution gain, which must be allocated according to the statutory rules for built-in gain allocations.

Stephanie is a calendar year cash basis taxpayer. She owns a 50% profit and loss interest in a cash basis partnership with a September 30 year-end. The partnership's operating income (after deducting guaranteed payments) was $120,000 ($10,000 per month) and $144,000 ($12,000 per month), respectively, for the partnership tax years ended September 30, 2011 and 2012. The partnership paid guaranteed payments to Stephanie of $2,000 and $3,000 per month during the fiscal years ended September 30, 2011 and 2012. How much will Stephanie's adjusted gross income be increased by these partnership items for her tax year ended December 31, 2011?

Section 721 provides that no gain or loss is recognized on contribution of property to a partnership in exchange for an interest in the partnership. A disguised sale is an exception to nonrecognition of gain or loss under § 721.

A partnership will take a carryover basis in an asset it acquires when:

Morgan and Kristen formed an equal partnership on August 1 of the current year. Morgan contributed $60,000 cash and land with a basis of $18,000 and a fair market value of $40,000. Kristen contributed equipment with a basis of $42,000 and a value of $100,000. Kristen's tax basis in her interest is $42,000; Morgan's tax basis is $78,000.

Which of the following statements is correct regarding the manner in which partnership liabilities are reflected in the partners' bases in their partnership interests?

Brooke and John formed a partnership. Brooke received a 40% interest in partnership capital and profits in exchange for contributing land (basis of $30,000 and fair market value of $120,000). John received a 60% interest in partnership capital and profits in exchange for contributing $180,000 of cash. Three years after the contribution date, the land contributed by Brooke is sold by the partnership to a third party for $150,000. How much taxable gain will Brooke recognize from the sale?

A partnership cannot use the cash method of accounting if one of the partners is a C corporation.

The amount of a partnership's income and loss from operating activities is combined with separately stated income and expenses in determining the partnership's net income (loss). This amount is reconciled to book income on the partnership's Schedule M-1 or Schedule M-3.

The LN partnership reported the following items of income and deduction during the current tax year: revenues, $200,000; cost of goods sold, $80,000; tax-exempt interest income, $5,000; salaries to employees, $50,000; and long-term capital gain, $5,000. In addition, the partnership distributed $10,000 of cash to 50% partner Nina and $20,000 of cash to 50% partner Len. What is Nina's share of ordinary partnership income and separately stated items?

An example of the "entity concept" underlying partnership taxation is the fact that the partners (rather than the partnership) pay tax on partnership income.

Debt of a limited liability company is allocated among LLC members using the nonrecourse debt allocation rules unless an LLC member has personally guaranteed the debt.