Tax 11
Miguel has a 50% interest in partnership capital, profits, and losses. The basis for his partnership interest is $50,000. The partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. Miguel receives a distribution of land that has an FMV of $40,000 and an adjusted basis of $30,000. The land is subject to a $15,000 liability, which Miguel assumes. His basis in the partnership interest following the land distribution is A) $12,500. B) $20,000. C) $27,500. D) $35,000.
$27,500. Predistribution basis $50,000 Minus: distribution (30,000) Minus: release from one-half of partnership liability for land ( 7,500) Plus: liability assumed from partnership 15,000 Postdistribution basis $27,500
21) On January 1, Helmut pays $2,000 for a 10% capital, profits, and loss interest in a partnership, which has recourse liabilities of $20,000. The partners share economic risk of loss from recourse liabilities in the same way they share partnership losses. In the same year, the partnership incurs losses of $6,000 and the recourse liabilities increase by $5,000. Helmut and the partnership use a calendar tax year-end. Helmut's basis at year-end is A) $1,500. B) $2,000. C) $3,500. D) $3,900.
$3,900.
On January 2 of the current year, Calloway and Taylor contribute cash equally to form the CT Partnership. Calloway and Taylor share profits and losses in a ratio of 75% and 25%, respectively. The partnership's ordinary income for the year was $40,000. Calloway received a distribution of $5,000 during the year. What is Calloway's share of taxable income for the year? A) $5,000 B) $10,000 C) $20,000 D) $30,000
$30,000 40,000 x .75 = 30,000
At the formation of the BD Partnership, Betty contributes land with a basis of $10,000 and an FMV of $30,000 and Dick contributes cash of $30,000. Betty and Dick share profits and losses equally. When the land is sold two years later for $50,000, Betty must recognize a gain of A) $10,000. B) $20,000. C) $30,000. D) $40,000.
$30,000. Precontribution gain ($30,000 - $10,000) $20,000 Plus: one-half of the postcontribution gain 10,000 Total gain recognized by Betty $30,000
Brent is a limited partner in BC Partnership. His distributive share of partnership income and his guaranteed payment for the year are as follows: Ordinary income $30,000 Short-term capital gain $18,000 Guaranteed payment $36,000 What is his self-employment income? A) $84,000 B) $66,000 C) $48,000 D) $36,000
$36,000
On December 1, Antonio, a member of a three-person partnership, purchases investment securities from the partnership for their $37,000 FMV. All partners share profits and losses equally. The securities were acquired by the partnership for $25,000 cash in March of the current year. What amount and character of gain will Antonio recognize because of this transaction? A) $0 gain B) $4,000 ordinary income C) $4,000 short-term capital gain D) $12,000 ordinary income
$4,000 short-term capital gain Answer: C Explanation: C) ($37,000 - $25,000) × 1/3 = $4,000 short-term capital gain from the sale of securities.
Martin is a limited partner in a card shop. At the end of the partnership's tax year, Martin's basis in the partnership interest is $25,000 ($5,000 cash investment plus a $20,000 share of nonqualified nonrecourse financing). Martin's distributive share of partnership losses for the tax year is $33,000. Martin has $30,000 of passive income this year from other activities. How much of the $33,000 partnership loss can be used by Martin in the year of the loss? A) $5,000 B) $25,000 C) $30,000 D) $33,000
$5,000 Explanation: A) Martin's total basis under Sec. 704(d) is $25,000. However, his $5,000 cash investment is the only amount for which he is at risk under the at-risk rules and sets the limit on his loss deduction, since he has $30,000 of passive income.
On the first day of the partnership's tax year, Karen purchases a 50% interest in a general partnership for $30,000 cash and she materially participates in the operation of the partnership for the entire year. The partnership has $40,000 in recourse liabilities when Karen enters the partnership. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. There is no minimum gain related to the nonrecourse liability. During the year, the partnership incurs a $120,000 loss and a $20,000 increase in liabilities. How much of the loss can Karen report on her tax return for the current year? A) $30,000 B) $40,000 C) $50,000 D) $60,000
$60,000
Brent is a general partner in BC Partnership. His distributive share of partnership income and his guaranteed payment for the year are as follows: Ordinary income $30,000 Short-term capital gain $18,000 Guaranteed payment $36,000 What is his self-employment income? A) $84,000 B) $66,000 C) $48,000 D) $36,000
$66,000 Explanation: B) ($30,000 + $36,000).
Matt and Joel are equal partners in the MJ Partnership. For the current year ended December 31, the partnership has book income of $80,000, which includes the following deductions: (1) guaranteed payments (salaries) to partners: Matt, $35,000; and Joel, $25,000; and (2) charitable contributions, $6,000. The book income amount does not include any sales of capital assets or Sec. 1231 assets or any tax-exempt income. Based on the above information, what amount should be reported as ordinary income on the partnership return? A) $60,000 B) $80,000 C) $86,000 D) $140,000
$86,000 Book income $80,000 Plus: charitable contributions 6,000 = Ordinary income $86,000
David purchased a 10% capital and profits interest in a partnership this year. He does not participate in the partnership's business. David has no passive income in the current year. His distributive share of the partnership's loss is $40,000 for this year. David's Sec. 705 basis in the partnership is $32,000 and his at-risk basis is $16,000 at the end of the current year. How much of the loss can David deduct on his tax return? A) $0 B) $16,000 C) $32,000 D) $40,000
$0
An S corporation may be subject to the following tax. a. Federal income tax. b. Alternative minimum tax. c. Built-in gains tax. d. Foreign earnings tax.
C
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. $85,000. e. $82,000.
C
Nicole's basis in her partnership interest was $160,000, including her $50,000 share of partnership liabilities. The partnership decides to liquidate, and after repaying all liabilities, distributes all remaining assets proportionately to the partners. Nicole receives $30,000 cash and accounts receivable with a $50,000 basis and a $52,000 fair market value to the partnership. What gain or loss does Nicole recognize, and what is her basis in the accounts receivable? a. $28,000 loss; $52,000 basis. b. $60,000 loss; $50,000 basis. c. $30,000 loss; $50,000 basis. d. $78,000 loss; $52,000 basis. e. $0 loss; $80,000 basis.
C
Which item has no effect on an S corporation's AAA? a. Capital loss. b. Interest expense. c. Stock purchase by a shareholder. d. Cost of goods sold. e. All of these choices modify AAA.
C
Which of the following is an election or calculation made by the partner rather than the partnership? a. Whether to capitalize, amortize, or expense research and experimental costs. b. The taxable year of the partnership. c. Whether to claim a tax credit or deduction for foreign taxes. d. The depreciation method used for partnership property. e. All of these elections are made by the partnership.
C
Which of these tax provisions does not apply to an S corporation? a. "Partial liquidation" stock redemption. b. Tax-free "A" reorganization. c. Section 1202 capital gain exclusion. d. Section 1244 stock.
C
Which statement is incorrect? a. An S corporation may not allocate income and deduction items to specific shareholders like a partnership can. b. S corporations are treated as corporations under state law. c. The alternative minimum tax applies to some S corporations. d. S corporations resemble partnerships under the Federal income tax law.
C
Dan receives a proportionate nonliquidating distribution when the basis of his partnership interest is $30,000. The distribution consists of $10,000 in cash and property with an adjusted basis to the partnership of $24,000 and a fair market value of $26,500. Dan's basis in the noncash property is: a. $20,000. b. $10,000. c. $26,500. d. $24,000. e. None of these choices are correct.
A
On January 1, Bobby and Alice own equally all of the stock of an electing S corporation called Prairie Dirt Delight. The dirt company has a $60,000 loss for a non-leap year. On the 200th day of the year, Bobby sells his one-half of the stock to his son, Saul. How much of the $60,000 loss, if any, is allocated to Bobby? a. $13,562. b. $0. c. $32,877. d. $16,438.
A
What method is used to allocate S corporation income or losses (unless an election to the contrary is made)? a. Per-day allocation. b. LIFO method. c. Any method agreed to by all of the shareholders. d. FIFO method.
A
Which of the following is not a correct statement regarding the advantage of the partnership entity form over the subchapter C corporate form? a. Partners in a general partnership have less personal liability for entity claims than shareholders of a C corporation. b. A partnership typically has easier administrative and filing requirements than does a C corporation. 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. Partnership income is subject to a single level of taxation; corporate income is double taxed. e. All of these choices are advantages of partnership taxation.
A
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 these statements are requirements of the substantial economic effect test.
A
Which of the following is false? A) A large partnership must not be a service partnership. B) A large partnership must have fewer than 100 partners. C) A large partnership must not be engaged in commodity trading. D) A large partnership is subject to a different system of audits.
A large partnership must have fewer than 100 partners. Page Ref.: C:9-4 Objective: 1
Mario contributes inventory to a partnership on August 1 of this year in exchange for a 20% partnership interest. Mario had purchased the inventory on July 2 of last year. His holding period for the partnership interest begins A) July 2 of last year. B) July 3 of last year. C) August 1 of the current year. D) August 2 of the current year.
August 2 of the current year.
2. General partnerships are legally formed by filing a partnership agreement with the state in which the partnership will be formed. T/F
FALSE General partnerships may be formed by written agreement among the partners, called a partnership agreement, or may be formed informally without a written agreement when two or more owners join together in an activity to generate profits.
Identify which of the following statements is true. A) A contribution of services for a partnership interest is a tax-free transaction. B) For federal income tax purposes, formation of a partnership is governed by Sec. 721. C) When a partnership assumes a liability on property contributed by a partner, the only effect on the contributing partner's basis in his or her partnership interest is that his or her basis will be increased by the amount of the liability assumed by the other partners. D) All of the above are false.
For federal income tax purposes, formation of a partnership is governed by Sec. 721.
The XYZ Partnership reports the following operating results for the current year: Net long-term capital loss ($40,000) Net Sec. 1231 loss ( 16,000) Ordinary income 50,000 Tai has a 20% profits interest and a 25% loss interest in the XYZ Partnership. His distributive share of ordinary income is A) $6,800. B) $8,500. C) $10,000. D) $12,500.
His distributive share of ordinary income is $12,500. Explanation: D) Since the partnership has a net loss [($40,000) + ($16,000) + $50,000 = ($6,000)] for the year, Tai's distributive share of the $50,000 of ordinary income is calculated using the 25% loss interest. Page Ref.: C:9-18; Example C:9-20 Objective:
A partner's basis for his or her partnership interest is increased by his share of the partnership's tax-exempt income.
TRUE
A partner's share of nonrecourse debt increases that partner's share of basis.
TRUE
ABC Partnership distributes $12,000 to partner Al. Al's distributive share of partnership income is $20,000. Al is taxed on $20,000.
TRUE
Guaranteed payments are always ordinary income to the recipient.
TRUE
Limited partners must consider the at-risk, basis, and passive loss limitations when determining the amount of their deductible loss.
TRUE
Identify which of the following statements is false. A) Jean and Blossom form an equal partnership. Jean contributes $10,000 cash and Blossom contributes property with a $10,000 FMV and a $5,000 basis. When the partnership sells the property contributed by Blossom for $10,000 shortly after the formation, Blossom must include the $5,000 gain in her income. B) In order to shift income/loss between partners, there must be substantial economic effect. C) The BB Partnership wants to make a special allocation of $10,000 of long-term capital gain to Bob and a special allocation of $10,000 of ordinary income to Briana. This allocation will have a substantial economic effect. D) Partners must make up negative balances in their capital accounts upon liquidation of the partnership.
The BB Partnership wants to make a special allocation of $10,000 of long-term capital gain to Bob and a special allocation of $10,000 of ordinary income to Briana. This allocation will have a substantial economic effect.
Identify which of the following statements is true. A) Tax-exempt interest received by a partnership is taxable to the partners if distributed. B) Partnership gains and losses from two different casualty and theft occurrences in one year are passed through to the partners as two separate items. C) The amount and character of any gains/losses is determined at the partnership level. D) All of the above are false.
The amount and character of any gains/losses is determined at the partnership level.
Which of the following statements correctly reflects the rules regarding proportionate liquidating distributions? a. Relief of liabilities is treated as a distribution of cash but only to the extent that the cash distribution does not exceed the partner's basis in the partnership interest. b. A partner's basis in distributed unrealized receivables is the lesser of the partnership's basis in the receivables or their fair market value. c. The basis of unrealized receivables cannot be stepped up to their fair market value unless the partner has adequate unabsorbed basis. d. Assets are deemed distributed in the following order: cash, unrealized receivables and inventory and finally, capital assets. e. The partner can recognize gain, but not loss, on a proportionate liquidating distribution.
D
Identify which of the following statements is true. A) When adjusting a partner's basis in a partnership interest, the negative basis adjustments are made prior to the positive basis adjustments. B) Martin and Carlos formed an equal partnership to which Martin contributed $10,000 cash and Carlos contributed a building worth $10,000 with a basis of $2,000. In the first year of operation, the partnership suffered a $10,000 ordinary loss. Martin and Carlos can each deduct a $5,000 loss on their personal tax returns. C) Any distributive share of a loss that cannot be deducted by a partner because of the Sec. 704(d) basis loss limitation is permanently lost. D) All of the above are false.
D) All of the above are false.
Identify which of the following statements is true. A) All of the partners in a limited partnership have limited liability. B) A limited partnership must have at least two general partners. C) A limited partnership cannot have a corporate general partner. D) All of the above are false.
D) All of the above are false. Page Ref.: C:9-3 Objective: 1
The definition of a partnership does not include A) a syndicate. B) a group. C) a pool. D) All of the above are included.
D) All of the above are included. Page Ref.: C:9-2 Objective: 1
Electing large partnership rules differ from other partnership rules in all of the following areas except A) partnership income reporting. B) partnership termination. C) partnership audits. D) All of the above are large partnership rule differences.
D) All of the above are large partnership rule differences. Page Ref.: C:9-4 Objective: 1
Identify which of the following statements is true. A) A general partner's share of recourse debt is based on his or her economic risk of loss, and his or her share of nonrecourse debt is predominantly based on his or her share of partnership profits. B) A partner's basis for his or her partnership interest is increased by his or her share of the partnership's tax-exempt income. C) If all tax-exempt interest income is distributed when received by a partnership, the partners' bases are the same after the distribution as they were before the tax-exempt interest was received by the partnership. D) All of the above are true.
D) All of the above are true.
Identify which of the following statements is true. A) A partner who performs services for a partnership is usually not considered an employee of the partnership. B) It may be necessary for the partnership to capitalize a partner's guaranteed payment. C) Guaranteed payments are ordinary income to the recipient. D) All of the above are true.
D) All of the above are true.
When computing the partnership's ordinary income, a deduction is allowed for A) contributions to charitable organizations. B) net operating losses. C) net short-term capital losses. D) guaranteed payments to partners.
D) guaranteed payments to partners.
Formation of a partnership requires legal documentation filed with the Secretary of State.
FALSE
No gain is recognized on the sale of property between a partnership and a more-than-50% partner.
FALSE
Jangyoun sells investment land having a $30,000 basis to a partnership in which he has a 60% partnership interest. The partnership pays $26,000 (FMV) for the land. Later, the partnership sells the investment land to a nonpartner for $31,000. On the sale of the land, the partnership must recognize a A) $0 gain or loss. B) $1,000 capital gain. C) $4,000 capital gain and $1,000 Sec. 1231 gain. D) $5,000 capital gain.
$1,000 capital gain. Amount realized $31,000 Minus: basis to partnership (26,000) Realized gain $ 5,000 Jangyoun realized a $4,000 loss ($26,000 - $30,000) on the sale of the land to the partnership. The $4,000 loss is disallowed in the year of Jangyoun's sale, but can offset the partnership's realized gain, thus reducing it to a $1,000 recognized gain. The gain is capital because the land was held for investment purposes by the partnership.
A partnership has one general partner, Allen, who materially participates in the business. Allen had a $30,000 distributive share of ordinary losses for this year and the partnership had no separately stated gains or losses. There are no changes in liabilities during this year and there are no additional contributions or distributions. At the beginning of this year, the Sec. 705 basis was $40,000 and the at-risk basis was $15,000. The basis on December 31 of this year based on the above information is A) $10,000. B) $15,000. C) $25,000. D) $40,000.
$10,000. Explanation: A) $40,000 - $30,000 = $10,000
For a 20% interest in partnership capital, profits, and losses, Kasi contributes a machine having a basis of $30,000 and an FMV of $40,000. The partnership also assumes a $24,000 recourse liability secured by the machine. The partnership has $6,000 in recourse liabilities immediately preceding Kasi's contributions. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. Kasi's basis in the partnership interest is.. A) $10,800. B) $12,000. C) $13,200. D) $30,000.
$12,000.
George pays $10,000 for a 20% interest in a general partnership, which has recourse liabilities of $20,000. The partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. George's basis in his partnership interest is A) $10,000. B) $12,000. C) $14,000. D) $30,000.
$14,000
Latoya owns a 10% interest in the ABC Partnership from January 1 through June 30 (the 181st day of the tax year) of the current year (a non-leap year). On July 1, Latoya buys an additional 10% interest in the partnership. The XYZ Partnership's ordinary income is $109,500 and it is earned evenly throughout the year. Latoya's distributive share of the ordinary income is A) $16,380. B) $16,425. C) $16,470. D) $21,900.
$16,470. $109,500 × 181/365 × 0.10 = $ 5,430 $109,500 × 184/365 × 0.20 = 11,040 Total 16,470
Meg and Abby are equal partners in the AM Partnership, which earns $40,000 ordinary income, $6,000 long-term capital gain (LTCG), and $2,000 Sec. 1231 loss during the current year. What is the amount and character of income that must be reported on Abby's tax return for this year's partnership operations? A) $20,000 ordinary income, $3,000 LTCG, $1,000 Sec. 1231 loss B) $19,000 ordinary income, $3,000 LTCG C) $23,000 ordinary income, $1,000 Sec. 1231 loss D) $22,000 ordinary income
$20,000 ordinary income, $3,000 LTCG, $1,000 Sec. 1231 loss
Stan had a basis in his partnership interest at the beginning of last year of $30,000. There was no change in partnership liabilities during the year. His share of the partnership's ordinary loss last year was $40,000 and the partnership had no separately stated items. This year, Stan has a distributive share of ordinary income of $30,000. The taxable income from the partnership reported on Stan's personal income tax return this year (ignoring the at-risk and passive activity loss limitations) is A) $10,000 ordinary loss. B) $20,000 ordinary income. C) $30,000 ordinary income. D) $40,000 ordinary income.
$20,000 ordinary income. Explanation: B) $30,000 - $10,000 loss carryover = $20,000.
William and Irene each contribute $20,000 cash to the WI Partnership on January 1 of last year. William and Irene share profits and losses equally. Last year, the partnership reported tax-exempt interest income of $4,000. This year, each partner receives $1,000 of the tax-exempt interest income in a cash distribution. There are no partnership liabilities and no other income, loss, contributions, or distributions during both years. William's basis in the partnership interest following these transactions is A) $19,000. B) $20,000. C) $21,000. D) $22,000.
$21,000. Beginning basis $20,000 Plus: one-half of tax-exempt interest income 2,000 Minus: distribution ( 1,000) Postdistribution basis $21,000
On December 31 of last year, Alex and Jackson become equal partners in the AJ Partnership with assets having a tax basis and FMV of $120,000. The partnership, which deals in securities, had no liabilities at the end of last year. In January of this year, Franklin contributes his investment securities with an FMV of $60,000 (purchased two years ago at a cost of $45,000) to become an equal partner in the new AJF Partnership. The securities, which are inventory to the partnership, are sold on December 15 of the current year for $90,000. What amount and character of gain from the sale of these securities should be allocated to Franklin? A) $10,000 ordinary income B) $15,000 capital gain and $10,000 ordinary income C) $25,000 capital gain D) $25,000 ordinary income
$25,000 ordinary income Precontribution gain $15,000 Plus: one-third of the postcontribution gain 10,000 Total gain recognized by Jackson $25,000 There is no special provision to preserve the capital gain character for Jackson, so the entire gain is ordinary income.
Identify which of the following statements is true. A) A partner's distributive share includes the full amount of partnership ordinary income, which she must report on her tax return plus her share of separately stated taxable and tax-exempt items. B) Sam has a 20% interest in partnership capital and profits but a 40% interest in partnership losses. The partnership has no special allocations or precontribution gains or losses. In a year in which the partnership reports ordinary income of $100,000 and a capital loss of $30,000, Sam's distributive share is $20,000 ordinary income and $12,000 capital loss. C) The partner's distributive share is the partner's share of any assets distributed by the partnership. D) All of the above are false.
A partner's distributive share includes the full amount of partnership ordinary income, which she must report on her tax return plus her share of separately stated taxable and tax-exempt items.
Identify which of the following statements is true. A) A partner's relief of debt is treated as if the partner receives a cash distribution. B) When a partnership assumes any liabilities of the transferor, the transferor has an increase in the basis of his or her partnership interest. C) Gain recognized by a contributing partner because of the assumption of liabilities by the partnership increases the partnership's basis in the contributed property. D) All of the above are false.
A partner's relief of debt is treated as if the partner receives a cash distribution.
Identify which of the following statements is true. A) A partnership cannot have an NOL carryback or carryforward. B) A partnership cannot make charitable contributions. C) Dividends received by a partnership from a domestic corporation are included in the partnership's ordinary income. D) All of the above are false.
A partnership cannot have an NOL carryback or carryforward.
Identify which of the following statements is true. A) Formation of a partnership requires legal documentation. B) An individual engaged in the active conduct of a business must elect not to be taxed as a partnership. C) A partnership exists as long as there are at least two individuals or entities engaged in the active conduct of a trade or business or a financial operation, and the business is not a trust or a corporation. D) All of the above are false.
A partnership exists as long as there are at least two individuals or entities engaged in the active conduct of a trade or business or a financial operation, and the business is not a trust or a corporation. Page Ref.: C:9-2 Objective: 1
Bob, Kara, and Mark are partners in the BKM Partnership. Bob is a 40% partner and has a June 30 tax year-end. Kara owns a 40% interest in the partnership and has a September 30 tax year-end, and Mark owns the remaining 20% interest and has an October 31 tax year-end. The partnership does not have a natural business year. What is the required tax year-end for the partnership (if no Sec. 444 election is made)? A) June 30 B) September 30 C) October 31 D) December 31
A) June 30 Explanation: A) The least aggregate deferral for the alternative tax year-ends is: June 30 2.0 September 30 3.8 October 31 7.6 December 31 8.0
The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date the partner transfers the asset to the partnership.
FALSE
Ali, a contractor, builds an office building for a construction partnership in exchange for a capital and profits interest in the partnership worth $500,000. Which of the following statements is correct? A) Ali recognizes $500,000 of ordinary income and the partnership can deduct $500,000 in the current year. B) Ali recognizes no income and the partnership can deduct nothing in the current year. C) Ali recognizes $500,000 ordinary income and the partnership deducts the $500,000 over the building's MACRS recovery period as a depreciation expense. D) Ali recognizes ordinary income in the current year in an amount equal to the depreciation deduction the partnership claims this year for the $500,000 capitalized amount.
Ali recognizes $500,000 ordinary income and the partnership deducts the $500,000 over the building's MACRS recovery period as a depreciation expense.
Identify which of the following statements is true. A) Although a partner's basis in the partnership cannot go below zero, a partner's book capital account (equity) may be negative. B) Tom purchased for cash a 40% capital, profits, and loss interest in the TP General Partnership. His $140,000 basis in his partnership interest includes his $45,000 share of recourse debt and his $30,000 of nonrecourse debt (that is not qualified nonrecourse real estate financing). His at-risk basis cannot be more than $65,000. C) Terri is a limited partner in the STU Partnership, which manufactures children's toys. Because the partnership is actively involved in a trade or business, Terri's income from the partnership is classified as active income for the passive activity loss rules. D) All of the above are false.
Although a partner's basis in the partnership cannot go below zero, a partner's book capital account (equity) may be negative.
Stella acquired a 25% interest in the STUV Partnership by contributing land having an adjusted basis of $32,000 and a fair market value of $100,000. The land was subject to a $48,000 mortgage, which was assumed by STUV. No other liabilities existed at the time of contribution. What is Stella's basis in her partnership interest? A) $0 B) $32,000 C) $52,000 D) $64,000
Answer: $0
David contributes investment land with a basis of $24,000 and an FMV of $40,000 to a partnership for a 10% interest in partnership capital, profits, and losses. The land is subject to a $30,000 recourse liability, which is assumed by the partnership. The partnership has other recourse liabilities of $18,000. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. David must recognize a
Answer: $1,200 capital gain.
Rashad contributes a machine having a basis of $30,000 and an FMV of $25,000 to a partnership in exchange for a 20% interest in partnership capital, profits, and losses. Prior to the contribution, the partnership had recourse liabilities of $20,000. The partnership assumes a $20,000 recourse liability that is owed by Rashad on the machine. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. Rashad's basis in his partnership interest is A) $11,000. B) $18,000. C) $22,000. D) $34,000.
Answer: $18,000
Allen contributed land, which was being held for sale to Allen's customers, to a partnership in exchange for a 20% interest. The partnership uses the land in its business for three years and then sells the property. When the property was contributed, it had a basis in Allen's hands of $500,000 and an FMV of $600,000. The partnership sells the land for $700,000. The gain reported by the partnership is A) $100,000 of ordinary income and $100,000 of Sec. 1231 gain. B) $100,000 of Sec. 1231 gain and $100,000 of capital gain. C) $200,000 of ordinary income. D) $200,000 of Sec. 1231 gain.
Answer: $200,000 of ordinary income. Amount realized ($700,000) - Adjusted basis ($500,000) = Ordinary income ($200,000) Land, which is held as inventory by Allen, retains its character as inventory in the hands of the partnership for five years after the contribution. Page Ref.: C:9-8 and C:9-9 Objective: 3
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. Because 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 these choices are correct.
B
Anthony's basis in the WAM Partnership interest was $200,000 just before he received a proportionate liquidating distribution consisting of investment land (basis of $90,000, fair market value of $100,000), and inventory (basis of $30,000, fair market value of $70,000). After the distribution, Anthony's recognized gain or loss and his basis in the land and inventory are: a. $80,000 loss; $90,000 (land); $30,000 (inventory). b. $0 gain or loss; $170,000 (land); $30,000 (inventory). c. $70,000 loss; $100,000 (land); $30,000 (inventory). d. $30,000 loss; $100,000 (land); $70,000 (inventory). e. None of these choices are correct.
B
Ryan is the sole shareholder of Sweetwater Apartments, an S corporation in Sour Lake, Texas. At a time when his stock basis is $10,000, the corporation distributes appreciated property worth $100,000 (basis of $10,000). There is no built-in gain. Ryan's taxable gain is: a. $100,000. b. $90,000. c. $10,000. d. $0.
B
Sharon contributed property to the newly formed QRST Partnership. The property had a $100,000 adjusted basis to Sharon and a $160,000 fair market value on the contribution date. The property was also encumbered by a $120,000 nonrecourse debt, which was transferred to the partnership on that date. Another partner, Rochelle, shares 30% of the partnership income, gain, loss, deduction, and credit. Under IRS regulations, Rochelle's share of the nonrecourse debt for basis purposes is: a. $120,000. b. $30,000. c. $100,000. d. $20,000. e. $36,000.
B
Which item does not appear on Schedule K of Form 1120S? a. Intangible drilling costs. b. Utilities expense. c. Foreign loss. d. Recovery of a tax benefit. e. All of these items appear on Schedule K.
B
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 these choices are correct.
B
1. Corporations are legally formed by filing articles of organization with the state in which the corporation will be created. T/F
FALSE Corporations file articles of incorporation.
A calendar year C corporation reports a $41,000 NOL in 2011, but it elects S status for 2012 and generates an NOL of $30,000 in that year. At all times during 2012, the stock of the corporation was owned by the same 10 shareholders, each of whom owned 10% of the stock. Kris, one of the 10 shareholders, holds an S stock basis of $2,300 at the beginning of 2012. How much of the 2012 loss, if any, is deductible by Kris? a. $7,100. b. $0. c. $3,000. d. $2,300.
D
Grams, Inc., a calendar year S corporation, reports $20,000 DPGR and $15,000 of wages, and the S corporation's QPAI is $5,000. Janet has a 40% interest in the S corporation. All expenses that reduce DPGR are from wages, and all wages paid relate to DPGR. How much QPAI and wages are allocated to Janet? a. None. b. $5,000 and $20,000. c. $5,000 and $15,000. d. $2,000 and $6,000.
D
On January 1, 2012, Zundel, Inc., an electing S corporation, has $4,000 of AEP and a balance of $10,000 in AAA. Zundel has two shareholders, Erin and Maine, each of whom owns 500 shares of Zundel's stock. Zundel's 2012 taxable income is $5,000. Zundel distributes $6,000 to each shareholder on February 1, 2012, and distributes another $3,000 to each shareholder on September 1. How is Erin taxed on this distribution? a. $500 dividend income. b. $3,000 dividend income. c. $1,000 dividend income. d. $1,500 dividend income.
D
Which of the following partnership owners is personally liable for the entity's debts to general creditors? a. A limited partner in a limited partnership. b. A partner in a limited liability partnership. c. A member of a limited liability company. d. A general partner in a limited partnership. e. None of these owners are personally liable for entity debts.
D
A partner's "distributive share" is the partner's share of any assets distributed by the partnership.
FALSE
Identify which of the following statements is true. A) Distribution of partnership income in the form of cash to partners is generally tax-free to the partners and the partnership. B) When partners receive cash distributions from the partnership, they pay taxes on those distributions. C) If money distributions exceed the partner's basis in the partnership interest, the partner would have to recognize gain on the distribution from the partnership. Such gain is usually an ordinary gain. D) All of the above are true.
Distribution of partnership income in the form of cash to partners is generally tax-free to the partners and the partnership.
Yee manages Huang real estate, a partnership in which she is also a partner. She receives 40% of all partnership income before guaranteed payments, but no less than $80,000 per year. In the current year, the partnership reports $400,000 in ordinary income. What is Yee's distributive share and her guaranteed payment? A) Distributive Share Guaranteed Payment $80,000 $80,000 B) Distributive Share Guaranteed Payment $160,000 0 C) Distributive Share Guaranteed Payment $160,000 $80,000 D) Distributive Share Guaranteed Payment $160,000 $160,000
Distributive Share Guaranteed Payment $160,000 0
Yee manages Huang real estate, a partnership in which she is also a partner. She receives 40% of all partnership income before guaranteed payments, but no less than $80,000 per year. In the current year, the partnership reports $100,000 in ordinary income. What is Yee's distributive share and her guaranteed payment? A) Distributive Share Guaranteed Payment $40,000 0 B) Distributive Share Guaranteed Payment $40,000 $80,000 C) Distributive Share Guaranteed Payment $40,000 $40,000 D) Distributive Share Guaranteed Payment 0 $80,000
Distributive Share Guaranteed Payment $40,000 $40,000
Which statement is incorrect with respect to filing an S election? a. Form 2553 must be filed. b. The election may be filed in the previous year. c. An extension of time is available for filing Form 2553. d. All shareholders must consent. e. None of these statements is incorrect.
E
Which, if any, of the following can be an eligible shareholder of an S corporation? a. A child, age 10. b. A voting trust. c. The estate of a deceased shareholder. d. A resident alien. e. All of these choices can own S stock.
E
A partner's basis for his partnership interest can be negative.
FALSE
A partnership cannot make charitable contributions.
FALSE
A partnership must file Form 1065 only if its income exceeds $1,000.
FALSE
Identify which of the following statements is true. A) The Hunter Partnership has a net long-term capital gain of $4,000 and a net short-term capital loss of $1,000 for the current tax year. The gain and loss will be netted and the partners will include their proportionate share of the $3,000 net long-term capital gain on their return. B) The Right Partnership sells a delivery truck and recognizes a gain of $2,000, which represents depreciation recaptured under Sec. 1245. The $2,000 gain will retain its identity as a separately stated item. C) For tax purposes, the partnership takes a carryover basis in the contributed property that references the contributing partner's basis. D) All of the above are false.
For tax purposes, the partnership takes a carryover basis in the contributed property that references the contributing partner's basis.
When determining the guaranteed payment, which of the following statements is correct? A) If the distributive share is less than the guaranteed minimum amount, the guaranteed payment is equal to the difference between the distributive share and the guaranteed minimum amount. B) If the distributive share is greater than the guaranteed minimum amount, the guaranteed payment is equal to the difference between the distributive share and the guaranteed minimum amount. C) Guaranteed payments are payments determined with regard to the partnership income. D) The distinction between guaranteed payments and distributive shares is clear in practice.
If the distributive share is less than the guaranteed minimum amount, the guaranteed payment is equal to the difference between the distributive share and the guaranteed minimum amount.
Albert contributes a Sec. 1231 asset to a partnership on June 1 of this year in exchange for a 10% partnership interest. He had purchased the asset on March 1, 2002. His holding period for the partnership interest begins A) March 1, 2002. B) March 2, 2002. C) June 1 of the current year. D) June 2 of the current year.
March 1, 2002.
Nicholas, a 40% partner in Nedeau Partnership, gives one-half of his interest to his sister, Michelle. During the current year, Nicholas performs services for the partnership for which reasonable compensation is $80,000, but for which he accepts no pay. Nicholas and Michelle are each credited with a $100,000 distributive share, all of which is ordinary income. What are Nicholas' and Michelle's distributive share? A) Nicholas Michelle $100,000 $100,000 B) Nicholas Michelle $ 60,000 $ 60,000 C) Nicholas Michelle $180,000 $100,000 D) Nicholas Michelle $140,000 $ 60,000
Nicholas Michelle $140,000 $ 60,000 Answer: D Explanation: D) Total distributive shares ($100,000 × 2) $200,000 Minus: reasonable compensation for Nicholas 80,000 Income to allocate $120,000 Nicholas' distributive share [(20%/40%) × $120,000] + $80,000 = $140,000 Michelle's distributive share (20%/40%) × $120,000 = $60,000
Identify which of the following statements is true. A) The Fisher Partnership is owned equally by four individual partners. Two of the partners have fiscal years ending March 31 and two partners have fiscal years ending June 30. The partnership has a natural business year. The partnership must adopt a calendar year for tax reporting purposes unless a Sec. 444 election is made. B) Partnerships make most of the tax elections for the partnership rather than the partners. C) A partner can elect the depreciation method to be applied to the partner's share of the partnership's depreciable assets. D) All of the above are false.
Partnerships make most of the tax elections for the partnership rather than the partners.
Identify which of the following statements is true. A) Bob gives his 16-year-old daughter Michelle a 20% capital and profits interest in his accounting practice. She does no work for the partnership and is not involved at all with the operations of the partnership. In fact, she does not know that her dad transferred the interest in the partnership to her. If the partnership allocates an $8,000 distributive share of ordinary income to her, it is properly reported on Michelle's individual tax return. B) Valid family partnership partners may be subject to the "kiddie tax." C) Joan gives her daughter, Sarah, a 25% interest in a partnership that operates a steel mill. Sarah, age 19, was allocated $20,000 from the partnership as her share of the partnership ordinary income. The IRS will require the income to be included on Sarah's return. D) All of the above are false.
Valid family partnership partners may be subject to the "kiddie tax."
Henry has a 30% interest in the HMS Partnership's capital, profits, and losses computed after taking into account his guaranteed payment of $40,000. In the current year, HMS reports ordinary income of $30,000 and capital gains of $60,000 before taking into account Henry's guaranteed payment. What is the amount and character of all income or loss that Henry must report as a result of partnership activities? A) $40,000 guaranteed payment (ordinary income), $3,000 ordinary loss, $18,000 capital gain B) $40,000 guaranteed payment (ordinary income), $15,000 capital gain C) $40,000 guaranteed payment (ordinary income), $9,000 ordinary income, $6,000 capital gain D) $13,000 guaranteed payment (ordinary income), $6,001 ordinary income, $38,820 capital gain
What is the amount and character of all income or loss that Henry must report as a result of partnership activities? $40,000 guaranteed payment (ordinary income), $3,000 ordinary loss, $18,000 capital gain
Identify which of the following statements is true. A) The contribution of Sec. 1245 property to a partnership triggers recognition of ordinary income by the contributor at the time of the transfer. B) A partner may not recognize ordinary income when receiving a capital and profits interest in a partnership in exchange for services. C) When a partnership interest is given to a partner in exchange for services, the partnership can deduct or capitalize the FMV of the services, depending on the nature of the services. D) All of the above are false.
When a partnership interest is given to a partner in exchange for services, the partnership can deduct or capitalize the FMV of the services, depending on the nature of the services.
Bao had investment land that he purchased in 1990 for $80,000. Two years ago, when the land was contributed to a partnership, the FMV was $50,000. The land is inventory in the hands of the partnership. The partnership then sells the land in the current year for $46,000. The partnership's recognized loss is A) a $34,000 capital loss. B) a $34,000 ordinary loss. C) a $30,000 capital loss and a $4,000 ordinary loss. D) a $4,000 capital loss and a $30,000 ordinary loss.
a $30,000 capital loss and a $4,000 ordinary loss. Explanation: C) The $30,000 precontribution loss retains its character as a capital loss, but the loss accrued since the contribution date is ordinary loss. Page Ref.: C:9-9 Objective: 3
Karl arranges financing for a limited partnership to purchase real estate in exchange for a 50% interest in partnership profits. Two weeks later, Karl sells the profits interest for $30,000. In this tax year, Karl must recognize A) no gain or loss. B) a $30,000 short-term capital gain. C) a $30,000 ordinary income. D) a $30,000 Sec. 1231 gain.
a $30,000 ordinary income.
For a 30% interest in partnership capital, profits, and losses, Carol contributes a machine with a basis of $40,000 and an FMV of $80,000. The partnership assumes a $70,000 recourse liability on the machine. At the time of the contribution, the partnership had recourse liabilities of $10,000. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. Following the contribution, Carol has A) a capital loss due to the contribution of $6,000 and a zero basis in the partnership interest. B) a capital gain due to the contribution of $6,000 and a zero basis in the partnership interest. C) a $34,000 basis in the partnership interest and no gain or loss. D) a $43,000 basis in the partnership interest and no gain or loss.
a capital gain due to the contribution of $6,000 and a zero basis in the partnership interest.
In computing the ordinary income of a partnership, a deduction is allowed for A) net Sec. 1231 losses. B) bad debts. C) foreign income taxes paid. D) charitable contributions.
bad debts.
In January of this year, Arkeva, a calendar-year taxpayer, receives a $50,000 guaranteed payment from NFR Partnership. NFR deducted the payment during its tax year ending November 30 of last year. What tax year must Arkeva report her guaranteed payment in? A) She may elect either year. B) last year C) current year D) She does not need to report guaranteed payments on her return.
last year
Yong contributes a machine having an adjusted basis of $20,000 and an FMV of $25,000 for a 10% partnership interest. Yong had taken $10,000 of depreciation prior to the contribution. The partnership has no liabilities. As a result of the contribution, Yong must recognize A) no gain or loss. B) a $5,000 Sec. 1245 gain. C) a $5,000 capital gain. D) $10,000 ordinary income.
no gain or loss. Explanation: A) No gain or loss is recognized at the time of the contribution.