Exam 9: Forming and Operating Partnerships

The term "outside basis" refers to the partnership's basis in its assets; whereas, the term "inside basis" refers an individual partner's basis in her partnership interest.

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 a FMV and tax basis of $5,000, and a building with a 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 a FMV of $27,000 and tax basis of $20,000. • Sarah - cash of $2,000, accounts receivable with a FMV and tax basis of $1,000, and equipment with a 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?

A partnership with a C corporation partner must always use the accrual method as its accounting method. An exception applies to partnerships with annual gross receipts for the three prior tax years of $5 million or less.

Kim received a 1/3 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?

ER General Partnership, a medical supplies business, states in its partnership agreement that Erin and Ryan agree to split profits and losses according to a 40/60 ratio. Additionally, the partnership will provide Erin with a $15,000 guaranteed payment for services she provides to the partnership. ER Partnership reports the following revenues, expenses, gains, losses, and distributions for its current taxable year: Gain on Sale of Land \ 4,000 MACRS Depreciation \ 7,500 Charitable Contributions \ 12,500 Sales \ 40,000 Interest Income \ 500 Cost of Goods Sold \ 32,000 179 Expense \ 7,000 Tax-Exempt Income \ 2,000 Other Income \ 5,000 *The Land is a Section 1231 asset Given these items, answer the following questions: A. Compute Erin's share of ordinary income (loss) and separately-stated items. Include her self-employment income as a separately-stated item. B. Compute Erin's self-employment income, except assume ER Partnership is a limited partnership and Erin is a limited partner. C. Compute Erin's self-employment income, except assume ER Partnership is an LLC and Erin is personally liable for half of the debt of the LLC. Apply the IRS's proposed regulations in formulating your answer.

What type of debt is not included in calculating a partner's at-risk amount?

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 a FMV of $30,000. His adjusted basis in the building was $15,000. In addition, the building was encumbered with a $9,000 nonrecourse mortgage that XYZ, LP assumed at the time the property was contributed. What is Gerald's outside basis immediately after his contribution?

A partner's tax basis or at-risk amount can be increased by making capital contributions, by paying off partnership debt, or by increasing the profitability of the partnership. Partners are deemed to have received a cash distribution from the partnership when they are relieved of partnership debt.

Illuminating Light Partnership had the following revenues, expenses, gains, losses, and distributions: Given these items, what is Illuminating Light's ordinary business income (loss) for the year?

Which of the following statements regarding partnerships losses suspended by the tax basis limitation is true?

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

Actual or deemed cash distributions in excess of a partner's outside basis are generally taxable as capital gains.

The least aggregate deferral test uses the profit percentage of each partner to determine the minimum amount of tax deferral for the partner group as a whole in determining the permissible tax year-end of a partnership.

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

Partners adjust their outside basis by adding non-deductible expenses and subtracting any tax-exempt income to avoid being double taxed. Non-deductible expenses decrease basis and tax-exempt income increases basis.

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

A general partner's share of ordinary business income is similar to investment income; thus, a general partner only includes their guaranteed payments as self-employment income. General partners report guaranteed payments and their share of ordinary business income as self-employment income because they are actively involved in managing the partnership.

Income earned by flow-through entities is usually taxed only once at the entity level. Income is taxed only once at the owner level.

An additional allocation of partnership debt or relief of partnership debt is considered to be a deemed cash contribution or cash distribution respectively.

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