Question 1

On January 1, 20X9, Mr. Blue and Mr. Grey each contributed $100,000 to form the B&G General Partnership. Their partnership agreement states that they will each receive a 50 percent profits and loss interest. The partnership agreement also provides that Mr. Blue will receive an annual $36,000 guaranteed payment. B&G began business on January 1, 20X9. For its first taxable year, its accounting records contained the following information:
  The $3,000 of interest was paid on a $60,000 loan made to B&G by Key Bank on June 30, 20X9. B&G repaid $10,000 of the loan on December 15, 20X9. Neither of the partners received a cash distribution from B&G in 20X9.
Complete the following table related to Mr. Blue's interest in B&G partnership:

Accepted Answer

The answer of On January 1, 20X9, Mr. Blue and...

Question 2

Which of the following would not be classified as a material participant in an activity?

Accepted Answer

A)  An individual who participates more than 100 hours a year and whose participation is not less than any other individual's participation. 
B)  An individual who participated in the activity for at least one of the preceding five taxable years. 
C)  An individual who participates in an activity regularly, continuously, and substantially. 
D)  An individual who participates in an activity for more than 500 hours a year.

Question 3

How does additional debt or relief of debt affect a partner's basis?

Accepted Answer

A)  Debt has no effect on a partner's basis. 
B)  Relief of debt increases a partner's basis. 
C)  Both additional debt and relief of debt increase a partner's basis. 
D)  Additional debt increases a partner's basis.

Question 4

Clint noticed that the Schedule K-1 he just received from ABC Partnership included a $20,000 ordinary business loss allocation. His tax basis in ABC at the beginning of ABC's most recent tax year was $10,000. Comparing the Schedule K-1 he recently received from ABC with the Schedule K-1 he received from ABC last year, Clint noted that his share of ABC partnership debt changed as follows: recourse debt increased from $0 to $2,000, qualified nonrecourse debt increased from $0 to $3,000, and nonrecourse debt increased from $0 to $3,000. Finally, the Schedule K-1 Clint recently received from ABC reflected a $1,000 cash contribution he made to ABC during the year.
Clint is not a material participant in ABC Partnership, and he received $10,000 of passive income from another investment during the same year he received the loss allocation from ABC. How much of the $20,000 loss from ABC can Clint deduct currently, and how much of the loss is suspended because of the tax basis, at-risk, and passive activity loss limitations?

Accepted Answer

The answer of Clint noticed that the Schedule K-1 he...

Question 5

If partnership debt is reduced and a partner is deemed to receive a cash distribution, what impact does the deemed distribution have on the partner if it is in excess of her tax basis?

Accepted Answer

A)  The partner will treat the distribution in excess of her basis as ordinary income. 
B)  The partner will treat the distribution in excess of her basis as capital gain. 
C)  The partner will not ever be taxed on the distribution in excess of her basis. 
D)  The partner will not be taxed on the distribution in excess of her basis until she sells her partnership interest.

Question 6

Nonrecourse debt is generally allocated according to the profit-sharing ratios of the partnership.

Accepted Answer

A) True 
 B)False

Question 7

XYZ, LLC, has several individual and corporate members. Abe and Joe, individuals with 4/30 year-ends, each have a 23 percent profits and capital interest. RST, Inc., a corporation with a 6/30 year-end, owns a 4 percent profits and capital interest, while DEF, Inc., a corporation with an 8/30 year-end, owns a 4.9 percent profits and capital interest. Finally, 30 other calendar year-end individual partners (each with less than a 2 percent profits and capital interest) own the remaining 45 percent of the profits and capital interests in XYZ. What tax year-end should XYZ use, and which test or rule requires this year-end?

Accepted Answer

A)  4/30, principal partners test. 
B)  4/30, least aggregate deferral test. 
C)  12/31, principal partners test. 
D)  12/31, least aggregate deferral test.

Question 8

What is the difference between the aggregate and entity theories 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.

Accepted Answer

The answer of What is the difference between the aggregate...

Question 9

What is the rationale for the specific rules partnerships must follow in determining a partnership's taxable year-end?

Accepted Answer

A)  To increase the amount of aggregate tax deferral partners receive. 
B)  To minimize the amount of aggregate tax deferral partners receive. 
C)  To align the year-end of the partnership with the year-end of a majority of the partners. 
D)  To spread the workload of tax practitioners more evenly over the year. 
E)  Both to minimize the amount of aggregate tax deferral partners receive and to align the year-end of the partnership with the year-end of a majority of the partners.

Question 10

Partners must generally treat the value of profits interests they receive in exchange for services as ordinary income.

Accepted Answer

A) True 
 B)False

Question 11

Bob is a general partner in Fresh Foods Partnership and is trying to determine if the income reported on his K-1 should be classified as passive or active trade or business income. List three different criteria that, if met, would allow Bob to treat the income from Fresh Foods as active trade or business income.

Accepted Answer

The answer of Bob is a general partner in Fresh...

Question 12

For partnership tax years ending after December 31, 2015, when must a partnership file its return?

Accepted Answer

A)  By the 15th day of the third month after the partnership's tax year-end. 
B)  By the fifth month after the original due date if an extension is filed. 
C)  By the 15th day of the fourth month after the partnership's tax year-end. 
D)  By the 15th day of the third month after the partnership's tax year-end and by the fifth month after the original due date if an extension is filed. 
E)  By the fifth month after the original due date if an extension is filed and by the 15th day of the fourth month after the partnership's tax year-end.

Question 13

Partnership tax rules incorporate both the entity and aggregate approaches.

Accepted Answer

A) True 
 B)False

Question 14

Which person would generally be treated as a material participant in an activity?

Accepted Answer

A)  A participant in a rental activity. 
B)  A limited partner. 
C)  An LLC member not involved with management of the LLC. 
D)  A general partner.

Question 15

Alfred, a one-third profits and capital partner in Pizzeria Partnership, needs help in adjusting his tax basis to reflect the information contained in his most recent Schedule K-1 from the partnership. Unfortunately, the Schedule K-1 he recently received was for Year 3 of the partnership, but Alfred only knows that his tax basis at the beginning of Year 2 of the partnership was $23,000. Thankfully, Alfred still has his Schedule K-1 from the partnership for Years 1 and 2.
Using the following information from Alfred's Year 1, Year 2, and Year 3 Schedule K-1, calculate his tax basis the end of Year 2 and Year 3.

Accepted Answer

The answer of Alfred, a one-third profits and capital partner...

Question 16

The main difference between a partner's tax basis and at-risk amount is that qualified nonrecourse financing is not included in the at-risk basis amount.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A)  Ordinary business income (loss). 
B)  Change in amount of partnership debt. 
C)  Tax-exempt income. 
D)  All of these choices adjust a partner's basis.

Question 18

Which of the following statements exemplifies the entity theory of partnership taxation?

Accepted Answer

A)  Partnerships are taxable entities. 
B)  Partnerships determine the character of separately stated items at the partnership level. 
C)  Partnerships make the majority of the tax elections. 
D)  Both partnerships are taxable entities and partnerships make the majority of the tax elections. 
E)  Both partnerships determine the character of separately stated items at the partnership level and partnerships make the majority of the tax elections.

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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.

Accepted Answer

A) True 
 B)False

Exam 9: Forming and Operating Partnerships

Which of the following would not be classified as a material participant in an activity?

How does additional debt or relief of debt affect a partner's basis?

If partnership debt is reduced and a partner is deemed to receive a cash distribution, what impact does the deemed distribution have on the partner if it is in excess of her tax basis?

Nonrecourse debt is generally allocated according to the profit-sharing ratios of the partnership.

What is the difference between the aggregate and entity theories 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.

What is the rationale for the specific rules partnerships must follow in determining a partnership's taxable year-end?

Partners must generally treat the value of profits interests they receive in exchange for services as ordinary income.

For partnership tax years ending after December 31, 2015, when must a partnership file its return?

Partnership tax rules incorporate both the entity and aggregate approaches.

Which person would generally be treated as a material participant in an activity?

The main difference between a partner's tax basis and at-risk amount is that qualified nonrecourse financing is not included in the at-risk basis amount.

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

Which of the following statements exemplifies the entity theory of partnership taxation?

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

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.