Deck 10: Partnerships: Formation, Operation, and Basis

Question 1

Justin and Kevin formed the equal JK Partnership during the current year, with Justin contributing $60,000 in cash and Kevin contributing land (basis of $40,000, fair market value of $30,000) and equipment (basis of $0, fair market value of $30,000). Kevin recognizes a $20,000 gain on the contribution and his basis in his partnership interest is $60,000.

Answer 1

False

Question 2

JLK Partnership incurred $15,000 of organizational costs and $75,000 of startup costs in 2011. JKL may deduct $5,000 each of organizational and startup costs, and the remaining costs ($10,000 of organizational costs and $70,000 of startup costs) may be amortized over 180 months.

Answer 2

False

Question 3

A partner has a profit-sharing percent, a loss-sharing percent, and a capital-sharing ownership percent. Depending on the provisions in the partnership agreement, these amounts may or may not be the same for a given partner.

Answer 3

True

Question 4

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's tax basis in her interest is $42,000; Morgan's tax basis is $78,000.

Question 5

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

Question 6

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

Question 7

The partnership reports each partner's share of income to the partner in a single amount on Form 1099.

Question 8

The MNO Partnership, a calendar year taxpayer, was formed on July 1 of the current year and started business on October 1. MNO incurred $30,000 in startup costs. MNO may deduct $5,000 and amortize the remaining $25,000 over 120 months starting in July.

Question 9

The governing document of a limited liability company (LLC) is a partnership agreement which should spell out the partners' rights and obligations.

Question 10

In a limited partnership, all partners are protected from debts of the partnership.

Question 11

Section 721 provides that no gain or loss is recognized on contribution of property to a partnership in exchange for an interest in the partnership. A disguised sale is an exception to nonrecognition of gain or loss under § 721.

Question 12

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

Question 13

The amount of a partnership's income and loss from operating activities is combined with separately stated income and expenses in determining the partnership's net income (loss). This amount is reconciled to book income on the partnership's Schedule M-1 or Schedule M-3.

Question 14

A limited liability company offers all "members" protection from claims by the LLC's creditors.

Question 15

Tyler and Travis formed the equal T&T Partnership during the current year, with Tyler contributing $300,000 in cash and Travis contributing land (basis of $120,000, fair market value of $160,000) and inventory (basis of $30,000, fair market value of $140,000). Travis recognizes no gain or loss on the contribution and his basis in his partnership interest is $150,000.

Question 16

A limited liability limited partnership (LLLP) is a limited partnership (LP) in which all partners, including the general partners, are protected from debts of the partnership.

Question 17

Julie owns property that is treated as a capital asset in her hands. She contributed a parcel of land (basis $60,000; fair market value $58,000) to a real estate partnership, which will hold it as inventory. After three years, the partnership sells the land for $56,000. The partnership will recognize a $4,000 ordinary loss on sale of the property.

Question 18

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

Question 19

Syndication costs arise when partnership interests are being marketed to investors. These costs are amortized over 180 months.

Question 20

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

Question 21

The partnership must allocate nonrecourse debt among the partners according to the "constructive liquidation scenario."

Question 22

Debt of a limited liability company is allocated among LLC members using the nonrecourse debt allocation rules unless an LLC member has personally guaranteed the debt.

Question 23

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 $88,000.

Question 24

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 25

Henry contributes property valued at $60,000 (basis $50,000) in exchange for a 25% interest in the HIKE Partnership. If the property is later sold for $80,000, gain of $7,500 will be allocated to Henry.

Question 26

Julie and Kate form an equal partnership during the current year. Julie contributes cash of $160,000, and Kate contributes property (adjusted basis of $90,000, fair market value of $260,000) subject to a nonrecourse liability of $100,000. As a result of these transactions, Kate has a basis in her partnership interest of $40,000.

Question 27

Tom and William are equal partners in the TW Partnership. Just before TW liquidated, Tom's capital account balance was $50,000 and William's capital account balance was $30,000. To meet the substantial economic effect requirements, any liquidating cash distribution must be allocated equally between the partners.

Question 28

During the current year, John and Ashley form the JA Partnership and agree to share profits and losses equally. Ashley contributes land with a fair market value of $80,000 (subject to a $30,000 nonrecourse mortgage). On the contribution date, Ashley's adjusted basis in the land is $40,000. Immediately after formation, Ashley's partnership outside basis is $25,000.

Question 29

A partnership's allocations of income and deductions to the partners are required to be proportionate to the partners' percentage ownership of partnership capital in order to meet the substantial economic effect tests.

Question 30

ABC, LLC is equally-owned by three corporations. Two corporations have June 30 fiscal year ends, the third is a calendar-year taxpayer. ABC will use a June 30 year end under the majority partners' tax year rule because more than 50% of the partnership's capital and profits is owned by partners with the same taxable year.

Question 31

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 32

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. If her share of partnership liabilities on the last day of the partnership year is $20,000, her outside basis for her partnership interest at the end of the year is $65,000.

Question 33

Hardy's basis in his partnership interest was $5,000 at the beginning of the tax year. For the year, his share of the partnership's loss was $6,000, and he also received a distribution of $3,000. Hardy can deduct a $2,000 loss, and the remaining $4,000 loss is suspended until a year in which he has adequate basis.

Question 34

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 35

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 $75,000. The partnership immediately started using the land as a parking lot for its employees. Maria's recognized gain of $15,000 on the sale is capital-not ordinary.

Question 36

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 37

Nicholas, a 1/3 partner with a basis in the interest of $80,000 at the beginning of the year, received a guaranteed payment in the current year of $50,000. Partnership income before consideration of the guaranteed payment was $20,000. Nicholas must report a $10,000 ordinary loss from partnership operations, and the $50,000 guaranteed payment as ordinary income.

Question 38

PaulCo, DavidCo, and Sean form a partnership with cash contributions of $80,000, $50,000 and $30,000, respectively, and agree to share profits and losses in the ratio of their original cash contributions. PaulCo uses a January 31 fiscal year-end, while DavidCo and Sean use a November 30 and December 31 year-end, respectively. The partnership must use the least aggregate deferral method to determine its year end.

Question 39

A partnership cannot use the cash method of accounting if one of the partners is a C corporation.

Question 40

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 41

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

A) A partnership is not 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 ratio equals the partner's loss-sharing ratio.
E) All of these statements are correct.

Question 42

On January 1 of the current year, Jenna and Rob form an equal partnership. Jenna makes a cash contribution of $80,000 and a property contribution (adjusted basis of $120,000; fair market value of $160,000) in exchange for her interest in the partnership. Rob contributes property (adjusted basis of $190,000; fair market value of $240,000) in exchange for his partnership interest. Which of the following statements is true concerning the income tax results of this partnership formation?

A) Jenna has a $200,000 tax basis for her partnership interest.
B) Rob recognizes a $50,000 gain on his property transfer.
C) Rob has a $240,000 tax basis for his partnership interest.
D) The partnership has a $160,000 adjusted basis in the property contributed by Jenna.
E) None of the statements is true.

Question 43

When property is contributed to a partnership for a capital and profits interest, the holding period of the contributing partner's interest:

A) Always starts the day after the contribution date.
B) Always starts the day the property was contributed.
C) May include the holding period of the contributed property.
D) Never includes the holding period of the contributed property.
E) None of the above.

Question 44

Erika contributed property with a basis of $30,000 and a value of $40,000 to the BE Partnership in exchange for a 40% interest in partnership capital and profits. During the first year of partnership operations, BE had net taxable income of $60,000. The partnership distributed $10,000 cash to Erika. Erika's adjusted basis (outside basis) for her partnership interest at year-end is:

A) $24,000.
B) $30,000.
C) $44,000.
D) $54,000.
E) None of the above.

Question 45

Kevin, Cody, and Greg contributed assets to form the equal KCG Partnership. Kevin contributed cash of $50,000 and land with a basis of $80,000 (fair market value of $50,000). Cody contributed cash of $30,000 and land with a basis of $40,000 (fair market value of $70,000). Greg 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) Kevin's basis in his partnership interest is $130,000.
B) Cody's basis in his partnership interest is $100,000.
C) Greg's basis in his partnership interest is $60,000.
D) KCG has a basis of $80,000, $40,000, and $0 in the land and property (excluding cash) contributed by Kevin, Cody, and Greg, respectively.
E) All of these statement are correct.

Question 46

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 47

In which of the following independent situations would the transaction most likely be characterized as a disguised sale?

A) Partner George contributes appreciated property to the GMVV Partnership, and three years later GMVV distributes $100,000 proportionately to all the partners.
B) Brianna contributes property with a basis of $20,000 and a fair market value of $50,000 to the BGB Partnership in exchange for a 20% interest therein. The partnership agrees to distribute $20,000 to Brianna in fifteen months, if partnership cash flows from operations exceed $100,000 at that time. The partnership does not expect to produce operating cash flows of over $100,000 for at least five years.
C) Luis contributes appreciated property to the BLP Partnership. Thirty months later, he receives a distribution from the partnership of $15,000 cash. None of the other partners received a distribution. There was no agreement that BLP would make the distribution, and Luis would have made the contribution whether or not the partnership made the distribution.
D) None of the above transactions will be treated as a disguised sale.
E) a., b., and c. are all treated as disguised sales.

Question 48

TEC Partners was formed during the current tax year. It incurred $10,000 of organizational expenses, $80,000 of startup expenses, $200,000 of syndication costs, and $5,000 of transfer taxes to retitle property contributioned by a partner. Which of the following statements is correct regarding these payments?

A) TEC may deduct $5,000 of the syndication costs; the remaining amount must be amortized.
B) TEC must amortize the $10,000 of organizational expenses over 180 months.
C) TEC's startup expenses are amortized over 60 months.
D) TEC must add the transfer tax to the basis of the contributed property.
E) None of the above statements are true.

Question 49

Which of the following statements is true regarding accounting methods available to a partnership?

A) If a partnership is a tax shelter, it cannot use the accrual method of accounting.
B) If a partnership has a personal service corporation as a partner, it cannot use the cash method.
C) If a partnership has a partner that is a C corporation, it cannot use the cash method.
D) If a partnership has a partner that is a C corporation, it must use the cash method.
E) All of the above statements are false.

Question 50

Kaylyn is a 40% partner in the KKM Partnership. During the current year, KKM reported gross receipts of $160,000 and a charitable contribution of $10,000. The partnership paid office expenses of $100,000. In addition, KKM distributed $10,000 each to partners Kaylyn and Kristie, and the partnership paid partner Megan $20,000 for administrative services. Kaylyn reports the following income from KKM during the current tax year:

A) $16,000 ordinary income; $4,000 charitable contribution.
B) $8,000 ordinary income; $4,000 charitable contribution.
C) $4,000 ordinary income.
D) $12,000 ordinary income.
E) None of the above.

Question 51

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 52

In the current year, the POD Partnership received revenues of $200,000 and paid the following amounts: $50,000 in rent and utilities, and $20,000 as a distribution to partner Olivia. In addition, the partnership earned $6,000 of long-term capital gains during the year. Partner Donald owns a 50% interest in the partnership. How much income must Donald report for the tax year?

A) $68,000 ordinary income.
B) $78,000 ordinary income.
C) $65,000 ordinary income; $3,000 of long-term capital gains.
D) $75,000 ordinary income; $3,000 of long-term capital gains.
E) None of the above.

Question 53

Partner Tom transferred property (basis of $20,000; fair market value of $50,000) to the TUV Partnership in exchange for a partnership interest. At a later date, when Tom's outside basis for his partnership interest was $70,000, Tom received a $50,000 cash distribution from the partnership. Which one of the following statements is not true?

A) If the cash distribution occurred two months after the property contribution, the IRS may treat the transaction as a disguised sale.
B) If the transaction is treated as a disguised sale, Tom's basis in the partnership interest will be $20,000.
C) If Tom would have made the property contribution anyway, even if he knew that the partnership would probably not have any cash to distribute to him, the IRS would not likely contend the transaction was a disguised sale.
D) If the IRS treated the transaction as a disguised sale, the partnership's basis in the property would be $50,000.

Question 54

Fern, Inc., Ivy Inc., and Jason formed a general partnership. Fern owns a 50% interest and Ivy and Jason each own 25% interests. Fern, Inc. files its tax return on a July 1 - June 30 fiscal year; Ivy Inc. files on a September 1 - August 31 fiscal year; and Jason is a calendar year taxpayer. Which of the following statements is true regarding the taxable year the partnership can choose?

A) The partnership must choose the calendar year because it has no principal partners.
B) The partnership must choose a June 30 year-end because Fern, Inc. is a majority partner.
C) The partnership can request permission from the IRS to use a January 31 fiscal year if it can establish that is a natural business year.
D) The partnership cannot use the "least aggregate deferral" method to determine its taxable year.
E) None of the above.

Question 55

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

A) Whether to claim a tax credit or deduction for foreign taxes.
B) Whether to capitalize, amortize, or expense research and experimental costs.
C) The taxable year of the partnership.
D) The depreciation method used for partnership property.
E) All of the above elections are made by the partnership.

Question 56

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

A) The partnership reconciles its net 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) All of the above statements are true.

Question 57

Lexi and Allie formed a partnership. Lexi received a 30% interest in partnership capital and profits in exchange for land with a basis of $50,000 and a fair market value of $90,000. Allie received a 70% interest in partnership capital and profits in exchange for $210,000 of cash. Three years after the contribution date, the land contributed by Lexi is sold by the partnership to a third party for $120,000. How much taxable gain will Lexi recognize from the sale?

A) $21,000.
B) $40,000.
C) $49,000.
D) $70,000.
E) None of the above.

Question 58

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

A) The entity 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 profits that will be allocated to the partner.
C) The partnership's inside 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 59

Which of the following partnership owners is personally liable for the entity's debts to general creditors?

A) A partner in a limited liability partnership.
B) A member of a limited liability company.
C) A limited partner in a limited partnership.
D) A general partner in a limited partnership.
E) None of these owners are personally liable for entity debts.

Question 60

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 and profits 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 61

BCD Partners reported the following items on the partnership's Schedule K: ordinary income, $72,000; interest income, $5,000; long-term capital gain, $8,000; charitable contributions, $3,000; post-1986 depreciation adjustment, $4,000; and cash distributions to partners, $20,000. How much will BCD show as net income (loss) on its Analysis of Income (Loss)?

A) $58,000.
B) $72,000.
C) $78,000.
D) $82,000.
E) $85,000.

Question 62

Marissa is a 50% partner in the BAM Partnership. At the beginning of the tax year, Marissa's basis in the partnership interest was $200,000, including her share of partnership liabilities. During the current year, BAM reported an ordinary loss of $100,000. In addition, BAM distributed $10,000 to Marissa and paid partner Brian a $20,000 consulting fee (neither of these amounts was deducted in determining the $100,000 loss from operations). At the end of the year, Marissa's share of partnership liabilities decreased by $30,000. Assuming loss limitation rules do not apply, Marissa's basis in the partnership interest at the end of the year is:

A) $135,000.
B) $100,000.
C) $95,000.
D) $90,000.
E) None of the above.

Question 63

Michelle and Jacob formed the MJ Partnership. Michelle contributed $20,000 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 $10,000; Michelle received a distribution of $8,000 cash from the partnership; and Michelle had a 50% share in the partnership's $16,000 of recourse liabilities on the last day of the partnership year. Michelle's adjusted basis for her partnership interest at year end is:

A) $17,000.
B) $20,000.
C) $25,000.
D) $33,000.
E) $38,000.

Question 64

At the beginning of the year, Heather's "tax basis" capital account balance in the HEP Partnership was $60,000. During the tax year, Heather contributed property with a basis of $10,000 and a fair market value of $30,000. Her share of the partnership's ordinary income and separately stated income and deduction items was $26,000. At the end of the year, the partnership distributed $10,000 of cash to Heather. Also, the partnership allocated $15,000 of recourse debt and $25,000 of nonrecourse debt to Heather. What is Heather's ending capital account balance determined using the "tax basis" method?

A) $86,000.
B) $96,000.
C) $101,000.
D) $126,000.
E) $136,000.

Question 65

During the current tax year, Jordan and Whitney each contributed $50,000 to form the J&W LLC. Each member has a 50% interest in LLC capital, profits, and losses, except that depreciation expense is allocated 40% to Jordan and 60% to Whitney. During the first year, the LLC reported income (before depreciation expense) of $20,000 and had depreciation expense of $10,000. The LLC incurred recourse debt (that was personally guaranteed by both of the LLC members) of $60,000. Partnership assets are $170,000 at the end of the year. Under the constructive liquidation scenario, how is the recourse debt allocated to Jordan and Whitney?

A) All recourse debt is allocated to Whitney because she has the highest percentage allocation of depreciation expense.
B) The recourse debt is shared equally ($30,000 each) by Jordan and Whitney.
C) The recourse debt is allocated $36,000 to Whitney and $24,000 to Jordan.
D) The recourse debt is allocated $31,000 to Whitney and $29,000 to Jordan.
E) The recourse debt is not allocated to the LLC members.

Question 66

Molly is a 40% partner in the MAP Partnership. During the current tax year, the partnership reported ordinary income of $210,000 before payment of guaranteed payments and distributions to partners. The partnership made an ordinary cash distribution of $30,000 to Molly, and paid guaranteed payments to partners Molly, Amber, and Pat of $30,000 each ($90,000 total). How much will Molly's adjusted gross income increase as a result of the above items?

A) $88,000.
B) $78,000.
C) $66,000.
D) $36,000.
E) None of the above.

Question 67

Shane made a contribution of property to the newly formed QRST Partnership. The property had a $80,000 adjusted basis to Shane and a $150,000 fair market value on the contribution date. The property was also encumbered by a $90,000 nonrecourse debt, which was transferred to the partnership on that date. Another partner, Rachel, shares 20% of the partnership income, gain, loss, deduction, and credit. Under IRS regulations, Rachel's share of the nonrecourse debt for basis purposes is:

A) $16,000.
B) $18,000.
C) $45,000.
D) $80,000.
E) $90,000.

Question 68

Victor is a 40% owner (member) of Real Properties R Us, LLC (RPRU). During the current tax year, RPRU reported a loss from rental real estate activities of ($200,000) which is treated as a passive loss. Victor is a material participant in RPRU and meets the active participation requirements for rental real estate activities. His modified AGI is $120,000. In addition, Victor has passive income from other sources of $60,000. Assuming Victor meets the basis and at risk limitations, what amount of the RPRU loss may Victor deduct under the passive loss rules?

A) $80,000.
B) $75,000.
C) $70,000.
D) $60,000.
E) $0.

Question 69

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 70

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 71

Which of the following is not an 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 the partner received from the partnership.
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 72

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 73

Rebecca is a 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 74

Rick is a 30% partner in the ROC Partnership. At the beginning of the tax year, Rick's basis in the partnership interest was $60,000, including his share of partnership liabilities. During the current year, ROC reported net ordinary income of $40,000. In addition, ROC distributed $5,000 to each of the partners ($15,000 total). At the end of the year, Rick's share of partnership liabilities increased by $20,000. Rick's basis in the partnership interest at the end of the year is:

A) $120,000.
B) $87,000.
C) $75,000.
D) $60,000.
E) None of the above.

Question 75

Joseph is the managing general partner of JKL, in which he owns a 40% interest. For the year, JKL reported income of $300,000 (after deducting all guaranteed payments). Joseph received a guaranteed payment of $20,000 for capital that he had loaned the partnership, and he received a guaranteed payment of $100,000 for services he performed for JKL. How much income from self-employment did Joseph earn from JKL?

A) $20,000.
B) $100,000.
C) $120,000.
D) $220,000.
E) $240,000.

Question 76

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) Since 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 77

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 78

Paul sells one parcel of land (basis of $200,000) for its fair market value of $250,000 to a partnership in which he owns a 75% 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) $37,500 ordinary income.
C) $37,500 capital gain.
D) $50,000 ordinary income.
E) $50,000 capital gain.

Question 79

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, 2011 and 2012. The partnership paid guaranteed payments to Stephanie of $2,000 and $3,000 per month during the fiscal years ended September 30, 2011 and 2012. How much will Stephanie's adjusted gross income be increased by these partnership items for her tax year ended December 31, 2011?

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

Question 80

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.