Deck 21: Partnerships

Question 1

John and Ken formed the equal JK Partnership during the current year,with John contributing $50,000 in cash and Ken contributing land (basis of $30,000,fair market value of $20,000)and equipment (basis of $0,fair market value of $30,000).Ken recognizes no gain or loss on the contribution and his basis in his partnership interest is $30,000.

Answer 1

True

Question 2

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.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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 5

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 6

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 7

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.

Question 8

JLK Partnership incurred $15,000 of organizational costs and $60,000 of startup costs.JKL may deduct $5,000 each of organizational and startup costs,and the remaining costs ($10,000 of organizational costs and $55,000 of startup costs)may be amortized over 180 months.

Question 9

A general partnership is similar to a limited liability company in that none of the partners or members of either type of entity is personally liable for entity debts.

Question 10

Schedule K of Form 1065 reports the separately stated items of a partnership.

Question 11

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

Question 12

PaulCo,DavidCo,and Ralph 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 Ralph use a November 30 and December 31 fiscal year-end,respectively.Since PaulCo is a majority partner,this partnership will use a January 31 year-end.

Question 13

Tim and Tom formed the equal T&T Partnership during the current year,with Tim contributing $200,000 in cash and Tom contributing land (basis of $100,000,fair market value of $140,000)and inventory (basis of $40,000,fair market value of $60,000).Tom recognizes a $60,000 gain on the contribution and his basis in his partnership interest is $200,000.

Question 14

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

Question 15

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

Question 16

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 17

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 18

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 19

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

Question 20

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 21

A distribution from a partnership to a partner is not generally taxable to the partner.

Question 22

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 23

Guaranteed payments from a partnership to a partner are treated as "W-2 Wages" for purposes of the § 199 deduction.

Question 24

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 25

Michael contributes land with a value of $120,000 and a basis of $80,000 to the MNO Partnership in exchange for a 1/4 interest.Several months later,the partnership sells the land for $140,000.Of the gain on the land sale,$45,000 is allocated to Michael.

Question 26

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 27

Beth's basis in her BBDE LLC interest is $40,000 at the beginning of the tax year.Her allocable share of LLC items are as follows: $30,000 of ordinary income,$5,000 tax-exempt interest income,and a $12,000 long-term capital gain.In addition,the LLC distributed $20,000 of cash to Beth during the year.Assuming the LLC had no liabilities at the beginning or the end of the year,Beth's ending basis in her LLC interest is $67,000.

Question 28

If a partnership allocates losses to the partners,the partners must first apply the basis limitation,then the at-risk limitations,and finally the passive loss limitations.If all three hurdles are met,the partner may deduct the loss.

Question 29

A partnership's allocations of income and deductions to the partners are not required to be proportionate to the partners' percentage ownership of partnership capital,provided the allocations meet the substantial economic effect tests.

Question 30

Meagan purchased her partnership interest from Lisa on the first day of the current year for $30,000 cash.She received a $15,000 cash distribution from the partnership during the year,and her share of partnership income is $12,000.If her share of partnership liabilities on the last day of the partnership year is $10,000,her outside basis for her partnership interest at the end of the year is $27,000.

Question 31

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 32

Bill's basis in his 20% interest in the BMW Partnership is $10,000 on the first day of the current tax year.The partnership reports "book" (GAAP)income of $60,000.The partnership "book" income is net of a deduction for a guaranteed payment made to Bill of $40,000.If there are no other differences between book and tax income,Bill's ending basis in his partnership interest is $22,000,and he reports income items from the partnership totaling $52,000.

Question 33

The partnership allocates recourse debt among the partners according to the "constructive liquidation scenario."

Question 34

Rhonda contributes land valued at $90,000 in exchange for a 40% interest in the RW Partnership.The adjusted basis of the land is $80,000 and it was subject to a liability of $20,000,which the partnership assumed.RW reported income of $100,000 for the year.If none of the liabilities are repaid by the end of the year,and if all liabilities are shared equally,Rhonda's basis at the end of the year is $108,000.

Question 35

Partner Bob purchased his partnership interest for $10,000.If Bob sells the partnership interest after three years,his gain or loss is determined by reference to this unadjusted $10,000 cost basis.

Question 36

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 37

On the first day of the current tax year,Melanie's basis in her partnership interest was $85,000.Her Schedule K-1 from the partnership reflected the following items for the current year: share of partnership ordinary loss,$95,000;interest income from money market accounts,$6,000.On her personal tax return,Melanie will report a loss from the partnership of $91,000,and interest income of $6,000.

Question 38

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 39

Nina and Sue form an equal partnership during the current year.Nina contributes cash of $130,000,and Sue contributes property (adjusted basis of $100,000,fair market value of $250,000)subject to a nonrecourse liability of $120,000.As a result of these transactions,Sue has a basis in her partnership interest of $50,000.

Question 40

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 41

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 take a $10,000 basis in the property,and his basis in the partnership interest is reduced to zero.

Question 42

In a proportionate liquidating distribution in which the partnership is also liquidated,Rosie received cash of $20,000 and inventory (basis of $12,000 and fair market value of $17,000).Immediately before the distribution,Rosie's basis in the partnership interest was $50,000.Rosie recognizes a loss of $18,000,and her basis in the inventory is $12,000.

Question 43

A distribution can be "proportionate" even if only one partner receives assets from the partnership.

Question 44

In a proportionate liquidating distribution,UVW Partnership distributes to partner William cash of $25,000,accounts receivable (basis of $10,000 and fair market value of $8,000),and land (basis of $50,000 and 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 45

For income tax purposes,proportionate and disproportionate distributions from a partnership are treated similarly.

Question 46

In a proportionate liquidating distribution,RST Partnership distributes to partner Rita cash of $10,000,accounts receivable (basis of $0 and fair market value of $20,000),and land (basis of $25,000 and fair market value of $20,000).Rita's basis was $40,000 before the distribution.On the liquidation,Rita recognizes a gain of $10,000,and her basis is $20,000 in each the land and accounts receivable.

Question 47

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

Question 48

Larry's partnership interest basis is $60,000.Larry receives a proportionate,liquidating distribution from a liquidating partnership of $45,000 cash and inventory having a basis of $30,000 to the partnership and a fair market value of $28,000.Larry assigns a basis of $15,000 to the inventory and recognizes no gain or loss.

Question 49

The LMO Partnership distributed $30,000 cash to Laura in a proportionate,nonliquidating distribution.Laura's basis in her partnership interest was $25,000 immediately before the distribution.As a result of the distribution,Laura's basis is reduced to ($5,000)(negative)and she recognizes no gain or loss.

Question 50

For purposes of determining gain on a current distribution to a partner,a distribution of cash includes relief of a partner's share of partnership liabilities and certain distributions of marketable securities.

Question 51

In a proportionate nonliquidating distribution of a capital asset,the partner recognizes gain to the extent the fair market value of the asset exceeds the partnership's basis in the asset.

Question 52

Pat is a 40% member of the P&J LLC.Her basis is $30,000 immediately before the LLC distributes to her $40,000 of cash and land (basis to the partnership of $25,000 and fair market value of $50,000).As a result of the proportionate nonliquidating distribution,Pat recognizes a gain of $10,000 and her basis in the land is $0.

Question 53

Tim and Janet are equal partners in the TJ Partnership.Partnership income for the year is $20,000.Tim needs cash in order to pay tax on his share of the partnership income,but Janet wants to leave the cash in the partnership for expansion.If the partners agree,it is acceptable for TJ to distribute $5,000 to Tim,and no cash or other property to Janet.

Question 54

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 55

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 56

Generally,gain is recognized on a proportionate current or liquidating distribution only if the cash distributed exceeds the partner's basis in the partnership interest.

Question 57

Marcie is a 40% member of the M&A LLC.Her basis is $40,000 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 $15,000 and her basis in the land equals its fair market value of $25,000.

Question 58

Jeremy receives a proportionate nonliquidating distribution from the JKL Partnership when the basis of his interest is $100,000.The distribution consists of cash of $25,000,land with a basis of $30,000 and a fair market value of $65,000,and inventory with a partnership basis of $50,000 and fair market value of $60,000.As a result of this distribution,Jeremy recognizes a $50,000 gain and takes a $65,000 basis in the land and a $60,000 basis in the inventory.

Question 59

Maggie,a partner in the Magpie partnership,received a proportionate nonliquidating distribution of $20,000 cash,unrealized receivables with a basis of $0 and a fair market value of $30,000,and land with a basis of $25,000 and a fair market value of $20,000.Her basis in the partnership interest immediately before the distributions was $30,000.She will recognize $0 gain on the distribution,and her basis in the receivables and land will be $0 and $20,000 respectively.

Question 60

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

Question 61

On a partnership's Form 1065,which of the following statements is always true?

A)The partnership will reconcile ordinary income from operations (excluding separately stated items)to book income on Schedule M-1 or M-3.
B)The partnership balance sheet is required to be presented on a tax 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 62

Kevin,Chuck,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).Chuck 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)Chuck'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,Chuck,and Greg,respectively.
E)All of these statement are correct.

Question 63

Cheryl and Nina formed a partnership.Cheryl received a 40% interest in partnership capital and profits in exchange for land with a basis of $60,000 and a fair market value of $80,000.Nina received a 60% interest in partnership capital and profits in exchange for $120,000 of cash.Three years after the contribution date,the land contributed by Cheryl is sold by the partnership to a third party for $90,000.How much taxable gain will Cheryl recognize from the sale?

A)$4,000.
B)$12,000.
C)$24,000.
D)$30,000.
E)None of the above.

Question 64

Tina and Randy formed the TR Partnership four years ago.Because they decided the company needed some expertise in multimedia presentations,they offered Susan 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 Susan.How should Susan treat the receipt of the partnership interest in the current year?

A)Nontaxable.
B)$25,000 short-term capital gain.
C)$25,000 long-term capital gain.
D)$25,000 ordinary income.
E)None of the above.

Question 65

A partnership has accounts receivable with a basis of $0 and a fair market value of $10,000 and depreciation recapture potential of $15,000.All other assets of the partnership are either cash,capital assets,or § 1231 assets.If a purchaser acquires a 30% interest in the partnership from another partner,the selling partner will be required to recognize ordinary income of $7,500.

Question 66

Surina sells her 25% partnership interest to Katie for $50,000 on July 1 of the current tax year.Surina'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 Surina'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.Surina recognizes a gain of $2,500 on the sale.

Question 67

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)Barbara 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 Barbara 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)Bill 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 Bill 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 68

George's basis in his partnership interest is $100,000,including his share of partnership debt.Sarah buys George's partnership interest for $60,000 cash and she assumes George's $60,000 share of the partnership's debt.If the partnership owns no hot assets,George will recognize a capital loss of $40,000.

Question 69

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

A)A partner's capital sharing ratio is defined as the percent of partnership profits that will be allocated to the partner.
B)The partnership's inside basis is defined as the sum of each partner's capital account balance.
C)The entity concept treats partners and partnerships as separate units and gives the partnership its own tax "personality."
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 70

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

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

Question 71

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 72

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

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

Question 73

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

A)The amount of the § 199 (domestic production activities)deduction related to partnership activities.
B)The taxable year of the partnership.
C)The depreciation method used for partnership property.
D)Amortization of organizational and startup expenses incurred by the partnership.
E)All of the above elections are made by the partnership.

Question 74

MEM Partners was formed during the current tax year.It incurred $20,000 of organizational expenses,$100,000 of startup expenses,and $200,000 of syndication costs.Which of the following statements is correct regarding these payments?

A)MEM may deduct $5,000 of the syndication costs;the remaining amount must be amortized.
B)MEM must amortize the $20,000 of organizational expenses over 180 months.
C)MEM's startup expenses are amortized over 60 months.
D)MEM must file an election to deduct and/or amortize its organizational expenses,startup costs,and syndication costs.
E)None of the above statements are true.

Question 75

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 76

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 acquires the asset from a partner as a contribution to partnership capital under § 721(a).
D)The partnership leases the asset from a partner on a one-year lease.
E)None of the above.

Question 77

Nick sells his 25% interest in the LMNO Partnership to new partner Nancy for $50,000.The partnership's assets consist of cash ($100,000),land (basis of $60,000;fair market value of $40,000),and inventory (basis of $50,000;fair market value of $60,000).Nick's basis in his partnership interest was $52,500.On the sale,Nick will recognize ordinary income of $2,500 and a capital loss of $5,000.

Question 78

Which one of the following statements regarding partnership taxation is always correct?

A)A partnership is 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 not required to file a tax return.
D)A partner's profit-sharing ratio will equal the partner's capital-sharing ratio.
E)None of these statements are correct.

Question 79

In a proportionate liquidating distribution in which the partnership is also liquidated,Ralph received cash of $30,000,accounts receivable (basis of $0 and fair market value of $20,000),and a desk (basis of $0 and fair market value of $1,000).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 desk.

Question 80

On January 1 of the current year,Sarah and Bart form an equal partnership.Sarah makes a cash contribution of $60,000 and a property contribution (adjusted basis of $160,000;fair market value of $140,000)in exchange for her interest in the partnership.Bart contributes property (adjusted basis of $120,000;fair market value of $200,000)in exchange for his partnership interest.Which of the following statements is true concerning the income tax results of this partnership formation?

A)Sarah has a $200,000 tax basis for her partnership interest.
B)The partnership has a $140,000 adjusted basis in the property contributed by Sarah.
C)Bart recognizes an $80,000 gain on his property transfer.
D)Bart has a $120,000 tax basis for his partnership interest.
E)None of the statements is true.