Chapter 9 FLOW
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. a $5,000 Sec. 1245 gain. B. no gain or loss. This is the correct answer. C. a $5,000 capital gain. D. $10,000 ordinary income.
no gain or loss.
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 This is the correct answer. B. $32,000 C. $52,000 D. $64,000
0
Identify which of the following statements is true. A. 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. This is the correct answer. B. An individual engaged in the active conduct of a business must elect not to be taxed as a partnership. C. Formation of a partnership requires legal documentation. 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.
Identify which of the following statements is false. A. 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. This is the correct answer. B. Partners must make up negative balances in their capital accounts upon liquidation of the partnership. C. 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. D. In order to shift income/loss between partners, there must be substantial economic effect.
A. 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.
Yvonne and Larry plan to begin a business that will grow plants for sale to retail nurseries. They expect to have substantial losses for the first three years of operations while they develop their plants and their sales operations. Both Yvonne and Larry have substantial interest income, and both expect to work full-time in this new business. List three advantages for operating this business as a partnership instead of a C corporation.
Advantages include (1) partnerships are not subject to tax, thereby eliminating the problem of double taxation that exists for C corporations, (2) partners may divide the partnership's profit or loss among themselves without regard to their proportionate capital interests, (3) under the conduit principle of taxation, partnership losses and other items receiving special tax treatment flow through to the partners.
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 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. C. Ali recognizes no income and the partnership can deduct nothing in the current year. D. Ali recognizes $500,000 ordinary income and the partnership deducts the $500,000 over the building's MACRS recovery period as a depreciation expense.
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. All of the above are false. This is the correct answer. B. A limited partnership cannot have a corporate general partner. C. A limited partnership must have at least two general partners. D. All of the partners in a limited partnership have limited liability.
All of the above are false.
The definition of a partnership does not include A. a pool. B. a group. C. a syndicate. D. All of the above are included.
All of the above are included.
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. August 2 of the current year. This is the correct answer. C. August 1 of the current year. D. July 3 of last year.
August 2 of the current year.
dentify which of the following statements is true. A. The partner's distributive share is the partner's share of any assets distributed by the partnership. 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. 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. This is the correct answer. 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
How will a partner's distributive share be determined if the partner sells one-half of his or her beginning-of-the-year partnership interest at the beginning of the tenth month of the partnership's tax year? A. A partner's distributive share will equal the sum of the partner's earnings for one-half of his or her beginning-of-the-year interest for the full year based on the one-half after the sale. B. A partner's distributive share will equal the sum of the partner's earnings for one-half of his or her end-of-the-year interest remaining after the sale for the full year because the distributive share is based on the ownership at the end of the year. C. A partner's distributive share will equal the sum of the partner's earnings for one-half of his or her beginning-of-the-year interest for the full year and the partner's earnings for the other one-half of his or her beginning-of-the year interest for nine months. This is the correct answer. D. A partner's distributive share will equal the sum of the partner's earnings for one-half of his or her beginning-of-the-year interest for the full year because the distributive share is based on the ownership at the beginning of the year.
A partner's distributive share will equal the sum of the partner's earnings for one-half of his or her beginning-of-the-year interest for the full year and the partner's earnings for the other one-half of his or her beginning-of-the year interest for nine months.
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. This is the correct answer. B. Gain recognized by a contributing partner because of the assumption of liabilities by the partnership increases the partnership's basis in the contributed property. C. When a partnership assumes any liabilities of the transferor, the transferor has an increase in the basis of his or her partnership interest. D. All of the above are false.
A partner's relief of debt is treated as if the partner receives a cash distribution.
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. $23,000 ordinary income, $1,000 Sec. 1231 loss B. $20,000 ordinary income, $3,000 LTCG, $1,000 Sec. 1231 loss This is the correct answer. C. $19,000 ordinary income, $3,000 LTCG D. $22,000 ordinary income
B. $20,000 ordinary income, $3,000 LTCG, $1,000 Sec. 1231 loss
Bob and Carol want to open a bed and breakfast inn as soon as they buy and renovate a turn-of-the-century home. What would be the major disadvantage of using a general partnership rather than a corporation for this business? Should they consider any other form for structuring their business? Should they consider any other form for structuring their business? A. Yes. They may want to consider a limited liability limited partnership (LLLP), if available in the taxpayer's state. B. Yes. They may want to consider a limited liability company (LLC). C. No. A general partnership provides the best protection from both liabilities and taxes. D. Both A. and B.
Both A. and B.
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. $12,000 ordinary income C. $4,000 short−term capital gain This is the correct answer. D. $4,000 ordinary income
C. $4,000 short−term capital gain
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. $25,000 capital gain B. $10,000 ordinary income C. $15,000 capital gain and $10,000 ordinary income D. $25,000 ordinary income
D. $25,000 ordinary income
Identify which of the following statements is true. A. 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. B. When partners receive cash distributions from the partnership, they pay taxes on those distributions. C. Distribution of partnership income in the form of cash to partners is generally tax−free to the partners and the partnership. This is the correct answer. D. All of the above are true.
Distribution of partnership income in the form of cash to partners is generally tax
Identify which of the following statements is true. A. 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. B. A contribution of services for a partnership interest is a tax−free transaction. C. For federal income tax purposes, formation of a partnership is governed by Sec. 721. This is the correct answer. D. All of the above are false.
For federal income tax purposes, formation of a partnership is governed by Sec. 721.
Identify which of the following statements is true. A. 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. B. For federal income tax purposes, formation of a partnership is governed by Sec. 721. This is the correct answer. C. A contribution of services for a partnership interest is a tax−free transaction. D. All of the above are false.
For federal income tax purposes, formation of a partnership is governed by Sec. 721.
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. This is the correct answer. 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.
Sam wants to help his brother, Lou, start a new business. Lou is a capable auto mechanic but has little business sense, so he needs Sam to help him make business decisions. Should this partnership be arranged as a general partnership or a limited partnership? Why? Should they consider any other form for structuring their business? A. General partnership because both brothers are starting the business. The brothers can consider a corporation to ensure ease of new owners joining at a later date. B. General partnership because Sam will be providing business advice. The brothers may want to consider an LLC to provide limited liability. This is the correct answer. C. Limited partnership because both brothers are starting the business. The brothers can consider an LLC to provide limited liability. D. Limited partnership because Sam will be providing business advice. The brothers may want to consider a corporation to allow for a separate tax identity.
General partnership because Sam will be providing business advice. The brothers may want to consider an LLC to provide limited liability.
Jane contributes valuable property to a partnership in exchange for a general partnership interest. The partnership also assumes the recourse mortgage Jane incurred when she purchased the property two years ago. a. How will the liability affect the amount of gain that Jane must recognize? b. How will it affect her basis in the partnership interest? A. There is no effect on her basis in the partnership interest. B. Her basis in the partnership interest will be decreased by the amount of the liability assumed by the other partners. This is the correct answer. C. Her basis in the partnership interest will be decreased by the amount of the liability that she assumes. D. Her basis in the partnership interest will be increased by the amount of the liability assumed by the other partners.
Her basis in the partnership interest will be decreased by the amount of the liability assumed by the other partners.
Jane contributes valuable property to a partnership in exchange for a general partnership interest. The partnership also assumes the recourse mortgage Jane incurred when she purchased the property two years ago. a. How will the liability affect the amount of gain that Jane must recognize? b. How will it affect her basis in the partnership interest? a. How will the liability affect the amount of gain that Jane must recognize? A. No gain or loss is recognized on the contribution of property regardless of whether or not the partnership assumes a liability associated with the contributed property. B. Jane recognizes gain on the contribution of property and assumption of a liability if the amount of the liability assumed by the other partners exceed Jane's basis in the contributed property plus her share of existing partnership liabilities. This is the correct answer. C. Jane recognizes no gain or loss on the contribution of property and the partnership's assumption of the related liability. Jane would only have recognized a gain if the property had no liability associated it. D. Jane recognizes a gain in an amount equal to the liability assumed by the partnership.
Jane recognizes gain on the contribution of property and assumption of a liability if the amount of the liability assumed by the other partners exceed Jane's basis in the contributed property plus her share of existing partnership liabilities.
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. September 30 B. December 31 C. October 31 D. June 30
June 30
Bob and Carol want to open a bed and breakfast inn as soon as they buy and renovate a turn-of-the-century home. What would be the major disadvantage of using a general partnership rather than a corporation for this business? Should they consider any other form for structuring their business? What would be the major disadvantage of using a general partnership rather than a corporation for this business? A. Lack of protection from capital gains tax. B. The cost to set up the general partnership versus a corporation. C. The cost to file tax returns. D. Lack of limited liability.
Lack of limited liability.
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. This is the correct answer. B. March 2, 2002. C. June 1 of the current year. D. June 2 of the current year.
March 1, 2002.
Identify which of the following statements is true. A. A partner can elect the depreciation method to be applied to the partner's share of the partnership's depreciable assets. B. Partnerships make most of the tax elections for the partnership rather than the partners. This is the correct answer. C. 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. 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. Partnership gains and losses from two different casualty and theft occurrences in one year are passed through to the partners as two separate items. B. The amount and character of any gains/losses are determined at the partnership level. This is the correct answer. C. Tax−exempt interest received by a partnership is taxable to the partners if distributed. D. All of the above are false.
The amount and character of any gains/losses are determined at the partnership level.
Identify which of the following statements is true. A. A partner may not recognize ordinary income when receiving a capital and profits interest in a partnership in exchange for services. B. 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. This is the correct answer. C. The contribution of Sec. 1245 property to a partnership triggers recognition of ordinary income by the contributor at the time of the transfer. 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.
Doug contributes services but no property to the CD Partnership upon its formation. What are the tax implications of his receiving only a profits interest versus his receiving a capital and profits interest? A. Whether Doug receives a profits interest or a capital and profits interest, he theoretically should report the value of the property he receives for services as ordinary income. This is the correct answer. B. Doug is not required to report any income, whether he receives a profits interest or a capital and profits interest. C. Whether Doug receives a profits interest or a capital and profits interest, he should report the value of the property he receives for services as a capital gain. D. Doug is not required to report any income for the first five years.
Whether Doug receives a profits interest or a capital and profits interest, he theoretically should report the value of the property he receives for services as 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 $34,000 basis in the partnership interest and no gain or loss. B. a capital loss due to the contribution of $6,000 and a zero basis in the partnership interest. C. a capital gain due to the contribution of $6,000 and a zero basis in the partnership interest. This is the correct answer. 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.
Why did Congress enact the 20% qualified business income deduction? Congress enacted the qualified business income deduction to give pass-through entity owners A. a tax rate somewhat comparable to the 21% individual tax rate. B. a tax rate somewhat comparable to the 25% corporate tax rate. Thus, Congress did not want to give a tax break to C corporations while not giving a tax break to businesses operating in a pass-through form. C. a favorable tax advantage over the C corporations. D. a tax rate somewhat comparable to the 21% corporate tax rate. Thus, Congress did not want to give a tax break to C corporations while not giving a tax break to businesses operating in a pass-through form.
a tax rate somewhat comparable to the 21% corporate tax rate. Thus, Congress did not want to give a tax break to C corporations while not giving a tax break to businesses operating in a pass-through form.
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 ordinary loss. B. a $34,000 capital loss. C. a $4,000 capital loss and a $30,000 ordinary loss. D. a $30,000 capital loss and a $4,000 ordinary loss.
a $30,000 capital loss and a $4,000 ordinary loss.
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. a $30,000 Sec. 1231 gain. B. a $30,000 short−term capital gain. C. a $30,000 ordinary income. This is the correct answer. D. no gain or loss.
a $30,000 ordinary income.
In computing the ordinary income of a partnership, a deduction is allowed for A. foreign income taxes paid. B. net Sec. 1231 losses. C. charitable contributions. D. bad debts.
bad debts.
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 A. $1,200 capital gain. This is the correct answer. B. $1,200 capital loss. C. $3,000 capital gain. D. $3,000 capital loss.
$1,200 capital gain.
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. $12,000. This is the correct answer. B. $13,200. C. $10,800. D. $30,000.
$12,000.
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. $12,500. This is the correct answer. B. $8,500. C. $6,800. D. $10,000.
$12,500.
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. $30,000. C. $14,000. This is the correct answer. D. $12,000.
$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. $16,470. This is the correct answer. B. $21,900. C. $16,380. D. $16,425.
$16,470.
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. $34,000. B. $22,000. C. $18,000. This is the correct answer. D. $11,000.
$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. $200,000 of Sec. 1231 gain. B. $200,000 of ordinary income. This is the correct answer. C. $100,000 of Sec. 1231 gain and $100,000 of capital gain. D. $100,000 of ordinary income and $100,000 of Sec. 1231 gain.
$200,000 of ordinary income.
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. $3,900. This is the correct answer. D. $3,500.
$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. $30,000 This is the correct answer. B. $10,000 C. $5,000 D. $20,000
$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. $30,000. This is the correct answer. B. $20,000. C. $10,000. D. $40,000.
$30,000.
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. $50,000 B. $30,000 C. $60,000 This is the correct answer. D. $40,000
$60,000
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. $80,000 B. $60,000 C. $86,000 This is the correct answer. D. $140,000
$86,000
