Deck 21: Partnerships

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

A partnership is an association formed by two or more taxpayers (who must be individuals) to carry on a trade or business.

Question 5

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

Question 6

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 and Morgan each have a basis of $100,000 in their partnership interests.

Question 7

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

Question 8

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

Question 9

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 10

Section 721 provides that no gain or loss is recognized on a contribution of property to a partnership in exchange for an interest in the partnership.An exception might apply if the taxpayer receives a cash distribution from the partnership soon after the property contribution is made.

Question 11

George received a fully-vested 10% interest in partnership capital and a 20% interest in future partnership profits in exchange for services rendered to the GHP, LLC (not a publicly-traded partnership interest).The future profits of the partnership are subject to normal operating risks.George will report ordinary income equal to the fair market value of the profits interest, but the capital interest will not be currently taxed to him.

Question 12

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.

Question 13

Seven years ago, Paul purchased residential rental estate that he has been depreciating as MACRS property over 27.5 years.This year, when his adjusted basis in the property was $250,000, Paul transferred the property to the newly formed PLA LLC in exchange for a one-third interest in the LLC.PLA incurred $10,000 of transfer taxes and fees related to the property.PLA must treat the $260,000 basis in the property, fees, and expenses, as new MACRS property depreciable over 27.5 years.

Question 14

Section 721 provides that, in general, no gain or loss is recognized by the partnership or the partner on contribution of appreciated or depreciated property to a partnership in exchange for an interest in the partnership.

Question 15

The primary purpose of the partnership agreement is to document the various tax elections made by the partners regarding depreciation methods, treatment of research and experimental costs, calculation of the § 199 deduction, and the § 754 election.

Question 16

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

Question 17

Laura is a real estate developer and owns property that is treated as inventory (not a capital asset) in her business.She contributes a parcel of this land (basis of $15,000) to a partnership, also to be held as inventory.The fair market value of the property is $12,000 at the contribution date.After three years, the partnership sells the land for $10,000.The partnership will recognize a $5,000 ordinary loss on sale of the property.

Question 18

Each partner's profit-sharing, loss-sharing, and capital-sharing ownership percentages are always the same.

Question 19

JLK Partnership incurred $15,000 of organizational costs and $75,000 of startup costs in 2012.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.

Question 20

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

Question 21

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 22

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 23

Items that are not required to be passed through separately from a partnership to the partners include AMT adjustments and preferences and taxes paid to foreign countries.

Question 24

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 25

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 26

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 27

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 28

Blaine contributes property valued at $50,000 (basis of $40,000) in exchange for a 25% interest in the BIKE Partnership.If the property is later sold for $70,000, gain of $15,000 will be allocated to Blaine.

Question 29

The sum of the partner's ending basis on Schedule K-1 equals the total of the partner's ending capital account on Schedule L.

Question 30

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 31

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 32

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 33

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 34

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 35

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 36

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 37

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 38

Harry's basis in his partnership interest was $10,000 at the beginning of the tax year.For the year, his share of the partnership's loss was $8,000, and he also received a distribution of $4,000.Harry can deduct an $8,000 loss, and he recognizes a gain of $2,000 on the distribution of cash in excess of his remaining basis.

Question 39

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 40

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 41

The LMO Partnership distributed $30,000 cash to Emma in a proportionate, nonliquidating distribution.Emma's basis in her partnership interest was $25,000 immediately before the distribution.As a result of the distribution, Emma's basis is reduced to $0 and she recognizes a $5,000 gain.

Question 42

In a proportionate nonliquidating distribution, cash is deemed to be distributed first, followed by unrealized receivables and inventory and, last, capital and other assets.

Question 43

Randi owns a 40% interest in the capital and profits of the RAY Partnership.Immediately before she receives a proportionate nonliquidating distribution from RAY, the basis for her partnership interest is $60,000.The distribution consists of $45,000 in cash and land with a fair market value of $72,000.RAY's adjusted basis in the land immediately before the distribution is $36,000.As a result of the distribution, Randi recognizes a gain of $21,000.

Question 44

Zach's partnership interest basis is $80,000.Zach receives a proportionate, liquidating distribution from a liquidating partnership of $60,000 cash and inventory having a basis of $30,000 to the partnership and a fair market value of $26,000.Zach assigns a basis of $20,000 to the inventory and recognizes no gain or loss.

Question 45

Generally, gain is recognized on a proportionate current or liquidating distribution if the fair market value of property distributed exceeds the partner's basis in the partnership interest.

Question 46

A property distribution from a partnership to a partner is generally taxable to the partner.

Question 47

A gain will only arise on a distribution of cash that exceeds the partner's basis in the partnership interest.For this purpose, only cash, checks, and credit card charges are treated as cash.

Question 48

A distribution cannot be "proportionate" if only one partner receives assets from the partnership.

Question 49

The BAM Partnership distributed the following assets to partner Barbie in a proportionate non-liquidating distribution: $10,000 cash, land parcel A (basis of $5,000, fair market value of $30,000) and land parcel B (basis of $25,000, fair market value of $20,000).Barbie's basis in her partnership interest was $40,000 immediately before the distribution.Barbie will allocate a basis of $15,000 each to the two land parcels, and her basis in her partnership interest will be reduced to $0.

Question 50

In a proportionate nonliquidating distribution of cash and a capital asset, the partner recognizes gain to the extent the amount of cash plus the fair market value of property distributed exceeds the partner's basis in the partnership interest.

Question 51

Tim and Darby are equal partners in the TD Partnership.Partnership income for the year is $60,000.Tim needs cash in order to pay tax on his share of the partnership income, but Darby wants to leave the cash in the partnership for expansion.If the partners agree, it is acceptable for TD to distribute $8,000 to Tim, and no cash or other property to Darby.

Question 52

Marcie is a 40% member of the M&A LLC.Her basis is $10,000 immediately before the LLC distributes to her $30,000 of cash and land (basis to the LLC of $20,000 and fair market value of $25,000).As a result of the proportionate, nonliquidating distribution, Marcie recognizes a gain of $20,000 and her basis in the land is $0.

Question 53

For Federal income tax purposes, a distribution from a partnership to a partner is treated the same as a distribution from a C corporation to its shareholders.

Question 54

Lori, a partner in the JKL partnership, received a proportionate nonliquidating distribution of $10,000 cash, unrealized receivables with a basis of $0 and a fair market value of $15,000, and land with a basis of $6,000 and a fair market value of $10,000.Her basis in the partnership interest immediately before the distributions was $14,000.She will recognize $0 gain on the distribution, and her basis in the receivables and land will be $0 and $4,000 respectively.

Question 55

Loss will be recognized on any distribution from a partnership in which cash, unrealized receivables and/or appreciated inventory are the only items distributed.

Question 56

Jared owns a 40% interest in the capital and profits of the JAJ Partnership.Immediately before he receives a proportionate nonliquidating distribution from JAJ, the basis of his partnership interest is $60,000.The distribution consists of $40,000 in cash and land with a fair market value of $25,000.JAJ's adjusted basis in the land immediately before the distribution is $30,000.As a result of the distribution, Jared recognizes no gain or loss and his basis in the land is $20,000.

Question 57

In a proportionate liquidating distribution, RST Partnership distributes to partner Riley cash of $30,000, accounts receivable (basis of $0, fair market value of $40,000), and land (basis of $65,000, fair market value of $50,000).Riley's basis was $40,000 before the distribution.On the liquidation, Riley recognizes a gain of $0, and her basis is $10,000 in the land and $0 in the accounts receivable.

Question 58

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 59

Matt, a partner in the MB Partnership, receives a proportionate, nonliquidating distribution of property having a fair market value of $16,000 and a partnership basis of $23,000.Matt's basis in the partnership is $10,000 before the distribution.In this situation, Matt will recognize a $6,000 gain, take a $16,000 basis in the property, and his basis in the partnership interest is reduced to zero.

Question 60

In a proportionate liquidating distribution, UVW Partnership distributes to partner William cash of $25,000, accounts receivable (basis of $10,000, fair market value of $8,000), and land (basis of $50,000, fair market value of $60,000).William's basis was $75,000 before the distribution.On the liquidation, William recognizes no gain or loss, and he takes a basis of $10,000 in the accounts receivable, and $50,000 in the land.

Question 61

A limited liability company generally provides limited liability for those owners that are not active in the management of the LLC but requires owner-managers of the LLC to have unlimited personal liability for LLC debts.

Question 62

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 63

Carlos receives a proportionate liquidating distribution consisting of $8,000 cash and inventory with a basis to the partnership of $5,000 and a fair market value of $6,000.His basis in his partnership interest was $15,000 immediately before the distribution.Carlos assigns a basis of $5,000 to the inventory, and recognizes a $2,000 capital loss.

Question 64

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 65

In a proportionate liquidating distribution in which the partnership is also liquidated, Ralph received cash of $30,000, accounts receivable (basis of $0, fair market value of $20,000), and equipment (basis of $0, fair market value of $10,000).Immediately before the distribution, Ralph's basis in the partnership interest was $40,000.Ralph realizes and recognizes a loss of $10,000, and his basis is $0 in both the accounts receivable and the equipment.

Question 66

TEC Partners was formed during the current tax year.It incurred $10,000 of organizational expenses, $80,000 of startup expenses, and $5,000 of transfer taxes to retitle property contributed by a partner.The property had been held as MACRS property for ten years by the contributing partner, and had an adjusted basis to the partner of $300,000 and fair market value of $400,000. Which of the following statements is correct regarding these items?

A)TEC treats the contributed property as a new MACRS asset placed in service on the date the property title is transferred.
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 capitalize the transfer tax and treat if as a new asset placed in service on the date the property is contributed.
E)None of the above statements are true.

Question 67

The JIH Partnership distributed the following assets to partner James in a proportionate liquidating distribution in which the partnership also liquidated: $25,000 cash, land parcel A (basis of $5,000, fair market value of $30,000) and land parcel B (basis of $5,000, fair market value of $15,000). James's basis in his partnership interest was $85,000 immediately before the distribution. James will allocate bases of $40,000 to parcel A and $20,000 to parcel B, and he will have no remaining basis in his partnership interest.

Question 68

Tim, Al, and Pat contributed assets to form the equal TAP Partnership.Tim contributed cash of $40,000 and land with a basis of $80,000 (fair market value of $60,000).Al contributed cash of $60,000 and land with a basis of $50,000 (fair market value of $40,000).Pat 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)Tim's basis in his partnership interest is $120,000.
B)Al realizes and recognizes a loss of $10,000.
C)Pat realizes a gain of $40,000 but recognizes $0 gain.
D)TAP has a basis of $80,000, $50,000, and $0 in the land and property (excluding cash) contributed by Tim, Al, and Pat, respectively.
E)All of these statement are correct.

Question 69

Beth sells her 25% partnership interest to Katie for $50,000 cash on July 1 of the current tax year.Katie also assumed Beth's share of the partnership's liabilities.Beth's basis in her partnership interest at the beginning of the year was $40,000, including a $15,000 share of partnership liabilities.The partnership's income for the entire year was $100,000, and Beth's share of partnership debt was $10,000 as of the date she sold the partnership interest.Assume the partnership has no hot assets and that its income is earned evenly throughout the year.Beth recognizes a gain of $12,500 on the sale.

Question 70

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 71

Which of the following would be currently taxable as ordinary income to the service partner if received in exchange for services performed for the partnership? (In all cases, assume the interest is not sold within two years after the time it is granted to the service partner.)

A)A 10% interest in the capital of the partnership that will vest in 3 years.
B)A 20% interest in the future profits of the partnership received in exchange for future services to be performed for the partnership.
C)A 25% interest in the capital of the partnership where there are no restrictions on transferability of the interest.
D)A 30% interest in ongoing profits of the partnership where the partnership is not a publicly-traded partnership and the income stream is not assured.
E)All of the above.

Question 72

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 73

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 74

Tyler's basis in his partnership interest is $110,000, including his share of partnership debt.Sarah buys Tyler's partnership interest for $60,000 cash and she assumes Tyler's $90,000 share of the partnership's debt.If the partnership owns no hot assets, Tyler will recognize a capital loss of $50,000.

Question 75

Nick sells his 25% interest in the LMNO Partnership to new partner Katrina for $57,500.The partnership's assets consist of cash ($100,000), land (basis of $90,000, fair market value of $70,000), and inventory (basis of $40,000, fair market value of $60,000).Nick's basis in his partnership interest was $57,500.On the sale, Nick will recognize ordinary income of $5,000 and a capital loss of $5,000.

Question 76

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

A)A partnership is not a taxable entity for Federal income tax purposes and is not required to file a return.
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 percent may differ from the partner's loss-sharing percent.
E)All of these statements are correct.

Question 77

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

A)The aggregate 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 assets (capital) that would be allocated to the partner upon liquidation of the partnership.
C)The partnership's outside 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 78

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 79

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 if she would come to work for the partnership.She will also receive a 25% interest in future partnership profits.On July 1 of the current year, the unrestricted partnership capital 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 80

A partnership has accounts receivable with a basis of $0 and a fair market value of $20,000 and depreciation recapture potential of $30,000.All other assets of the partnership are either cash, capital assets, or § 1231 assets.If a purchaser acquires a 40% interest in the partnership from another partner, the selling partner will be required to recognize ordinary income of $20,000.