Question 1

Hilary had an outside basis in LTL, General Partnership of $10,000 at the beginning of the year. LTL reported the following items on Hilary's K-1 for the year: ordinary business income of $5,000, a $10,000 reduction in Hilary's share of partnership debt, a cash distribution of $20,000, and tax-exempt income of $3,000. What is Hilary's adjusted basis at the end of the year?

Accepted Answer

A)  ($12,000). 
B)  ($9,000). 
C)  $0. 
D)  $15,000. 
E)  $18,000.

Question 2

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.

Accepted Answer

A) True 
 B)False

Question 3

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?

Accepted Answer

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

Question 4

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 5

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

Accepted Answer

A) True 
 B)False

Question 6

At the end of year 1, Tony had a tax basis of $40,000 in Tall Ladders, Limited Partnership. Tony has a 20 percent profits interest in Tall Ladders. For year 2, Tall Ladders will pay Tony a $10,000 guaranteed payment for extra services he provides to the partnership. Given the following Income Statement and Balance Sheet from Tall Ladders, what is Tony's adjusted tax basis at the end of year 2?

Accepted Answer

The answer of At the end of year 1, Tony...

Question 7

What general accounting methods may be used by a partnership and how and by whom are they selected?

Accepted Answer

The answer of What general accounting methods may be used...

Question 8

Tim, a real estate investor, Ken, a dealer in securities, and Hardware, Inc., a retail lumber store form a partnership called HKT, LP. HKT is in the home building business. Tim recently purchased his interest in HKT while the other partners purchased their interest several years ago. During X3, HKT reports a $12,000 gain from the sale of a stock in a wholesale lumber company it purchased in X1 for investment purposes. Which of the following statements best represents how their portion of the gain should be reported to the partner?

Accepted Answer

A)  Tim - Short-term capital gain. 
B)  Ken - Ordinary Income. 
C)  Hardware, Inc. - Long-term capital gain. 
D)  All of the choices accurately report the gain to the partner. 
E)  None of the choices accurately report the gain to the partner.

Question 9

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 the choices will be reported as ordinary business income (loss) on Schedule K-1.

Question 10

A purchased partnership interest has a holding period beginning on the date of purchase regardless of the type of property held by the partnership.

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

On June 12, 20X9, Kevin, Chris, and Candy Corp. came together to form Scrumptious Sweets General Partnership. Now, Scrumptious Sweets must decide which tax year-end to use. Kevin and Chris have calendar year-ends and each holds a 35% profits and capital interest. However, Candy Corp. has a September 30^th year-end and holds the remaining 30% profits and capital interest. What tax year-end must Scrumptious Sweets adopt and what rule mandates this year-end?

Accepted Answer

The answer of On June 12, 20X9, Kevin, Chris, and...

Question 13

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 the person's 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 14

Tom is talking to his friend Bob, who has an interest in Freedom, LLC, about purchasing his LLC interest. Bob's outside basis in Freedom, LLC is $10,000. This includes his $2,500 one-fourth share of the LLC's debt. Bob's 704(b) capital account is $17,000. If Tom bought Bob's LLC interest for $17,000, what would Tom's outside basis be in Freedom, LLC?

Accepted Answer

A)  $10,000. 
B)  $14,500. 
C)  $17,000. 
D)  $19,500.

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

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 17

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 18

How does a partnership make a tax election for the current year?

Accepted Answer

A)  Partnerships make certain elections automatically by simply filing their returns. 
B)  Partnerships make certain tax elections by filing a separate form with the IRS. 
C)  Partnerships do not need to file anything to make a tax election. 
D)  Partnerships do not make tax elections. Partners must make tax elections separately. 
E)  Both Partnerships make certain elections automatically by simply filing their returns and Partnerships make certain tax elections by filing a separate form with the IRS.

Question 19

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 20

For partnership tax years ending after December 31, 2015, partnerships can request up to a six-month extension by filing IRS Form 7004 prior to the original due date of the partnership return.

Accepted Answer

A) True 
 B)False

Exam 20: Forming and Operating Partnerships

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.

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

What general accounting methods may be used by a partnership and how and by whom are they selected?

A purchased partnership interest has a holding period beginning on the date of purchase regardless of the type of property held by the partnership.

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

How does a partnership make a tax election for the current year?

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.

For partnership tax years ending after December 31, 2015, partnerships can request up to a six-month extension by filing IRS Form 7004 prior to the original due date of the partnership return.