Deck 14: Partnerships and Limited Liability Entities

Question 1

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 and Morgan each have a basis of $100,000 in their partnership interests.

Answer 1

False

Question 2

If the partnership properly makes an election for treatment of a specific tax item, the partner is bound by that treatment.

Answer 2

True

Question 3

A partnership is an association formed by two or more taxpayers (which may be any type of entity) to carry on a trade or business.

Answer 3

True

Question 4

Section 721 provides that, in general, no gain or loss is recognized by the partnership or the partner on contribution of appreciated or depreciated property to a partnership in exchange for an interest in the partnership.

Question 5

Section 721 provides that no gain or loss is recognized on a contribution of property to a partnership in exchange for an interest in the partnership. An exception might apply if the taxpayer receives a cash distribution from the partnership soon after the property contribution is made.

Question 6

Syndication costs arise when partnership interests are being marketed to investors. These costs cannot be amortized or deducted.

Question 7

Seven years ago, Paul purchased residential rental estate that he has been depreciating as MACRS property over 27.5 years. This year, when his adjusted basis in the property was $250,000, Paul transferred the property to the newly formed PLA LLC in exchange for a one-third interest in the LLC. PLA incurred $10,000 of transfer taxes and fees related to the property. PLA must treat the $260,000 basis in the property, fees, and expenses, as new MACRS property depreciable over 27.5 years.

Question 8

Laura is a real estate developer and owns property that is treated as inventory (not a capital asset) in her business. She contributes a parcel of this land (basis of $15,000) to a partnership, also to be held as inventory. The fair market value of the property is $12,000 at the contribution date. After three years, the partnership sells the land for $10,000. The partnership will recognize a $5,000 ordinary loss on sale of the property.

Question 9

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

Question 10

The taxable income of a partnership flows through to the partners, who report the income on their tax returns.

Question 11

A partnership must provide any information to the partners that the partners would need to calculate deductions not permitted at the partnership level, such as for oil and gas depletion or the corporate dividends received deduction.

Question 12

The primary purpose of the partnership agreement is to document the various tax elections made by the partners regarding depreciation methods, treatment of research and experimental costs, calculation of the § 199 deduction, and the § 754 election.

Question 13

A partner will have the same profit-sharing, loss-sharing, and capital-sharing ownership percentages.

Question 14

A limited partnership (LP) offers all partners protection from claims by the LP's creditors.

Question 15

In a limited liability company, all members are protected from all debts of the partnership unless they personally guaranteed the debt.

Question 16

George received a fully-vested 10% interest in partnership capital and a 20% interest in future partnership profits in exchange for services rendered to the GHP, LLC (not a publicly-traded partnership interest). The future profits of the partnership are subject to normal operating risks. George will report ordinary income equal to the fair market value of the profits interest, but the capital interest will not be currently taxed to him.

Question 17

JLK Partnership incurred $6,000 of organizational costs and $50,000 of startup costs in 2016. JKL may deduct $5,000 each of organizational and startup costs, and the remaining costs ($1,000 of organizational costs and $45,000 of startup costs) may be amortized over 60 months.

Question 18

Ken and Lars formed the equal KL Partnership during the current year, with Ken contributing $100,000 in cash and Lars contributing land (basis of $60,000, fair market value of $40,000) and equipment (basis of $0, fair market value of $60,000). Lars recognizes a $40,000 gain on the contribution and his basis in his partnership interest is $100,000.

Question 19

The partnership reports each partner's share of income to the partner on a Form 1099-MISC.

Question 20

The "inside basis" is defined as a partner's basis in the partnership interest.

Question 21

Which of the following is a correct definition of a concept related to partnership taxation?

A)The aggregate concept treats partners and partnerships as separate units and gives the partnership its own tax "personality."
B)A partner's capital sharing ratio is defined as the percent of partnership assets (capital) that would be allocated to the partner upon liquidation of the partnership.
C)The partnership's outside basis is defined as the sum of each partner's capital account balance.
D)A special allocation is defined as an amount that could differently affect the tax liabilities of two or more partners.
E)None of these statements is correct.

Question 22

Blaine contributes property valued at $50,000 (basis of $40,000) in exchange for a 25% interest in the BIKE Partnership. If the property is later sold for $70,000, gain of $15,000 will be allocated to Blaine.

Question 23

If a partnership allocates losses to the partners, the partners must first apply the passive loss limitations, then the basis limitation, and finally the at-risk limitations. If all three hurdles are met, the partner may deduct the loss.

Question 24

The amount of a partnership's income and loss from operating activities is combined with separately stated income and expenses to determine the partnership's equivalent of "taxable income." This amount is reconciled to book income on the partnership's Schedule M-1 or Schedule M-3.

Question 25

One of the disadvantages of the partnership form is that the partner's share of the partnership's taxable income is taxed to the partner, regardless of whether or not distributed.

Question 26

Ashley purchased her partnership interest from Lindsey on the first day of the current year for $40,000 cash. She received a $10,000 cash distribution from the partnership during the year, and her share of partnership income is $15,000. Her share of partnership liabilities on the last day of the partnership year is $20,000. Ashley's outside basis for her partnership interest at the end of the year is $45,000.

Question 27

Which of the following entity owners cannot participate in management of the entity?

A)A general partner in a general partnership.
B)A member of a limited liability company.
C)A partner in a limited liability partnership.
D)A limited partner in a limited liability limited partnership.
E)None of the above.

Question 28

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

A)A partnership is a taxable entity for Federal income tax purposes.
B)Partnership income is comprised of ordinary partnership income or loss and separately stated items.
C)A partnership is required to file a return with the IRS.
D)A partner's profit-sharing percent may differ from the partner's loss-sharing percent.
E)All of these statements are correct.

Question 29

Harry's basis in his partnership interest was $10,000 at the beginning of the tax year. For the year, his share of the partnership's loss was $8,000, and he also received a distribution of $4,000. Harry can deduct an $8,000 loss, and he recognizes a gain of $2,000 on the distribution of cash in excess of his remaining basis.

Question 30

The sum of the partners' ending basis amounts on all Schedules K-1 equals the partners' ending capital account balance shown on the partnership's Schedule L.

Question 31

William is a general partner in the WST partnership. During the current year, he receives a guaranteed payment of $10,000 for services he provides to the partnership, and his distributive share of partnership income is $30,000. William is required to pay self-employment tax on the $10,000 guaranteed payment, but not on his distributive share of partnership income.

Question 32

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

A)The partnership acquires the asset through a § 1031 like-kind exchange.
B)A partner owning 25% of partnership capital and profits sells the asset to the partnership.
C)The partnership leases the asset from a partner on a one-year lease.
D)The partnership acquires the asset from a partner as a contribution to partnership capital under § 721(a).
E)None of the above.

Question 33

Partners' capital accounts should be determined using the same method on Form 1065 Schedule L, Form 1065 Schedule M-2, and the Schedules K-1 prepared for the partners.

Question 34

Maria owns a 60% interest in the KLM Partnership. Four years ago her father gave her a parcel of land. The gift basis of the land to Maria is $60,000. In the current year, Maria had still not figured out how to use the land for her own personal or business use; consequently, she sold the land to the partnership for $50,000. The partnership immediately started using the land as a parking lot for its employees. Maria may recognize her $10,000 loss on the sale.

Question 35

Emma's basis in her BBDE LLC interest is $60,000 at the beginning of the tax year. Her allocable share of LLC items are as follows: $20,000 of ordinary income, $2,000 tax-exempt interest income, and a $6,000 long-term capital gain. In addition, the LLC distributed $12,000 of cash to Emma during the year. Assuming the LLC had no liabilities at the beginning or the end of the year, Emma's ending basis in her LLC interest is $76,000.

Question 36

The JPM Partnership is a US-based manufacturing company. JPM calculates the domestic production activities deduction (§ 199) and deducts that amount on its Form 1065.

Question 37

On January 1 of the current year, Anna and Jason form an equal partnership. Anna contributes $50,000 cash and a parcel of land (adjusted basis of $100,000; fair market value of $150,000) in exchange for her interest in the partnership. Jason contributes property (adjusted basis of $180,000; fair market value of $200,000) in exchange for his partnership interest. Which of the following statements is true concerning the income tax results of this partnership formation?

A)Jason recognizes a $20,000 gain on his property transfer.
B)Jason has a $200,000 tax basis for his partnership interest.
C)Anna has a $150,000 tax basis for her partnership interest.
D)The partnership has a $150,000 adjusted basis in the land contributed by Anna.
E)None of the statements is true.

Question 38

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 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?

A)Nontaxable.
B)$25,000 ordinary income.
C)$25,000 short-term capital gain.
D)$25,000 long-term capital gain.
E)None of the above.

Question 39

Tim, Al, and Pat contributed assets to form the equal TAP Partnership. Tim contributed cash of $40,000 and land with a basis of $80,000 (fair market value of $60,000). Al contributed cash of $60,000 and land with a basis of $50,000 (fair market value of $40,000). Pat contributed cash of $60,000 and a fully depreciated property ($0 basis) valued at $40,000. Which of the following tax treatments is not correct?

A)Tim's basis in his partnership interest is $120,000.
B)Al realizes and recognizes a loss of $10,000.
C)Pat realizes a gain of $40,000 but recognizes $0 gain.
D)TAP has a basis of $80,000, $50,000, and $0 in the land and property (excluding cash) contributed by Tim, Al, and Pat, respectively.
E)All of these statement are correct.

Question 40

Items that are not required to be shown on the partners' Schedules K-1 include AMT adjustments and preferences and taxes paid to foreign countries, as AMT and the foreign tax credit are calculated by the partnership.

Question 41

Which of the following statements is always correct regarding assets acquired by a newly formed partnership? If a partner contributes:

A)Depreciable property: the partnership treats the property as newly acquired depreciable property, and may claim a § 179 deduction.
B)Unrealized (cash-basis) receivables: the partnership will report a capital gain when the receivable is collected.
C)Inventory (in the partner's hands): the partnership reports ordinary income if the property is held as a capital asset and sold within five years of the contribution date.
D)Land valued at less than its basis: the partnership reports a § 1231 loss if the property is sold at a loss.
E)None of these statements is correct.

Question 42

ABC LLC reported the following items on the LLC's Schedule K: ordinary income, $100,000; interest income, $3,000; long-term capital loss, ($4,000); charitable contributions, $1,000; post-1986 depreciation adjustment, $10,000; and cash distributions to partners, $50,000. How much will ABC show as net income (loss) on its Analysis of Income (Loss)?

A)$68,000
B)$78,000
C)$95,000
D)$98,000
E)$102,000

Question 43

Misty and John formed the MJ Partnership. Misty contributed $50,000 of cash in exchange for her 50% interest in the partnership capital and profits. During the first year of partnership operations, the following events occurred: the partnership had a net taxable income of $20,000; Misty received a distribution of $12,000 cash from the partnership; and Misty had a 50% share in the partnership's $60,000 of recourse liabilities on the last day of the partnership year. Misty's adjusted basis for her partnership interest at year end is:

A)$48,000.
B)$60,000.
C)$78,000.
D)$88,000.
E)$90,000.

Question 44

Which of the following would be currently taxable as ordinary income to the service partner if received in exchange for services performed for the partnership? (In all cases, assume the interest is not sold within two years after the time it is granted to the service partner.)

A)A 10% interest in the capital of the partnership that will vest in 3 years.
B)A 20% interest in the future profits of the partnership received in exchange for future services to be performed for the partnership.
C)A 25% interest in the capital of the partnership where there are no restrictions on transferability of the interest.
D)A 30% interest in ongoing profits of the partnership where the partnership is not a publicly-traded partnership and the income stream is not assured.
E)All of the above.

Question 45

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

A)The partnership reconciles its net (tax basis) income (including separately stated items) to book income on Schedule M-1 or M-3.
B)The partnership balance sheet on Schedule L is generally presented on a financial (book) basis.
C)All partnership income and expense items are reported on Form 1065, page 1.
D)The partnership's equivalent of taxable income is reported in the "Analysis of Income (Loss)."
E)None of the above statements are true.

Question 46

At the beginning of the year, Heather's "tax basis" capital account balance in the HEP Partnership was $85,000. During the tax year, Heather contributed property with a basis of $6,000 and a fair market value of $10,000. Her share of the partnership's ordinary income and separately stated income and deduction items was $40,000. At the end of the year, the partnership distributed $15,000 of cash to Heather. Also, the partnership allocated $12,000 of recourse debt and $10,000 of nonrecourse debt to Heather. What is Heather's ending capital account balance determined using the "tax basis" method?

A)$116,000
B)$120,000
C)$126,000
D)$128,000
E)$138,000

Question 47

Kristie is a 30% partner in the KKM Partnership. During the current year, KKM reported gross receipts of $280,000 and a charitable contribution of $30,000. The partnership paid office expenses of $80,000. In addition, KKM distributed $20,000 each to partners Kaylyn and Megan, and the partnership paid partner Kaylyn $20,000 for administrative services. Kristie reports the following income from KKM during the current tax year:

A)$54,000 ordinary income; $9,000 charitable contribution.
B)$60,000 ordinary income; $9,000 charitable contribution.
C)$36,000 ordinary income.
D)$54,000 ordinary income.
E)None of the above.

Question 48

Which of the following statements is not a requirement of the substantial economic effect test?

A)Income, gains, losses, and deductions must be allocated to the partners in accordance with their capital contributions.
B)An allocation of income must increase the partner's capital account balance, and an allocation of deduction must decrease the partner's capital account balance.
C)A partner with a negative capital account balance must "restore" that capital account, generally by contributing cash to the partnership.
D)On liquidation of the partner's interest in the partnership, the partner must receive assets that have a fair market value equal to that partner's (positive) capital account balance.
E)All of the above statements are requirements of the substantial economic effect test.

Question 49

TEC Partners was formed during the current tax year. It incurred $10,000 of organizational expenses, $80,000 of startup expenses, and $5,000 of transfer taxes to retitle property contributed by a partner. The property had been held as MACRS property for ten years by the contributing partner, and had an adjusted basis to the partner of $300,000 and fair market value of $400,000. Which of the following statements is correct regarding these items?

A)TEC treats the contributed property as a new MACRS asset placed in service on the date the property title is transferred.
B)TEC must amortize the $10,000 of organizational expenses over 180 months.
C)TEC's deducts the first $5,000 of startup expenses and amortizes the remainder over 180 months.
D)TEC must capitalize the transfer tax and treat it as a new asset placed in service on the date the property is contributed.
E)None of the above statements are true.

Question 50

Mark and Addison formed a partnership. Mark received a 25% interest in partnership capital and profits in exchange for land with a basis of $40,000 and a fair market value of $60,000. Addison received a 75% interest in partnership capital and profits in exchange for $180,000 of cash. Three years after the contribution date, the land contributed by Mark is sold by the partnership to a third party for $76,000. How much taxable gain will Mark recognize from the sale?

A)$0
B)$9,000
C)$24,000
D)$36,000
E)None of the above

Question 51

Allison is a 40% partner in the BAM Partnership. At the beginning of the tax year, Allison's basis in the partnership interest was $100,000, including her share of partnership liabilities. During the current year, BAM reported an ordinary loss of $60,000 (before the following payments to the partners). In addition, BAM made an ordinary distribution of $8,000 to Allison and paid partner Brian a $20,000 consulting fee. At the end of the year, Allison's share of partnership liabilities decreased by $10,000. Assuming loss limitation rules do not apply, Allison's basis in the partnership interest at the end of the year is:

A)$2,000.
B)$50,000.
C)$58,000.
D)$70,000.
E)None of the above.

Question 52

Molly is a 30% partner in the MAP Partnership. During the current tax year, the partnership reported ordinary income of $200,000 before payment of guaranteed payments and distributions to partners. The partnership made an ordinary cash distribution of $20,000 to Molly, and paid guaranteed payments to partners Molly, Amber, and Pat of $20,000 each ($60,000 total guaranteed payments). How much will Molly's adjusted gross income increase as a result of the above items?

A)$42,000
B)$60,000
C)$62,000
D)$80,000
E)None of the above

Question 53

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, 2015 and 2016. The partnership paid guaranteed payments to Stephanie of $2,000 and $3,000 per month during the fiscal years ended September 30, 2015 and 2016. How much will Stephanie's adjusted gross income be increased by these partnership items for her tax year ended December 31, 2015?

A)$60,000
B)$72,000
C)$84,000
D)$90,000
E)$108,000

Question 54

Which one of the following is not shown on the partnership's Schedule K on Page 4 of Form 1065?

A)The partnership's self-employment income.
B)The partnership's separately stated income and deductions.
C)The partnership's tax preference and adjustment items.
D)The partnership's net operating loss carryforward.
E)All of the above.

Question 55

Ryan is a 25% partner in the ROCC Partnership. At the beginning of the tax year, Ryan's basis in the partnership interest was $90,000, including his share of partnership liabilities. During the current year, ROCC reported net ordinary income of $100,000. In addition, ROCC distributed $10,000 to each of the partners ($40,000 total). At the end of the year, Ryan's share of partnership liabilities increased by $10,000. Ryan's basis in the partnership interest at the end of the year is:

A)$90,000.
B)$100,000.
C)$115,000.
D)$125,000.
E)None of the above.

Question 56

Binita contributed property with a basis of $40,000 and a value of $50,000 to the BE Partnership in exchange for a 20% interest in partnership capital and profits. During the first year of partnership operations, BE had net taxable income of $30,000 and tax-exempt interest income of $10,000. The partnership distributed $10,000 cash to Binita. Binita's adjusted basis (outside basis) for her partnership interest at year-end is:

A)$36,000.
B)$38,000.
C)$60,000.
D)$70,000.
E)None of the above.

Question 57

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)$102,000
B)$90,000
C)$48,000
D)$36,000
E)$0

Question 58

Which of the following is an election or calculation made by the partner rather than the partnership?

A)Calculation of a § 199 deduction amount.
B)Whether to capitalize, amortize, or expense research and experimental costs.
C)The partnership's overall accounting method.
D)Whether to claim a § 179 deduction related to property acquired by the partnership.
E)All of the above elections are made by the partnership.

Question 59

Alicia and Barry form the AB Partnership at the start of the current year with a land contribution by Barry and a cash contribution by Alicia. Barry's contributed property is subject to a recourse mortgage assumed by the partnership. Barry has an 80% interest in AB's profits and losses. The land has been held by Barry for the past 6 years as an investment. It will be used by AB as an operating asset in its parking lot business. Which of the following statements is correct?

A)Immediately after formation, Alicia's basis in the partnership equals the cash contributed by Alicia.
B)Immediately after formation, Alicia's basis in the partnership equals the cash she contributed plus her share of the recourse debt contributed by Barry.
C)Because the debt is recourse, the constructive liquidation scenario is not applicable for determining the allocation of debt to the partners.
D)AB's basis in the land contributed by Barry equals Barry's basis in the land immediately before the contribution date, less the amount of the recourse debt assumed by the partnership.
E)None of the above.

Question 60

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

A)Nonrecourse debt is allocated to the partners according to their loss-sharing ratios.
B)Recourse debt is allocated to the partners to the extent of the partnership's minimum gain in the property.
C)An increase in partnership debts results in a decrease in the partners' bases in the partnership interest.
D)A decrease in partnership debt is treated as a distribution from the partnership to the partner and reduces the partner's basis in the partnership interest.
E)Partnership debt is not reflected in the partners' bases in their partnership interests.

Question 61

Palmer contributes property with a fair market value of $4,000,000 and an adjusted basis of $3,000,000 to AP Partnership. Palmer shares in $3,000,000 of partnership debt under the liability sharing rules, giving him an initial adjusted basis for his partnership interest of $6,000,000. One month after the contribution, Palmer receives a cash distribution from the partnership of $2,000,000. Palmer would not have contributed the property if the partnership had not contractually obligated itself to make the distribution. Assume Palmer's share of partnership liabilities will not change as a result of this distribution.
a.​Under the IRS's likely treatment of this transaction, what is the amount of gain or loss that Palmer will recognize because of the $2,000,000 cash distribution?
b.What is the partnership's basis for the property after the distribution?
c.​If Palmer is unhappy with this result, can you suggest a possible alternative that may provide him with a better answer?

Question 62

Sharon and Sue are equal partners in the S&S Partnership. On January 1 of the current year, each partner's adjusted basis in S&S was $80,000 (including each partner's $20,000 share of the partnership's $40,000 of liabilities). During the current year, S&S repaid $30,000 of the debt and borrowed $20,000 for which Sharon and Sue are equally liable. In the current year ended December 31, S&S also sustained a net operating loss of $40,000 and earned $10,000 of interest income from investments. If liabilities are shared equally by the partners, on January 1 of the next year how much is each partner's basis in her interest in S&S?

Question 63

During the current year, MAC Partnership reported the following items of receipts and expenditures: $600,000 sales, $80,000 utilities and rent, $200,000 salaries to employees, $20,000 guaranteed payment to partner Antonio, investment interest income of $4,000, a charitable contribution of $8,000, and a distribution of $30,000 to partner Carl. Antonio is a 25% general partner. Based on this information, what items will be reflected on Antonio's Schedule K-1?

Question 64

Rebecca is a limited partner in the RST Partnership, which is not publicly traded. Her allocable share of RST's passive ordinary losses from a nonrealty activity for the current year is ($60,000). Rebecca has a $40,000 adjusted basis (outside basis) for her interest in RST (before deduction of any of the passive losses). Her amount "at risk" under § 465 is $30,000 (before deduction of any of the passive losses). She also has $25,000 of passive income from other sources. How much of her ($60,000) allocable loss can Rebecca deduct on her current year's tax return?

A)$25,000
B)$30,000
C)$40,000
D)$60,000
E)None of the above

Question 65

The MOP Partnership is involved in construction activities. 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 an active ("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? How would your answer change if MOP were an LLC and Patricia had not personally guaranteed any of the debt?

Question 66

Samuel is the managing general partner of STU, in which he owns a 25% interest. For the year, STU reported ordinary income of $400,000 (after deducting all guaranteed payments). In addition, the LLC reported interest income of $12,000. Samuel received a guaranteed payment of $120,000 for services he performed for STU. How much income from self-employment did Samuel earn from STU?

A)$100,000
B)$120,000
C)$220,000
D)$223,000
E)None of the above

Question 67

Katherine invested $80,000 this year to purchase a 30% interest in the KLM Partnership. The partnership reported $200,000 of net income from operations, a $2,000 short-term capital loss, and a $10,000 charitable contribution. In addition, the partnership distributed $20,000 to Katherine and $10,000 each to partners Lauren and Missy. Assuming the partnership has no beginning or ending liabilities, what is Katherine's basis in her partnership interest at the end of the year?

Question 68

At the beginning of the tax year, Zach's basis for his partnership interest and his amount at risk in the partnership was $30,000. His share of partnership items for the year consisted of tax-exempt interest income of $2,000 and an ordinary loss of $44,000. He also received a distribution from the partnership of $20,000 cash during the year. For the tax year, Zach will report:

A)A nontaxable distribution of $20,000, an ordinary loss of $10,000, and a suspended loss carryforward of $34,000.
B)An ordinary loss of $32,000, a suspended loss carryforward of $12,000, and a taxable distribution of $20,000.
C)A nontaxable distribution of $20,000, an ordinary loss of $12,000, and a suspended loss carryforward of $32,000.
D)An ordinary loss of $44,000 and a nontaxable distribution of $20,000.

Question 69

In the current year, Derek formed an equal partnership with Cody. Derek contributed land with an adjusted basis of $110,000 and a fair market value of $200,000. Derek also contributed $50,000 cash to the partnership. Cody contributed land with an adjusted basis of $80,000 and a fair market value of $230,000. The land contributed by Derek was encumbered by a $60,000 nonrecourse debt. The land contributed by Cody was encumbered by $40,000 of nonrecourse debt. Assume the partners share debt equally. Immediately after the formation, what is the basis of Cody's partnership interest?

Question 70

Which of the following is not a specific adjustment to the partners' basis in the partnership interest?

A)Increased by contributions the partner made to the partnership.
B)Decreased by the amount of guaranteed payments shown on the partner's Schedule K-1.
C)Increased by the partner's share of tax-exempt income.
D)Decreased by any decrease in the partner's share of partnership liabilities.
E)Increased by the partner's share of separately stated income items.

Question 71

Carli contributes land to the newly formed CD Partnership in exchange for a 30% interest. The land has an adjusted basis and fair market value of $300,000 and is subject to a liability of $100,000, which the partnership assumes. None of this liability is repaid at year-end. At the end of the year, the partnership has trade accounts payable of $20,000. Assume all liabilities are allocated proportionately to the partners. Total partnership income for the year is $400,000. What is Carli's basis in her partnership interest at the end of the year?

Question 72

In the current year, the DOE LLC received revenues of $200,000 and paid the following amounts: $50,000 in rent and utilities, a $40,000 guaranteed payment to 50% member Dave, $10,000 to member Ethan for consulting services, and $10,000 as a distribution to member Olivia. In addition, the LLC earned $2,000 of tax-exempt interest income during the year. Dave is the managing member of the LLC. Dave's basis in his LLC interest was $50,000 at the beginning of the year, and includes a $12,000 share of LLC liabilities. At the end of the year, his share of the LLC's liabilities was $20,000.
a.How much income must Dave report for the tax year and what is the character of the income?
b.What is Dave's basis in his LLC interest at the end of the tax year?
c.On what income will Dave's self-employment tax be calculated?

Question 73

Sarah contributed fully depreciated ($0 basis) property valued at $50,000 to the RSTU Partnership in exchange for a 25% interest in partnership capital and profits. During the first year of partnership operations, RSTU had net taxable income of $200,000 and tax-exempt income of $4,000. The partnership distributed $10,000 cash to Sarah. Her share of partnership recourse liabilities on the last day of the partnership year was $20,000. What is Sarah's adjusted basis (outside basis) for her partnership interest at the end of the tax year?

Question 74

The LN partnership reported the following items of income and deduction during the current tax year: revenues, $300,000; cost of goods sold, $180,000; tax-exempt interest income, $2,000; salaries to employees, $80,000; and long-term capital gain, $10,000. In addition, the partnership distributed $20,000 of cash to 50% partner Nina and $10,000 of cash to 50% partner Len. What is Nina's share of ordinary partnership income and separately stated items?

Question 75

In the current year, the CAR Partnership received revenues of $400,000 and paid the following amounts: $160,000 in rent, utilities, and salaries; a $40,000 guaranteed payment to partner Ryan; $20,000 to partner Amy for consulting services; and a $40,000 distribution to 25% partner Cameron. In addition, the partnership realized a $12,000 net long-term capital gain. Cameron's basis in his partnership interest was $60,000 at the beginning of the year, and included his $25,000 share of partnership liabilities. At the end of the year, his share of partnership liabilities was $15,000.
a.How much income must Cameron report for the tax year?
b.What is Cameron's basis in the partnership interest at the end of the year?

Question 76

Morgan is a 50% managing member in the calendar year, cash basis MKK LLC. The LLC received $150,000 income from services and paid the following other amounts:
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How much will Morgan's adjusted gross income increase as a result of the above items? What amount will be included in Morgan's self-employment tax calculation?

Question 77

Paul sells one parcel of land (basis of $100,000) for its fair market value of $160,000 to a partnership in which he owns a 60% capital interest. Paul held the land for investment purposes. The partnership is in the real estate development business, and will build residential housing (for sale to customers) on the land. Paul will recognize:

A)$0 gain or loss.
B)$36,000 ordinary income.
C)$36,000 capital gain.
D)$60,000 ordinary income.
E)$60,000 capital gain.

Question 78

George and James are forming the GJ Partnership. George contributes $600,000 cash and James contributes nondepreciable property with an adjusted basis of $400,000 and a fair market value of $750,000. The property is subject to a $150,000 liability, which is also transferred into the partnership and is shared equally by the partners for basis purposes. George and James 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.
a.​What is James's adjusted tax basis for his partnership interest immediately after the partnership is formed?
b.What is the partnership's adjusted basis for the property contributed by James?
c.​If the partnership sells the property contributed by James for $800,000, how is the tax gain allocated between the partners?

Question 79

Which of the following is not a correct statement regarding the advantage of the partnership entity form over the subchapter C corporate form?

A)A partnership typically has easier administrative and filing requirements than does a C corporation.
B)Partnership income is subject to a single level of taxation; corporate income is double taxed.
C)Partnerships may specially allocate income and expenses among the partners, provided the substantial economic effect requirements are met; corporate dividends must be proportionate to shareholdings.
D)Partners in a general partnership have less personal liability for entity claims than shareholders of a C corporation.
E)All of the above are advantages of partnership taxation.

Question 80

An examination of the RB Partnership's tax books provides the following information for the current year:
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Rachel is a 30% general partner in partnership capital, profits, and losses. Assume the adjusted basis of her partnership interest is $60,000 at the beginning of the year, and she shares in 30% of the partnership's liabilities for basis purposes.
a.What is Rachel's adjusted basis for the partnership interest at the end of the year?
b.​How much income must Rachel report on her tax return for the current year? What is the character of the income and what types of tax might apply to it?