Question 1

A partnership may use the cash method despite having a corporate partner when the partnership's average gross receipts for the prior three taxable years don't exceed _________.

Accepted Answer

A)  $500,000 
B)  $1,000,000 
C)  $5,000,000 
D)  Partnerships may never use the cash method if they have corporate partners

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

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.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following would not be classified as a separately-stated item?

Accepted Answer

A)  Short-term capital gains 
B)  Charitable contributions 
C)  MACRS depreciation expense 
D)  Guaranteed payments

Question 5

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

Question 6

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, the at-risk, and the passive activity loss limitations?

Accepted Answer

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

Question 7

Sarah, Sue, and AS Inc. formed a partnership on May 1, 20X9 called SSAS, LP. Now that the partnership is formed, they must determine its appropriate year-end. Sarah has a 30% profits and capital interest while Sue has a 35% profits and capital interest. Both Sarah and Sue have calendar year-ends. AS Inc. holds the remaining profits and capital interest in the LP, and it has a September 30 year-end. What tax year-end must SSAS, LP use for 20X9 and which test or rule requires this year-end?

Accepted Answer

A)  9/30, majority interest taxable year 
B)  12/31, majority interest taxable year 
C)  12/31, principal partners test 
D)  12/31, least aggregate deferral test

Question 8

Peter, Matt, Priscilla, and Mary began the year in the PMPM General Partnership sharing profits, losses, and capital equally. They each had a tax basis at the beginning of the year of $3,000, $10,000, $8,000, and $11,000 respectively. Early in the year, Mary provided general consulting services to the partnership and received an additional 15 percent profits, losses, and capital interest in the partnership. The liquidation value of her additional interest was $45,000. Later the same year, the partnership received cash contributions of $25,000 from Peter and Matt that it used to repay the partnership's $35,000 recourse debt. According to state law, the partners shared responsibility for this debt in accordance with their loss sharing ratios. What is each partner's tax basis after adjustment for these transactions?

Accepted Answer

The answer of Peter, Matt, Priscilla, and Mary began the...

Question 9

Which of the following statements regarding a partner's basis adjustments is true?

Accepted Answer

A)  A partner's basis may never be reduced below zero. 
B)  A partner must adjust his basis for ordinary income (loss) but not for separately-stated items. 
C)  A partnership fine or penalty does not affect a partner's basis. 
D)  Relief of partnership debt increases a partner's tax basis.

Question 10

Which of the following items are subject to the Net Investment Income tax when a partner is a not a material participant in the partnership?

Accepted Answer

A)  Partner's distributive share of dividends. 
B)  Partner's distributive share of interest. 
C)  Partner's distributive share of ordinary business income. 
D)  All of these are correct.

Question 11

Erica and Brett decide to form their new motorcycle business as an LLC. Each will receive an equal profits (loss) interest by contributing cash, property, or both. In addition to the members' contributions, their LLC will obtain a $50,000 nonrecourse loan from First Bank at the time it is formed. Brett contributes cash of $5,000 and a building he bought as a storefront for the motorcycles. The building has a FMV of $45,000, an adjusted basis of $30,000, and is secured by a $35,000 nonrecourse mortgage that the LLC will assume. What is Brett's outside tax basis in his LLC interest?

Accepted Answer

A)  $37,500 
B)  $40,000 
C)  $42,500 
D)  $45,000

Question 12

This year, HPLC, LLC was formed by H Inc., P Inc., L Inc., and C Inc. Each member had an equal share in the LLC's capital. H Inc., P Inc., and L Inc. each had a 30% profits interest in the LLC with C Inc. having a 10% profits interest. The members had the following tax year-ends: H Inc. [1/31], P Inc. [5/31], L Inc. [7/31], and C Inc. [10/31]. What tax year-end must the LLC use?

Accepted Answer

A)  1/31 
B)  5/31 
C)  7/31 
D)  10/31

Question 13

On April 18, 20X8, Robert sold his 35 percent partnership interest in Fruit Wonder, LLC to Richard for $120,000. Prior to selling his interest, Robert had a basis in Fruit Wonder of $80,000. Robert's basis included $5,000 of recourse debt and $15,000 of nonrecourse debt that had been allocated to him. Immediately after the purchase, what is Richard's tax basis in Fruit Wonder?

Accepted Answer

The answer of On April 18, 20X8, Robert sold his...

Question 14

Jordan, Inc., Bird, Inc., Ewing, Inc., and Barkley, Inc. formed Nothing-But-Net Partnership on June 1^st, 20X9. Now, Nothing-But-Net must adopt its required tax year-end. The partners' year-ends, profits interests, and capital interests are reflected in the table below. Given this information, what tax year-end must Nothing-But-Net use and what rule requires this year-end? $$\begin{array} { | l | r | } \hline \text { Gain on Sale of Land } & \$ 4,000 \ \hline \text { MACRS Depreciation } & \$ 7,500 \ \hline \text { Charitable Contributions } & \$ 12,500 \ \hline \text { Sales } & \$ 40,000 \ \hline \text { Interest Income } & \$ 500 \ \hline \text { Cost of Goods Sold } & \$ 32,000 \ \hline 179 \text { Expense } & \$ 7,000 \ \hline \text { Tax-Exempt Income } & \$ 2,000 \ \hline \text { Other Income } & \$ 5,000 \end{array}$$

Accepted Answer

The answer of Jordan, Inc., Bird, Inc., Ewing, Inc., and...

Question 15

Jerry, a partner with 30% capital and profit interest, received his Schedule K-1 from Plush Pillows, LP. At the beginning of the year, Jerry's tax basis in his partnership interest was $50,000. His current year Schedule K-1 reported an ordinary loss of $15,000, long-term capital gain of $3,000, qualified dividends of $2,000, $500 of non-deductible expenses, a $10,000 cash contribution, and a reduction of $4,000 in his share of partnership debt. What is Jerry's adjusted basis in his partnership interest at the end of the year?

Accepted Answer

A)  $35,000 
B)  $40,000 
C)  $45,500 
D)  $49,500

Question 16

XYZ, LLC has several individual and corporate members. Abe and Joe, individuals with 4/30 year-ends, each have a 23% profits and capital interest. RST, Inc., a corporation with a 6/30 year end, owns a 4% profits and capital interest while DEF, Inc., a corporation with an 8/30 year end, owns a 4.9% profits and capital interest. Finally, thirty other calendar year-end individual partners (each with less than a 2% profits and capital interest) own the remaining 45% 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 17

In X1, Adam and Jason formed ABC, LLC, a car dealership in Kansas City. In X2, Adam and Jason realized they needed an advertising expert to assist in their business. Thus, the two members offered Cory, a marketing expert, a 1/3 capital interest in their partnership for contributing his expert services. Cory agreed to this arrangement and received his capital interest in X2. If the value of the LLC's capital equals $180,000 when Cory receives his 1/3 capital interest, which of the following tax consequences does not occur in X2?

Accepted Answer

A)  Cory reports $60,000 of ordinary income in X2 
B)  Adam, Jason and Cory receive an ordinary deduction of $20,000 in X2 
C)  Adam and Jason receive an ordinary deduction of $30,000 in X2 
D)  Cory reports $60,000 of ordinary income in X2, and Adam and Jason receive an ordinary deduction of $30,000 in X2

Question 18

This year, Reggie's distributive share from Almonte Partnership includes $8,000 of interest income, $4,000 of dividend income, and $60,000 ordinary business income.
A. Assume that Reggie materially participates in the partnership. How much of his distributive share from Almonte Partnership is potentially subject to the Medicare contribution tax?
B. Assume that Reggie does not materially participate in the partnership. How much of his distributive share from Almonte Partnership is potentially subject to the Medicare contribution tax?

Accepted Answer

The answer of This year, Reggie's distributive share from Almonte...

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

What is the correct order for applying the following three items to adjust a partner's tax basis in his partnership interest: (1) Increase for share of ordinary business income, (2) Decrease for share of separately stated loss items, and (3) Decrease for distributions?

Accepted Answer

A)  1, 3, 2 
B)  1, 2, 3 
C)  3, 1, 2 
D)  2, 3, 1

Exam 15: Forming and Operating Partnerships

A partnership may use the cash method despite having a corporate partner when the partnership's average gross receipts for the prior three taxable years don't exceed _________.

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 would not be classified as a separately-stated item?

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.

Which of the following statements regarding a partner's basis adjustments is true?

Which of the following items are subject to the Net Investment Income tax when a partner is a not a material participant in the partnership?

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

What is the correct order for applying the following three items to adjust a partner's tax basis in his partnership interest: (1) Increase for share of ordinary business income, (2) Decrease for share of separately stated loss items, and (3) Decrease for distributions?