Question 1

KBL, Inc., AGW, Inc., Blaster, Inc., Shiny Shoes, Inc., and a group of 24 individuals form Shoes Galore General Partnership on October 11, 20X9. Now, Shoes Galore 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 Shoes Galore use and what rule requires this year-end?

Accepted Answer

The answer of KBL, Inc., AGW, Inc., Blaster, Inc., Shiny...

Question 2

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) A LLC member not involved with management of the LLC 
D) A general partner

Question 3

Fred has a 45% profits interest and 30% capital interest in the SAP Partnership and his tax basis before considering his share of SAP's current year loss is $11,000. Included in his tax basis is a $2,600 share of recourse debt and $5,300 share of nonrecourse debt. Fred is a limited partner in SAP. He is not involved in any other activities. If SAP has a $15,000 ordinary loss for the year, how much of the loss can be deducted 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 Fred has a 45% profits interest and...

Question 4

Which of the following does not represent a tax election available to either partners or partnerships?

Accepted Answer

A) Electing to change an accounting method 
B) Electing to amortize organization costs 
C) Electing to expense a portion of syndication costs 
D) Electing to immediately expense depreciable property under Section 179

Question 5

Sue and Andrew form SA general partnership. Each person receives an equal interest in the newly created partnership. Sue contributes $10,000 of cash and land with a FMV of $55,000. Her basis in the land is $20,000. Andrew contributes equipment with a FMV of $12,000 and a building with a FMV of $33,000. His basis in the equipment is $8,000, and his basis in the building is $20,000. How much gain must the SA general partnership recognize on the transfer of these assets from Sue and Andrew?

Accepted Answer

A) $0 
B) $4,000 
C) $48,000 
D) $52,000

Question 6

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 7

John, a limited partner of Candy Apple, LP, is allocated $30,000 of ordinary business loss from the partnership. Before the loss allocation, his tax basis is $20,000 and at-risk amount is $10,000. John also has ordinary business income of $20,000 from Sweet Pea, LP as a general partner and ordinary business income of $5,000 from Red Tomato, as a limited partner. How much of the $30,000 loss from Candy Apple can John deduct currently?

Accepted Answer

A) $5,000 
B) $10,000 
C) $25,000 
D) $30,000

Question 8

What is the difference between the aggregate and entity theory 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

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?

Accepted Answer

A) $6,000 
B) $9,000 
C) $21,000 
D) $24,000

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

Jay has a tax basis of $14,000 in his partnership interest at the beginning of the partnership tax year. The following amounts of partnership debt were allocated to Jay and are included in his beginning of the year tax basis: (1) recourse debt - $3,000, (2) qualified nonrecourse debt - $1,000, and (3) nonrecourse debt - $500. If Jay is allocated a $15,000 loss for the current year, how much of the loss will be suspended under the tax basis and at-risk limitations?

Accepted Answer

A) $500, $1,000 
B) $1,000, $500 
C) $0, $0 
D) $14,000, $1,000

Question 12

Partnerships may maintain their capital accounts according to which of the following rules?

Accepted Answer

A) GAAP 
B) 704(b) 
C) Tax 
D) Any of these 
E) Only GAAP and 704(b)

Question 13

J&J, LLC was in its third year of operations when J&J decided to expand the number of members from two, A & B, with equal profits and capital interests to three members, A, B, and
C.The third member, C, will contribute her financial expertise to the LLC in exchange for a 1/3 capital interest in J&J.Given the balance sheet below reflecting the financial position of J&J on the date member C is admitted, what are the tax consequences to members A, B, and C, and to J&J when C receives her capital interest? If, instead, member C receives a 1/3 profit interest, what would be the tax consequences to members A, B, and C, and to J&J?

Accepted Answer

The answer of J&J, LLC was in its third year...

Question 14

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 15

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?

Accepted Answer

A) ($15,000) 
B) $6,000 
C) $9,000 
D) $15,000 
E) None of these will be reported as ordinary business income (loss) on Schedule K-1.

Question 16

Styling Shoes, LLC filed its 20X8 Form 1065 on March 15, 20X9. Styling had three members with the following ownership interests and tax basis at the beginning of the 20X8: (1) Jane, a member with a 25% profits and capital interest and a $5,000 outside basis, (2) Joe, a member with a 45% profits and capital interest and a $10,000 outside basis, and (3) Jack, a member with a 30% profits and capital interest and a $2,000 outside basis. The following items were reported on Styling's Schedule K for the year: ordinary income of $100,000, Section 1231 gain of $15,000, charitable contributions of $25,000, and tax-exempt income of $3,000. In addition, Styling received an additional bank loan of $12,000 during 20X8. What is Jane's tax basis after adjustment for her share of these items?

Accepted Answer

A) $28,250 
B) $31,250 
C) $33,500 
D) $57,250

Question 17

Explain why partners must increase their tax basis for their share of partnership taxable and nontaxable income or gain and reduce their basis by their share of partnership deductible and nondeductible expenses or losses?

Accepted Answer

The answer of Explain why partners must increase their tax...

Question 18

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 19

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 adjust a partner's basis

Question 20

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

Accepted Answer

A) Partnership losses must be used only in the year the losses are created 
B) Partnership losses may be carried back 2 years and carried forward 5 years 
C) Partnership losses may be carried forward indefinitely 
D) Partnership losses may be carried back 2 years and carried forward 20 years

Exam 20: Forming and Operating Partnerships