Partnership Final Quizzes

T/F A QIO is a provision in a partnership agreement stating that any partner who has a deficit capital account as a result of unexpectedly receiving a distribution must be allocated items of future income or gain in an amount and manner sufficient to eliminate any deficit balance as quickly as possible.

True

T/F It is this ability of the partners to include liabilities in basis that makes Subchapter K the choice over Subchapter S in partnerships that engage in leveraged investing.

True

T/F Regulation 1.704-3(b) (1) describes the "ceiling rule", which provides when making Section 704(c) allocations, the total income, gain, loss or deductions allocated to the partners for a taxable year with respect to a property cannot exceed the total partnership income, gain, loss or deductions with respect to that property for the taxable year.

True

T/F Section 1061(c) provides, in general, that the term "applicable partnership interest" means any interest in a partnership which, directly or indirectly, is transferred to (or is held by) the taxpayer in connection with the performance of substantial services by the taxpayer, or any other related person, in any applicable trade or business.

True

T/F Section 741 provides that the seller of a partnership interest will generally recognize capital gain or loss?

True

T/F Under the rules for allocating partnership liabilities among partners in the Section 752 regulations, a single partnership liability can be bifurcated into a recourse portion and a nonrecourse portion.

True

A contributes a piece of land to Partnership in exchange for an interest in Partnership. At the date of contribution A's tax basis in the land was $100,000 and the FMV of the land was $250,000. What is the tax basis of the land in the hands of the Partnership (ie "inside basis")? a. $100,000 b. $250,000 c. $150,000 d. $0

a. $100,000

Joe is a 50% partner in a partnership to which he contributes non-depreciable and non-amortizable property with a FMV of $300 and a tax basis of $100. The property is sold by the partnership for $400. How much tax gain is allocated to Joe? a. $250 b. $300 c. $150 d. $50

a. $250

Adam and Ben formed Tundra Golf Club, a partnership to purchase and operate a golf course. Tundra paid $2,500 to attorneys for drafting its partnership agreement, $500 to accountants to organize its books, and $3,000 in wages for preparation and upkeep of the golf course. How much represents organizational costs for tax purposes? a. $3,000 b. $2,500 c. $6,000 d. $500

a. $3,000

X (as GP) and Y (as LP) are equal owners in a limited partnership (XY Partnership). X and Y are unrelated. XY Partnership borrows $100 from Z, a party unrelated to X and Y, on a nonrecourse basis. The debt is secured by an asset worth $80. The amount of 704(b) minimum gain is 0, and the amount of 704(c) minimum gain is 0. How will the debt owed to Z be allocated between X and Y? a. $50 to X and $50 to Y b. $100 to X and $0 to Y c. $0 to X and $100 to Y d. $75 to X and $25 to Y

a. $50 to X and $50 to Y

Ted contributes real property to a partnership in exchange for a 50% capital and profits interest in the partnership. The real property has a fair market value of $1,500,000 and a tax basis of $1,000,000. The property is encumbered by a nonrecourse mortgage of $1,200,000 that the partnership assumes in the transaction. What amount of the liability is allocable to Ted? a. $700,000 b. $300,000 c. $600,000 d. $1,200,000

a. $700,000

Partnership X is a large publicly traded partnership. In connection with an acquisition of a piece of property, Partnership X hires A, a real estate broker, to help purchase the property and agrees to pay A 100. A owns an interest in Partnership X. Which best describes how the payment to A should be treated? a. A payment between a partnership and a partner who is not acting in their capacity as a partner b. Guaranteed payment c. Distributive share d. Disguised payment for services

a. A payment between a partnership and a partner who is not acting in their capacity as a partner

Which of the following trade or business is not considered a "specified service trade or business" for purposes of Section 199A? a. Architecture b. Accounting c. Athletics d. Law

a. Architecture

C and D form a partnership to own and manage real estate. C contributes $500,000 of cash. D does not contribute cash, but agrees to be the sole service provider in running the business. C's capital account at formation is $500,000 and D's capital account is zero. The partnership agreement provides that C will be allocated 20% of the profits and D will be allocated 80% of the profits. What result to D? a. D will not recognize any income in the year the partnership is formed. b. D will recognize ordinary income of $100,000 in the year the partnership is formed. c. D will recognize capital gain income of $100,000 in the year the partnership is formed. d. D will recognize ordinary income $400,000 in the year the partnership is formed.

a. D will not recognize any income in the year the partnership is formed.

Whether two or more participants have formed a partnership that will be treated as such for federal tax purposes depends primarily on which of the following factors? a. Intent of the participants b. Amount of capital contributed by each participant c. State law filings d. Title of the legal agreement forming the entity

a. Intent of the participants

Which Code Section provides that the net long-term gain with respect to certain "applicable partnership interests" will be treated as short-term capital gain if the relevant interest in the partnership was not held for at least 3 years? a. Section 1061(a) b. Section1061(c) c. Section 1061(d) d. Section 1061(e)

a. Section 1061(a)

X (as GP) and Y (as LP) are equal owners in a limited partnership (XY LP). X and Y are unrelated. XY LP borrows $100 from Z, a party unrelated to X and Y, on a recourse basis. Absent any other arrangement, how will the debt owed to Z be allocated between X and Y? a. $50 to X and $50 to Y b. $100 to X and $0 to Y c. $0 to X and $100 to Y d. $75 to X and $25 to Y

b. $100 to X and $0 to Y

Which of the following is not required to satisfy the primary economic effect test? a. Maintenance of capital accounts in accordance with the regulations b. Allocating income and loss pro rata in accordance with capital contributions c. Making liquidating distributions in accordance with positive capital account balances d. Restoration of a deficit capital account balance upon the liquidation of the partnership

b. Allocating income and loss pro rata in accordance with capital contributions

A and B form a partnership for their new business venture. A agrees to contribute $100,000 of cash. B does not contribute cash, but he agrees to be the sole service provider for the partnership in running and managing the business. The partnership agreement provides that A and B will share profits equally, and it also credits the capital accounts of both A and B at $50,000 each. What result to B? a. B will not recognize any income in the year the partnership is formed. b. B will recognize ordinary income of $50,000 in the year the partnership is formed. c. B will recognize capital gain income of $50,000 in the year the partnership is formed. d. B can make a Section 83(b) election to defer gain recognition because he is providing services to the partnership.

b. B will recognize ordinary income of $50,000 in the year the partnership is formed.

Ace contributes property to Partnership ABC in exchange for a 1/3rd interest. The property has an adjusted basis on date of contribution of $100 and a FMV of $160. The asset had a 10-year life at acquisition but has only four years remaining at the date of contribution. Depreciation is straight-line. Betty and Clay each contributed $160 cash. The partnership elected to apply remedial allocations. How much book and tax depreciation will the partnership record in year 1 (assume a full year)? a. Book depreciation of $40. Tax depreciation of $25 b. Book depreciation of $31. Tax depreciation of $25 c. Book depreciation of $16. Tax depreciation of $25 d. Book depreciation of $16. Tax depreciation of $10

b. Book depreciation of $31. Tax depreciation of $25

Partnership ABC has three partners. One of the partners, A, receives a distribution of $50,000 per year without regard to partnership profits. Which best describes how the payment to A should be treated? a. A payment between a partnership and a partner who is not acting in their capacity as a partner b. Guaranteed payment c. Distributive share d. Disguised payment for services

b. Guaranteed payment

Section 1061 carves out specific interests in partnerships that will not be included in the definition of an "applicable partnership interest." Which of the following is not a carved out interest? a. Interests in a partnership held directly or indirectly by a corporation. b. Interests in a partnership related to the raising and returning of capital. c. A capital interest in a partnership that provides the taxpayer with the right to share in partnership capital commensurate with the amount of capital contributed. d. Interests in a partnership held by a person who is employed by another entity that is conducting a trade or business and who only provides services to such other entity.

b. Interests in a partnership related to the raising and returning of capital.

Which of the following statements is false regarding the Section 743(b) adjustment? a. It protects the purchasing partner from gain or loss inherent in the partner's share of partnership assets prior to its purchase b. It is always mandatory c. It treats the purchasing partner as if the partner purchased an interest in each partnership asset d. It only affects the purchasing partner

b. It is always mandatory

Which of the following is not included in the amount realized when a partner sells or exchanges her interest in a partnership? a. Cash received. b. Partner's proportionate share of any remaining Section 743 adjustment. c. Fair market value of any property received. d. Partner's share of partnership liabilities under Section 752.

b. Partner's proportionate share of any remaining Section 743 adjustment.

Which Code Section provides an exception to the general rule that gain or loss is not recognized to a partnership or a partner when property is contributed to the partnership? a. Section 721(a) b. Section 721(b) c. Section 723 d. Section 724

b. Section 721(b)

Section 704(c) affects which of the following allocations? a. The allocation of section 704(b) book income and deductions. b. The allocation of tax gain or loss from the sale of property that had a different Section 704(b) book and tax basis when the property was contributed to a partnership. c. The allocation of section 704(b) book gain and loss. d. The allocation of gain from the sale of a partnership asset computed based on GAAP.

b. The allocation of tax gain or loss from the sale of property that had a different Section 704(b) book and tax basis when the property was contributed to a partnership.

X (as GP) and Y (as LP) are equal owners in a limited partnership (XY LP). X and Y are unrelated. XY LP borrows $100 from Z, a party unrelated to X and Y, on a nonrecourse basis. Y guarantees all of the debt. Absent any other arrangement, how will the debt owed to Z be allocated between X and Y? a. $50 to X and $50 to Y b. $100 to X and $0 to Y c. $0 to X and $100 to Y d. $75 to X and $25 to Y

c. $0 to X and $100 to Y

A sells its entire interest in partnership PRS to B. A receives $500 in cash in exchange for its PRS interest. A's basis in its PRS interest equals $450, which includes A's $350 share of PRS's debt immediately before the sale. What is A's gain or loss on the sale of its interest in PRS? a. $50 gain b. $150 gain c. $400 gain d. $300 loss

c. $400 gain

A sells its entire interest in partnership PRS to B. A receives $100 in cash and property with a FMV of $200 in exchange for its PRS interest. A's share of PRS's debt equals $350 immediately before the sale. What is A's amount realized on the sale of its interest in PRS? a. $100 b. $300 c. $650 d. Not enough information is provided.

c. $650

For purposes of Section 704(c), which of the following statements regarding the calculation of book and tax depreciation is NOT correct? a. A partnership generally applies the "step in the shoes" method for computing tax depreciation of contributed property. b. When adopting the remedial method, the book basis in excess of the tax basis is recovered as a newly placed in service asset. c. Using the traditional method with curative allocations will always solve the ceiling rule problem. d. When using the traditional method, book depreciation equals the ratio of tax depreciation divided by the tax basis multiplied by book basis.

c. Using the traditional method with curative allocations will always solve the ceiling rule problem.

A limited partner in a partnership guarantees the bottom $100 of a $500 dollar loan from a bank to the partnership. The guarantee is structured as a bottom-dollar guarantee. How much will the partner owe the bank under the guarantee if the value of the property drops, and the bank recovers $125 of the loan on a foreclosure sale? a. $375 b. $100 c. $25 d. $0

d. $0

Which of the following entities is eligible to elect its classification under the check-the-box regulations? a. An entity organized as a corporation under state law b. An insurance company c. A bank d. A business entity that does not meet the definition of a per se corporation under Reg. 301.7701-2(b)

d. A business entity that does not meet the definition of a per se corporation under Reg. 301.7701-2(b)

A and B form a partnership in which A contributes cash of 75 and B contributes cash of 75. In year 1, the partnership borrows 150 and purchased properties X, Y and Z for 100 each. In year 1, 100 of income is allocated to A and 50 of income is allocated to B. At the end of year 1, property X, which is still worth 100 is distributed to A. What are the capital accounts of A and B? a. A: 25, B: 125 b. A: 100, B: 200 c. A:125, B: 25 d. A: 75, B: 125

d. A: 75, B: 125

Reg. Section 1.704-1(b) contains the three requirements a partnership agreement must have in order for the partnership allocations to have Economic Effect. If a partnership agreement does not contain all three requirements, the partnership allocations can still have Economic Effect test under which of the following provisions? a. The Alternate Economic Effect test pursuant to Reg. Section 1.704-1(b)(2)(ii)(d). b. The Economic Effect Equivalence provision pursuant to Reg. Section 1.704-1(b)(2)(ii)(i). c. Allocating income and loss pro rata in accordance with capital contributions. d. Both (a) and (b).

d. Both (a) and (b).

The definition of a partnership does not include which of the following terms? a. Syndicate b. Group c. Joint Venture d. Cost sharing arrangement

d. Cost sharing arrangement

In Year 1, E receives a 10% profits interest in a partnership for services to be rendered to the partnership. Two and one-half years after receipt of the partnership interest, E sells the profits interest to a colleague for $20,000. What result to E? a. E will be required to amend his Year 1 tax return to include $20,000 of ordinary income. b. E will be required to amend his Year 1 tax return to include $20,000 of capital gain income. c. E will recognize $20,000 of ordinary income in the year he sells the interest. d. E will recognize $20,000 of short term capital gain income in the year he sells the interest.

d. E will recognize $20,000 of short term capital gain income in the year he sells the interest.

Which of the following statements is not correct regarding the application of Revenue Procedure 93-27 as it relates to the receipt of a partnership interest in return for services rendered to a partnership? a. If the profits interest relates to a substantially certain and predictable stream of income from partnership interests, the receipt of the interest is taxable. b. Revenue 93-27 does not apply to the receipt of a capital interest in a partnership. c. If the profits interest is a limited partnership interest in a PTP, the receipt of the interest is taxable. d. If the partner disposes of the profits interest within 2 years of receipt, the amount is taxable in the year of disposition.

d. If the partner disposes of the profits interest within 2 years of receipt, the amount is taxable in the year of disposition.

Which of the following is true about Revenue Ruling 2019-38? a. It eliminates the QBI deduction for rental real estate. b. It makes an exception for the definition of a specified service trade or business. c. It allows corporations to take the QBI deduction. d. It provides a safe harbor to allow rental real estate to qualify as a business for qualified business income deduction.

d. It provides a safe harbor to allow rental real estate to qualify as a business for qualified business income deduction.

Which of the following businesses would not typically select a partnership as its choice of entity? a. Real estate owner/operator b. Law firm c. Private equity fund d. Publicly traded manufacturing company

d. Publicly traded manufacturing company

Which of the following is accurate regarding the definition of QBI? a. QBI includes domestic and foreign trade or business income. b. If net QBI is negative for a year, it can be deducted in the current year. c. QBI includes capital gains and losses, dividends and interest income. d. QBI does not include guaranteed payments made to a partner.

d. QBI does not include guaranteed payments made to a partner.

When a partnership calculates a basis adjustment as the result of a transfer of a partnership interest, Section 743 provides that the allocation of basis among partnership properties shall be made in accordance with rules found in which of the following code sections? a. Section 754 b. Section 453 c. Section 734 d. Section 755

d. Section 755

Which of the following statements is correct regarding the character of gain on the sale of a partnership interest? a. The character of gain on sale of a partnership interest is always treated as capital in nature b. A partner will have only one holding period for its partnership interest, even when it contributes property at formation and a cash contribution at a later date. c. Capital gain recognized on the sale of a partnership interest will always be taxed at one capital gains rate. d. The character of gain on the sale of a partnership interest will be affected by the character of the assets held by the partnership on the date of sale.

d. The character of gain on the sale of a partnership interest will be affected by the character of the assets held by the partnership on the date of sale.

In determining a partner's allocable share of partnership nonrecourse debt, the first tier (or share) of liability allocation equals which of the following? a. The partner's share of Section 704(c) minimum gain. b. The partner's share of economic risk of loss. c. The partner's share based on the partner's profit-sharing percentage. d. The partner's share of Section 704(b) minimum gain.

d. The partner's share of Section 704(b) minimum gain.

The general purpose of Section 704(c) is: a. To allow shifting of pre-contribution built-in loss among partners in a partnership. b. To allow allocation of liabilities from contributed property to be shared among partners in a partnership. c. To prevent shifting of pre-contribution built-in gain among partners in a partnership. d. To prevent shifting of pre-contribution built-in gain or loss among partners in a partnership.

d. To prevent shifting of pre-contribution built-in gain or loss among partners in a partnership.

The category of Section 751(a) assets includes: a. Cash b. Capital assets c. Notes receivables and investments d. Unrealized receivable and inventory assets

d. Unrealized receivable and inventory assets

Which of the following statements regarding the calculation of book and tax depreciation is incorrect? a. Book depreciation always equals the ratio of tax depreciation divided by tax basis times book basis. b. The partnership generally applies the "step-into-the-shoes" method for computing tax depreciation of contributed property. c. When adopting the remedial method, the book basis in excess of tax basis is recovered as a newly placed in service asset. d. When adopting a method other for contributed property with a tax basis of zero, the taxpayer is not required to use a reasonable method.

d. When adopting a method other for contributed property with a tax basis of zero, the taxpayer is not required to use a reasonable method.

X contributes to PRS partnership an asset with a $20 basis subject to $100 in debt. Assume that immediately after the contribution, X's share of all partnership debt is $80. What is the result to X? a. X recognizes $20 in gain and has zero basis in its PRS interest. b. X recognizes no gain and has a negative $80 basis in its PRS interest. c. X recognizes no gain and has a $20 basis in its PRS interest. d. X recognizes no gain and takes a $0 basis in its PRS interest.

d. X recognizes no gain and takes a $0 basis in its PRS interest.

T/F A partner in a partnership which is engaged in a "specified service trade or business" (as defined in Section 199A) is not entitled to the QBI deduction, even if her taxable income is less than the threshold amount provided in the statute.

False

T/F A partnership has three equal partners - Individuals A and B file calendar year tax returns, and Corporation C files its return using a June 30 yearend. Assuming that the partnership cannot base its tax yearend using the business purpose standard of Section 444, the partnership may select either June 30 or December 31 as its year-end.

False

T/F A partnership must elect under Section 754 to make the optional basis adjustment in the manner provided in Section 743 for each transfer of a partnership interest during the taxable year, and it must also separately elect under Section 754 for any transfers in subsequent years.

False

T/F In determining a partner's outside basis in her partnership interest, Section 705 directs us to decrease the partner's basis by her distributive share of partnership losses and tax exempt income.

False

T/F In order to meet the substantial economic test in Section 704(b), the allocations must have economic effect or be substantial?

False

T/F Regulation 1.752-3(a)(3) does not allow a partnership agreement to specify the partners' interest in the partnership profits for purposes of allocating "excess nonrecourse liabilities."

False

T/F Section 704(c) requires tax allocations to take into account the built-in gain or loss that exists at the time of contribution for depreciable property only.

False

T/F The QBI deduction is limited to the greater of 50% of W-2 wages paid by the pass-through entity, or 25% of the W-2 wages paid by the pass-through entity plus 25% of the unadjusted basis of certain property the business uses to produce qualified business income.

False

T/F Under Reg. Section 1.704-1(b)(2)(iii)(b), a "transitory allocation" will prevent a partnership allocation from meeting the substantiality requirement.

False

T/F Under Regulation 1.752-2(b), the obligation of a partner to make a payment to any person upon the constructive liquidation of the partnership will establish that partner's economic risk of loss, even if the partner is entitled to reimbursement from another partner.

False

A contributes a piece of land to Partnership in exchange for an interest in Partnership. At the date of contribution A's tax basis in the land was $100,000 and the FMV of the land was $250,000. What is A's tax basis in his newly acquired Partnership interest (ie, "outside basis)? a. $100,000 b. $250,000 c. $150,000 d. $0

a. $100,000

Unless a business purpose is satisfactorily established under Section 444, a partnership must select its taxable year as follows: a. A partnership must use the same calendar yearend of its largest corporate partner. b. A partnership must adopt the yearend of its principal partners; if there are no principal partners, then it must adopt the yearend of its majority interest partners; and if no majority or principal partners, then it must adopt the yearend that results in the least aggregate deferral of income. c. A partnership must adopt the yearend of its majority interest partners; if there are no majority partners, then it must adopt the yearend of its principal partners; and if no majority or principal partners, then it must adopt the yearend that results in the least aggregate deferral of income. d. A partnership must use a calendar yearend unless it has a business purpose for another yearend under Section 444.

c. A partnership must adopt the yearend of its majority interest partners; if there are no majority partners, then it must adopt the yearend of its principal partners; and if no majority or principal partners, then it must adopt the yearend that results in the least aggregate deferral of income.

A and B form a partnership in which A contributes cash of 50 and B contributes cash of 100. In year 1, the partnership borrows 150 and purchased property A. In year 1, 30 of income is allocated to A and 60 of income is allocated to B. At the end of year 1, a distribution of 40 is made to B. What are the capital accounts of A and B? a. A: 130, B: 220 b. A: 30, B: 20 c. A:80, B: 120 d. A:80, B: 200

c. A:80, B: 120

Partnership ABC has three partners. One of the partners, A, receives a 10% of net profits per year in exchange for services. Which best describes how the payment to A should be treated? a. A payment between a partnership and a partner who is not acting in their capacity as a partner b. Guaranteed payment c. Distributive share d. Disguised payment for services

c. Distributive share

Under the Economic Effect test, Reg. Section 1.704-2(b)(2) provides if a partner has a deficit balance in his capital account following liquidation of his interest, he must be unconditionally obligated to restore the deficit by the later of: a. The end of the taxable year of liquidation of the partner's interest. b. Ninety days after the date of liquidation. c. Either (a) or (b). d. Within two years of the date of liquidation.

c. Either (a) or (b).

Which of the following will not result in a decrease to a partnership's book capital accounts: a. Cash distributions b. Property distributions c. Nontaxable income d. Partnership losses

c. Nontaxable income

A unique feature of a partnership is that a partner can include a proportionate share of the partnership liabilities in the basis of his partnership interest. Which of the following statements is correct regarding the statutory mechanism that enables this feature? a. Section 702(a) which determines each partner's share of liabilities. b. Section 703(a) which provides for determining the partner's share of liabilities. c. Section 752 which provides that a partner's share of liabilities is considered as a contribution of money by the partner to the partnership. d. Section 7701 which defines the treatment of partnership liabilities.

c. Section 752 which provides that a partner's share of liabilities is considered as a contribution of money by the partner to the partnership.

Income from which of the following items is not included in the definition of "unrealized receivables" under Section 751? a. Goods delivered, or to be delivered to the extent they are not capital assets. b. Section 1245 property. c. Substantially appreciated inventory items. d. Services rendered, or to be rendered.

c. Substantially appreciated inventory items.

The amount of built in gain under Section 704 (c) is defined as: a. The difference between the fair market value and the amount of debt of property contributed to a partnership. b. The difference between the fair market value and the GAAP basis of property contributed to a partnership. c. The difference between the fair market value and the tax basis of the property of property contributed to a partnership. d. The difference between the amount of debt and the tax basis of the property contributed to a partnership.

c. The difference between the fair market value and the tax basis of the property of property contributed to a partnership.

A and B each contribute 50 to a partnership. The partnership buys assets A and B. Asset A generates a stable return of 10 per year in ordinary income. Asset B generates 50 in capital gain in year 1. The partners agree that the 50 of capital gain from asset B will be allocated to B and A will receive 50 of income from Asset A over the next 5 years. All other allocations are split evenly. The partnership agreement provides that distributions will be made in accordance with properly maintained positive capital account balances and there is a deficit restoration obligation. Which of the following best reflects the treatment of the special allocations described above. a. This allocation is likely to be respected because it has economic effect. b. This allocation is likely to be respected because it has economic effect and it is substantial. c. This allocation is not likely to be respected because it is not substantial, even though it may have economic effect. d. This allocation is not likely to be respect because it is not substantial and does not have economic effect.

c. This allocation is not likely to be respected because it is not substantial, even though it may have economic effect.

Which of the following methods is not identified as a permissible method for allocating tax items under Section 704(c)? a. Remedial Method b. Traditional Method with Curative Allocations c. Traditional Method with Remedial Allocation d. Traditional Method

c. Traditional Method with Remedial Allocation

A contributes a piece of land to Partnership in exchange for an interest in Partnership. At the date of contribution A's tax basis in the land was $100,000 and the FMV of the land was $250,000. Assume that A originally purchased the land two years before it was contributed to the partnership, and A held the land for investment. What is A's holding period in his newly acquired partnership interest? a. Three months b. A's holding period in his partnership interest starts on the day it acquires the partnership interest. c. Two years d. One year

c. Two years