Question 1

Which of the following is not true regarding a limited liability company?

Accepted Answer

A) The Code does not specifically provide for the taxation of limited liability companies.Therefore,an LLC that is taxed as a partnership must rely primarily on the tax provisions that apply to partnerships. 
B) Under the "check the box" regulations,a domestic,two-owner unincorporated business organization,such as an LLC,is taxed as a partnership unless the owners elect otherwise. 
C) An LLC offers several advantages over the S corporation,including not making the managing member of the LLC liable for self-employment taxes on his or her share of LLC income. 
D) The economic benefits of an LLC may be reduced if lenders require owners to personally guarantee LLC debts. 
E) In general,an LLC member is not personally liable for LLC debts. 
A) The Code does not specifically provide for the taxation of limited liability companies.Therefore,an LLC that is taxed as a partnership must rely primarily on the tax provisions that apply to partnerships. 
B) Under the "check the box" regulations,a domestic,two-owner unincorporated business organization,such as an LLC,is taxed as a partnership unless the owners elect otherwise. 
C) An LLC offers several advantages over the S corporation,including not making the managing member of the LLC liable for self-employment taxes on his or her share of LLC income. 
D) The economic benefits of an LLC may be reduced if lenders require owners to personally guarantee LLC debts. 
E) In general,an LLC member is not personally liable for LLC debts.

Question 2

Which of the following statements,if any,about an LLC is false?

Accepted Answer

A) An LLC is usually taxed like a partnership. 
B) "Members" of an LLC generally have limited personal liability for debts of the LLC. 
C) "Members" of an LLC can participate in management of the LLC unless the member agrees not to participate. 
D) An LLC can specially allocate income items,as long as the substantial economic effect rules of § 704(b)are followed. 
E) None of the above statements is false. 
A) An LLC is usually taxed like a partnership. 
B) "Members" of an LLC generally have limited personal liability for debts of the LLC. 
C) "Members" of an LLC can participate in management of the LLC unless the member agrees not to participate. 
D) An LLC can specially allocate income items,as long as the substantial economic effect rules of § 704(b)are followed. 
E) None of the above statements is false.

Question 3

A distribution can be "proportionate" even if only one partner receives assets from the partnership.

Accepted Answer

A) True 
 B)False

Question 4

A disproportionate distribution occurs when a cash distribution is not made in proportion to the partners' ownership interests in the partnership.(Assume the partnership's only assets are cash and land held for investment).

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is not typically considered to be a "hot asset?"

Accepted Answer

A) Accounts receivable of a cash basis partnership. 
B) Inventory with a basis of $10,000 and a fair market value of $15,000. 
C) Depreciation recapture potential. 
D) Stock held for investment. 
E) Land held for development. 
A) Accounts receivable of a cash basis partnership. 
B) Inventory with a basis of $10,000 and a fair market value of $15,000. 
C) Depreciation recapture potential. 
D) Stock held for investment. 
E) Land held for development.

Question 6

A limited liability company generally provides limited liability for those owners that are not active in the management of the LLC but requires owner-managers of the LLC to have unlimited personal liability for LLC debts.

Accepted Answer

A) True 
 B)False

Question 7

Jeremy receives a proportionate nonliquidating distribution from the JKL Partnership when the basis of his interest is $100,000.The distribution consists of cash of $25,000,land with a basis of $30,000 and a fair market value of $65,000,and inventory with a partnership basis of $50,000 and fair market value of $60,000.As a result of this distribution,Jeremy recognizes a $50,000 gain and takes a $65,000 basis in the land and a $60,000 basis in the inventory.

Accepted Answer

A) True 
 B)False

Question 8

In a liquidating distribution,a partnership must distribute all of its property to all of its partners.

Accepted Answer

A) True 
 B)False

Question 9

In a proportionate liquidating distribution,Lina receives a distribution of $10,000 cash,accounts receivable (basis of $0 and fair market value of $12,000),and inventory (basis of $30,000 and fair market value of $40,000).Lina's basis in the entity immediately before the distribution was $80,000.As a result of the distribution,what is Lina's basis in the accounts receivable and inventory,and how much gain or loss does she recognize?

Accepted Answer

A) $0 basis in accounts receivable;$30,000 basis in inventory;$40,000 loss. 
B) $0 basis in accounts receivable;$70,000 basis in inventory;$0 gain or loss. 
C) $0 basis in accounts receivable;$40,000 basis in inventory;$50,000 loss. 
D) $12,000 basis in accounts receivable;$30,000 basis in inventory;$28,000 gain. 
E) $12,000 basis in accounts receivable;$40,000 basis in inventory;$18,000 gain. 
A) $0 basis in accounts receivable;$30,000 basis in inventory;$40,000 loss. 
B) $0 basis in accounts receivable;$70,000 basis in inventory;$0 gain or loss. 
C) $0 basis in accounts receivable;$40,000 basis in inventory;$50,000 loss. 
D) $12,000 basis in accounts receivable;$30,000 basis in inventory;$28,000 gain. 
E) $12,000 basis in accounts receivable;$40,000 basis in inventory;$18,000 gain.

Question 10

A § 754 election is made for a tax year in which the partner recognizes gain or loss on a distribution from the partnership or the basis in distributed property is increased or decreased from the inside basis the partnership held in those assets.The election is made by a partner any time it is necessary to adjust his or her share of the inside basis of partnership assets.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements correctly reflects the rules regarding proportionate liquidating distributions?

Accepted Answer

A) Relief of liabilities is treated as a distribution of cash and will cause recognition of gain if the cash distribution exceeds the partner's basis in the partnership interest. 
B) A partner's basis in distributed unrealized receivables is the lesser of the partnership's basis in the receivables or their fair market value. 
C) The basis of unrealized receivables may be stepped up to their fair market value if the partner has adequate unabsorbed basis. 
D) Assets are deemed distributed in the following order: cash,unrealized receivables,capital assets,and finally inventory. 
E) The partner can recognize gain,but not loss,on a proportionate liquidating distribution. 
A) Relief of liabilities is treated as a distribution of cash and will cause recognition of gain if the cash distribution exceeds the partner's basis in the partnership interest. 
B) A partner's basis in distributed unrealized receivables is the lesser of the partnership's basis in the receivables or their fair market value. 
C) The basis of unrealized receivables may be stepped up to their fair market value if the partner has adequate unabsorbed basis. 
D) Assets are deemed distributed in the following order: cash,unrealized receivables,capital assets,and finally inventory. 
E) The partner can recognize gain,but not loss,on a proportionate liquidating distribution.

Question 12

Paul is a 25% owner in the DDBP LLC (a calendar year entity).At the end of the last tax year,Paul's basis in his interest was $40,000,including his $10,000 share of LLC liabilities.On July 1 of the current tax year,Paul sells his LLC interest to Lee Anna for $50,000 cash.In addition,Lee Anna assumes Paul's share of LLC liabilities,which,at that date,was $15,000.During the current tax year,DDBP's taxable income is $100,000 (earned evenly during the year).Paul's share of the LLC's unrealized receivables is valued at $5,000 ($0 basis).At the sale date,what is Paul's basis in his LLC interest,how much gain or loss must he recognize,and what is the character of the gain or loss?

Accepted Answer

A) $65,000 basis;no gain or loss. 
B) $65,000 basis;$15,000 capital gain. 
C) $57,500 basis;$2,500 ordinary income and $5,000 capital loss. 
D) $57,500 basis;$5,000 ordinary income and $2,500 capital gain. 
E) $55,000 basis;$5,000 capital loss. 
A) $65,000 basis;no gain or loss. 
B) $65,000 basis;$15,000 capital gain. 
C) $57,500 basis;$2,500 ordinary income and $5,000 capital loss. 
D) $57,500 basis;$5,000 ordinary income and $2,500 capital gain. 
E) $55,000 basis;$5,000 capital loss.

Question 13

Barney,Bob,and Billie are equal partners in the BBB Partnership.The partnership balance sheet reads as follows on December 31 of the current year:
 
Partner Billie has an adjusted basis of $40,000 for her partnership interest.If Billie sells her entire partnership interest to new partner Janet for $60,000 cash,how much capital gain and ordinary income must Billie recognize from the sale?

Accepted Answer

A) $20,000 ordinary income. 
B) $20,000 capital gain. 
C) $10,000 ordinary income;$10,000 capital gain. 
D) $30,000 ordinary income;$10,000 capital loss. 
E) None of the above. 
A) $20,000 ordinary income. 
B) $20,000 capital gain. 
C) $10,000 ordinary income;$10,000 capital gain. 
D) $30,000 ordinary income;$10,000 capital loss. 
E) None of the above.

Question 14

Maggie,a partner in the Magpie partnership,received a proportionate nonliquidating distribution of $20,000 cash,unrealized receivables with a basis of $0 and a fair market value of $30,000,and land with a basis of $25,000 and a fair market value of $20,000.Her basis in the partnership interest immediately before the distributions was $30,000.She will recognize $0 gain on the distribution,and her basis in the receivables and land will be $0 and $20,000 respectively.

Accepted Answer

A) True 
 B)False

Question 15

Larry's partnership interest basis is $60,000.Larry receives a proportionate,liquidating distribution from a liquidating partnership of $45,000 cash and inventory having a basis of $30,000 to the partnership and a fair market value of $28,000.Larry assigns a basis of $15,000 to the inventory and recognizes no gain or loss.

Accepted Answer

A) True 
 B)False

Question 16

The December 31,2010,balance sheet of the BCD General Partnership reads as follows.
   
Each partner shares in 1/3 of the partnership capital,income,gain,loss,deduction and credit.Capital is not a material income-producing factor to the partnership.On December 31,2010,general partner Cassie receives a distribution of $120,000 cash in liquidation of her partnership interest under § 736.Nothing is stated in the partnership agreement about goodwill.Cassie's outside basis for the partnership interest immediately before the distribution is $74,000.
How much is Cassie's recognized gain from the distribution and what is the character of the gain?

Accepted Answer

Cassie will recognize $39,000 of ordinar

Question 17

Normally a distribution of property from a partnership does not result in gain recognition.However,a distribution of marketable securities may be treated,in part,as a distribution of cash that could result in gain recognition.

Accepted Answer

A) True 
 B)False

Question 18

The December 31,2010,balance sheet of the DIP General Partnership is as follows:
   
The partners share equally in partnership capital,income,gain,loss,deduction,and credit and capital is not a material income-producing factor.On December 31,2010,general partner Dana receives a distribution of $120,000 cash in liquidation of her interest under § 736.Dana's outside basis for the partnership interest immediately before the distribution is $90,000.What is Dana's gain or loss on the distribution and its character?

Accepted Answer

The $20,000 payment for Dana's share of

Question 19

The ABC Partnership makes a proportionate distribution of its assets to Charles,in complete liquidation of his partnership interest.The distribution consists of $30,000 in cash and capital assets with a basis to the partnership of $20,000 and a fair market value of $28,000.None of the payment is for partnership goodwill.At the time of the distribution,Charles's partnership basis is $42,000 and the partnership has no liabilities and no "hot assets." If the partnership makes an optional basis adjustment election on a timely filed return,it recognizes:

Accepted Answer

A) Capital gain of $16,000 and increases the basis of its remaining assets by $8,000. 
B) Capital loss of $8,000 and decreases the basis of its remaining assets by $16,000. 
C) No gain or loss and increases the basis of its remaining assets by $8,000. 
D) No gain or loss and decreases the basis of its remaining assets by $16,000. 
E) None of the above. 
A) Capital gain of $16,000 and increases the basis of its remaining assets by $8,000. 
B) Capital loss of $8,000 and decreases the basis of its remaining assets by $16,000. 
C) No gain or loss and increases the basis of its remaining assets by $8,000. 
D) No gain or loss and decreases the basis of its remaining assets by $16,000. 
E) None of the above.

Question 20

In a proportionate liquidating distribution,UVW Partnership distributes to partner William cash of $25,000,accounts receivable (basis of $10,000 and fair market value of $8,000),and land (basis of $50,000 and fair market value of $60,000).William's basis was $75,000 before the distribution.On the liquidation,William recognizes no gain or loss,and he takes a basis of $10,000 in the accounts receivable,and $50,000 in the land.

Accepted Answer

A) True 
 B)False

Which of the following is not true regarding a limited liability company?

Which of the following statements,if any,about an LLC is false?

A distribution can be "proportionate" even if only one partner receives assets from the partnership.

A disproportionate distribution occurs when a cash distribution is not made in proportion to the partners' ownership interests in the partnership.(Assume the partnership's only assets are cash and land held for investment).

Which of the following is not typically considered to be a "hot asset?"

A limited liability company generally provides limited liability for those owners that are not active in the management of the LLC but requires owner-managers of the LLC to have unlimited personal liability for LLC debts.

In a liquidating distribution,a partnership must distribute all of its property to all of its partners.

Which of the following statements correctly reflects the rules regarding proportionate liquidating distributions?

Normally a distribution of property from a partnership does not result in gain recognition.However,a distribution of marketable securities may be treated,in part,as a distribution of cash that could result in gain recognition.

Understanding and Working With the Federal Tax Law

Corporations: Introduction and Operating Rules

Corporations: Special Situations

Corporations: Organization and Capital Structure

Corporations: Earnings Profits and Dividend Distributions

Corporations: Redemptions and Liquidations

Corporations: Reorganizations

Consolidated Tax Returns

Taxation of International Transactions

Partnerships: Formation, operation, and Basis

S Corporations

Comparative Forms of Doing Business

Taxes on the Financial Statements

Exempt Entities

Multistate Corporate Taxation

Tax Practice and Ethics

The Federal Gift and Estate Taxes

Family Tax Planning

Income Taxation of Trusts and Estates

Filters

Exam 11: Partnerships: Distributions, transfer of Interests, and Terminations

Which of the following is not true regarding a limited liability company?

Which of the following statements,if any,about an LLC is false?

A distribution can be "proportionate" even if only one partner receives assets from the partnership.

A disproportionate distribution occurs when a cash distribution is not made in proportion to the partners' ownership interests in the partnership.(Assume the partnership's only assets are cash and land held for investment).

Which of the following is not typically considered to be a "hot asset?"

A limited liability company generally provides limited liability for those owners that are not active in the management of the LLC but requires owner-managers of the LLC to have unlimited personal liability for LLC debts.

In a liquidating distribution,a partnership must distribute all of its property to all of its partners.

Which of the following statements correctly reflects the rules regarding proportionate liquidating distributions?

Normally a distribution of property from a partnership does not result in gain recognition.However,a distribution of marketable securities may be treated,in part,as a distribution of cash that could result in gain recognition.

Understanding and Working With the Federal Tax Law

Corporations: Introduction and Operating Rules

Corporations: Special Situations

Corporations: Organization and Capital Structure

Corporations: Earnings Profits and Dividend Distributions

Corporations: Redemptions and Liquidations

Corporations: Reorganizations

Consolidated Tax Returns

Taxation of International Transactions

Partnerships: Formation, operation, and Basis

S Corporations

Comparative Forms of Doing Business

Taxes on the Financial Statements

Exempt Entities

Multistate Corporate Taxation

Tax Practice and Ethics

The Federal Gift and Estate Taxes

Family Tax Planning

Income Taxation of Trusts and Estates

Filters