Chapter 21 Set Questions

A special entity that offers the flow-through treatment of partnership taxation and the limited liability of a corporation

LLC

A general partnership that has filed under state law to be treated as a limited liability partnership. All partners are eligible to participate in partnership management.

LLP

Has at least one general partner and one or more limited partners. General partners participate in management. limited partners are typically investors and cannot participate in management

Limited Partnership

An example of the "aggregate concept" underlying partnership taxation is the fact that the partners (rather than the partnership) pay tax on partnership income. True or False?

True

An example of the "entity concept" underlying partnership taxation is the fact that the partnership must file an information tax return. True or False

True

Each partner's share of the partnership items are reported on that partner's Schedule K-1. True or False?

True

If a partner contributes depreciable property to the partnership, the partnership continues to use the depreciation schedule and calculations the partner used True or False

True

Neither the partner nor the partnership recognizes any realized gain or loss arising on contribution of property to a partnership. True or False?

True

Partners basis is reduced by cash distribution? T or F

True

Ryan is a 25% partner in the ROCC Partnership. At the beginning of the tax year, Ryan's basis in the partnership interest was $90,000, including his share of partnership liabilities. During the current year, ROCC reported net ordinary income of $200,000. In addition, ROCC distributed $35,000 to each of the partners ($120,000 total). At the end of the year, Ryan's share of partnership liabilities increased by $10,000. Ryan's basis in the partnership interest at the end of the year is:

$115,000 (Ryan's $90,000 basis is increased by his $10,000 share of increased partnership liabilities and is decreased by the $35,000 distribution he received. His basis is also increased by his $50,000 share of partnership income ($200,000 × 25%). ( + contr, + debt, + income, - distr, - debt, - ded/loss)

Partnerships include the following entities: 1. 2. 3. 4. 5.

- Syndicate - Group - Pool - Joint venture, etc. -individuals

A partnership can use the cash method if 1. 2.

1. a C partner is a personal service corporation 2. the partnership has average annual gross receipts of 25 million or less for all prior three-year tax periods

Hart's adjusted basis of his interest in a partnership was $30,000. He received a nonliquidating distribution of $24,000 cash plus a parcel of land with a fair market value and partnership basis of $9,000. Hart's basis for the land is: A $9,000 B $6,000 C $3,000 D $0

30000-24000 = 6000 B

At the beginning of the year, Aretha's basis in the A&B Partnership interest is $60,000. She receives a proportionate nonliquidating distribution from the partnership consisting of $10,000 of cash, unrealized accounts receivable (basis of $0, fair market value of $30,000), and inventory (basis of $10,000, fair market value of $20,000). After the distribution, Aretha's bases in the accounts receivable, inventory, and partnership interest are: a. $0; $10,000; and $40,000. b. $30,000; $20,000; and $0. c. $0; $20,000; and $30,000. d. $30,000; $10,000; and $10,000. e. None of these choices are correct.

A Aretha's $60,000 basis is first reduced by the cash distribution of $10,000 to $50,000. The accounts receivable and inventory are distributed next and take carryover bases of $0 and $10,000, respectively. This reduces the basis in the partnership interest to $40,000.

Arthur is a 30 percent partner in the CAR Partnership. At the beginning of the tax year, Arthur's basis in the partnership interest was $60,000, including his share of partnership liabilities. During the current year, CAR reported net ordinary income of $40,000. In addition, CAR distributed $5,000 to each of the partners ($15,000 total). At the end of the year, Arthur's share of partnership liabilities increased by $20,000. Arthur's basis in the partnership interest at the end of the year is: a. $87,000. b. $60,000. c. $120,000. d. $75,000. e. None of these choices are correct.

A Arthur's $60,000 basis is increased by his $20,000 share of increased partnership liabilities and is decreased by the $5,000 distribution he received. His basis is also increased by his $12,000 share of partnership income ($40,000 × 30%).

Swift, Inc., Heron, Inc., and Canary formed a general partnership. Swift owns a 50 percent interest, and Heron and Canary each own 25 percent interests. Swift, Inc., files its tax return on a July 1-June 30 fiscal year; Heron, Inc., files on a September 1-August 31 fiscal year; and Canary is a calendar year taxpayer. Which of the following statements is true regarding the taxable year the partnership can choose? a. The partnership can request permission from the IRS to use a January 31 fiscal year if it can establish that is a natural business year. b. The partnership cannot use the "least aggregate deferral" method to determine its taxable year. c. The partnership must choose the calendar year because it has no principal partners. d. The partnership must choose a June 30 year-end because Swift, Inc., is a majority partner. e. None of these choices are correct.

A Because the partnership does not have any majority partners and because the principal partners do not all have the same taxable year, the least aggregate deferral rule determines the partnership's "required" taxable year. The partnership may be able to obtain IRS permission to adopt a different taxable year if it can demonstrate to the IRS that it has a substantial business purpose for choosing that year, such as having a "natural business year." The partnership can also make an election under § 444 (not a choice in this problem).

Cornelius is a 25 percent owner in the NICE LLC (a calendar year entity). At the end of the last tax year, Cornelius's basis in his interest was $40,000, including his $10,000 share of LLC liabilities. On July 1 of the current tax year, Cornelius sells his LLC interest to Inga for $50,000 cash. In addition, Inga assumes Cornelius's share of LLC liabilities, which, at that date, was $15,000. During the current tax year, NICE's taxable income is $100,000 (earned evenly during the year). Cornelius's share of the LLC's unrealized receivables is valued at $5,000 ($0 basis). At the sale date, what is Cornelius's basis in his LLC interest, how much gain or loss must he recognize, and what is the character of the gain or loss? a. $57,500 basis; $5,000 ordinary income and $2,500 capital gain. b. $65,000 basis; $15,000 capital gain. c. $55,000 basis; $5,000 capital loss. d. $65,000 basis; no gain or loss. e. $57,500 basis; $2,500 ordinary income and $5,000 capital loss.

A Cornelius's beginning $40,000 basis is increased by the $5,000 increase in his share of LLC liabilities and by his $12,500 share of LLC income for the year ($100,000 × 25% × 1/2 year), for a basis of $57,500 at the date the interest is sold. As the selling price of the interest was $65,000 ($50,000 cash plus $15,000 assumption of liabilities), Cornelius's total gain is $7,500. Because his share of the LLC's hot asset is $5,000, he has $5,000 of ordinary income and the remaining $2,500 is capital gain.

Erica is a limited partner in the ART Partnership, which is not publicly traded. Her allocable share of ART's passive ordinary losses from a nonrealty activity for the current year is ($70,000). Erica has a $50,000 adjusted basis (outside basis) for her interest in ART (before deduction of any of the passive losses). Her amount "at risk" under § 465 is $40,000 (before deduction of any of the passive losses). She also has $35,000 of passive income from other sources. How much of her ($70,000) allocable loss can Erica deduct on her current year's tax return? a. $35,000. b. $50,000. c. $40,000. d. $70,000. e. None of these choices are correct.

A The $70,000 passive loss must be limited first by Erica's $50,000 outside basis for her partnership interest. The "at risk" rules further limit her deduction to $40,000, the amount she is "at risk" in ART. She can deduct $35,000 of this loss because that is the amount she has of passive income from other sources.

Petra's basis was $50,000 in the PAM Partnership interest just before she received a proportionate nonliquidating distribution consisting of land held for investment (basis of $40,000, fair market value of $60,000) and inventory (basis of $40,000, fair market value of $40,000). After the distribution, Petra's bases in the land and inventory, respectively, are: a. $10,000 and $40,000. b. $25,000 and $25,000. c. $40,000 and $10,000. d. $40,000 and $40,000. e. None of these choices are correct.

A Under the ordering rules for distributions, cash is distributed first, followed by unrealized receivables and inventory; other assets are distributed last. For Petra, the inventory is distributed first and takes a carryover basis of $40,000. This reduces Petra's basis to $10,000. The land is distributed next and takes the $10,000 remaining basis.

PQR Partners reported the following items: Sales revenue $720,000 Interest income 5,000 Long-term capital gain 8,000 Cost of goods sold 200,000 Wages paid to employees 100,000 Cash distributions to partners 20,000 Other operating expenses 30,000 How much will PQR report as ordinary business income? a. $390,000. b. $733,000. c. $403,000. d. $383,000. e. $720,000.

A. 390000 The partnership's ordinary business income is $390,000 ($720,000 sales revenue - $200,000 cost of goods sold - $100,000 wages paid to employees - $30,000 other operating expenses).

In a general partnership who is responsible for the entity debts?

All partners because all general partners and general partners have tax debt liability

Gearty's adjusted basis in Worthington Company, a partnership, was $18,000 at the time Gearty received the following nonliquidating distributions of partnership property: Cash $10,000 Land Adjusted basis 14,000 Land Fair market value20,000 What is Gearty's tax basis in the land received from the partnership? a. $0 b. $8,000 c. $14,000 d. $20,000

Answer: $8,000 Gearty's tax basis in land received from the partnership is $8,000. General rule:The basis of property received in a nonliquidating distribution will be the same as the basis of the property in the hands of the partnership immediately prior to the distribution. Exception:The basis of distributed property assigned under the general rule above may not exceed the basis of the partner's entire interest in the partnership. Gearty's tax basis in the land: Gearty's basis in partnership before distribution$ 18,000 Less: Cash received(10,000) Gearty's remaining basis in Worthington Company$ 8,000

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

Zion Corporation was formed on July 1, 2018 and started business on November 1. Zion adopts a calendar year. During 2018, Zion incurred $40,000 in legal fees for drafting the LLC's operating agreement and $12,000 in accounting fees for tax advice of an organizational nature. If Zion wants to take the largest deduction for organizational expenses, how much can they deduct for 2018? a. $2,167. b. $3,544. c. $5,522. d. $4,633. e. $5,000.

B The partnership may deduct up to $5,000 of organizational expenditures in the year in which it begins business. This amount must be reduced, however, by organizational expenditures that exceed $50,000. Excess expenditures are amortizable over 180 months, beginning with the month in which the partnership begins business. All of November and all of December = 2mths Total organizational expenses $52,000 Less (50,000) Excess $2,000 Maximum amount deductible $5,000 Less (2,000) Permitted deduction $3,000 Amortization ($52,000 - $3,000)/180 months × 2 months = 544 Total deduction $3,544

Tonesha has an outside basis of $60,000 in the TREE Partnership as of December 31 of the current year. On that date, the partnership liquidates and distributes to Tonesha a proportionate distribution of $20,000 cash and inventory with an inside basis to the partnership of $18,000 and a fair market value of $22,000. In addition, Tonesha receives a desk (not inventory) that has an inside basis and fair market value of $200 and $350, respectively. None of the distribution is for partnership goodwill. How much gain or loss will Tonesha recognize on the distribution, and what basis will she take in the desk? a. $0 loss; $200 basis. b. $0 loss; $22,000 basis. c. $21,800 loss; $200 basis. d. $21,650 loss; $350 basis. e. None of these choices are correct.

B The cash and inventory are distributed first and take bases of $20,000 and $18,000, respectively. The partner cannot recognize a loss on the distribution because the desk is a § 1231 asset (depreciable property used in a trade or business). Only cash, inventory, and receivables can be distributed if the partner is to recognize a loss. Therefore, the desk must take a substituted basis of $22,000 to the partner, which is the amount of the partner's remaining outside basis when the desk is distributed.

George sells one parcel of land (basis of $100,000) for its fair market value of $160,000 to a partnership in which he owns a 60 percent capital interest. George held the land for investment purposes. The partnership is in the real estate development business and will build residential housing (for sale to customers) on the land. George will recognize: a. $36,000 ordinary income. b. $60,000 ordinary income. c. $36,000 capital gain. d. $60,000 capital gain. e. $0 gain or loss.

B If a partner owns more than a 50 percent interest in a partnership, any property sold to the partnership at a gain results in ordinary income to the selling partner, unless the property was a capital asset both to the partner and the partnership. In this case, the land was a capital asset to George, but it was inventory to the partnership, so the gain is treated as ordinary income. The gain on the sale is $60,000 ($160,000 - $100,000); as this is a sale of George's asset, the entire gain is taxed to him.

Benji owns a 25 percent interest in a continuing partnership. The partnership distributes a $20,000 year-end cash bonus to all the partners. In a proportionate nonliquidating distribution, the partnership also distributed property (basis of $2,000, fair market value of $3,000) to Benji. Immediately before the distribution, Benji's basis in the partnership interest was $30,000. As a result of the distribution, Benji recognizes: a. Ordinary loss of $7,000. b. No gain or loss. c. Ordinary loss of $8,000. d. Capital loss of $7,000. e. Capital loss of $8,000.

B On a nonliquidating distribution, the partner does not recognize a loss. Instead, the basis in the partnership interest is reduced by the cash received and by the partnership's basis in the property received. Benji's basis in his partnership interest immediately following the distribution is $8,000 ($30,000 - $20,000 - $2,000).

At the beginning of the year, Penny's "tax basis" capital account balance in the PAL Partnership was $60,000. During the tax year, Penny contributed property with a basis of $10,000 and a fair market value of $30,000. Her share of the partnership's ordinary income and separately stated income and deduction items was $26,000. At the end of the year, the partnership distributed $10,000 of cash to Penny. Also, the partnership allocated $15,000 of recourse debt and $25,000 of nonrecourse debt to Penny. What is Penny's ending capital account balance determined using the "tax basis" method? a. $96,000. b. $86,000. c. $136,000. d. $101,000. e. $126,000.

B Penny's beginning capital account balance of $60,000 is "rolled forward" by adding the basis of the property she contributed ($10,000) and her share of partnership income ($26,000), and subtracting the distribution to her ($10,000). Liabilities are not included in the partner's capital account.

Tyler and Josie formed a partnership. Tyler received a 25 percent interest in partnership capital and profits in exchange for land with a basis of $40,000 and a fair market value of $60,000. Josie received a 75 percent interest in partnership capital and profits in exchange for $180,000 of cash. Three years after the contribution date, the land contributed by Tyler is sold by the partnership to a third party for $76,000. How much taxable gain will Tyler recognize from the sale? a. $0. b. $24,000. c. $36,000. d. $9,000. e. None of these choices are correct.

B Section 704(c)(1)(A) requires that any precontribution gain must be allocated entirely to Tyler. Therefore, Tyler is allocated the $20,000 precontribution ("built-in") gain and 25 percent ($4,000) of the $16,000 postcontribution gain.

Stephen's basis in the SEE Partnership interest was $100,000 just before he received a proportionate liquidating distribution consisting of investment land (basis of $30,000, fair market value of $40,000) and inventory (basis of $30,000, fair market value of $70,000). After the distribution, Stephen's recognized gain or loss and his basis in the land and inventory are: a. $0 gain or loss; $30,000 (land); $70,000 (inventory). b. $0 gain or loss; $70,000 (land); $30,000 (inventory). c. $40,000 loss; $30,000 (land); $30,000 (inventory). d. $10,000 gain; $40,000 (land); $70,000 (inventory). e. None of these choices are correct.

B Under the ordering rules for distributions, cash is distributed first, followed by unrealized receivables and inventory; other assets are distributed last. For Stephen, the inventory is distributed first and takes a carryover basis of $30,000. This reduces Stephen's basis to $70,000. The land is distributed next. Because this is a liquidating distribution, the land absorbs Stephen's remaining basis in SEE of $70,000. Stephen cannot claim a loss because he has received property other than cash, inventory, and unrealized receivables.

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

Sally and Roberto formed the RT Partnership four years ago. Because they decided the company needed some expertise in multimedia presentations, they offered Katie a 1/3 interest in partnership capital if she would come to work for the partnership. She will also receive a 25 percent interest in future partnership profits. On July 1 of the current year, the unrestricted partnership capital interest (fair market value of $25,000) was transferred to Katie. How should Katie treat the receipt of the partnership interest in the current year? a. $25,000 short-term capital gain. b. $25,000 long-term capital gain. c. $25,000 ordinary income. d. Nontaxable. e. None of these choices are correct.

C

Jane contributed property with a basis of $40,000 and a value of $50,000 to the JO Partnership in exchange for a 20 percent interest in partnership capital and profits. During the first year of partnership operations, JO had net taxable income of $30,000 and tax-exempt interest income of $10,000. The partnership distributed $10,000 cash to Jane. On January 1 of year 2, Jane sells her partnership interest for $49,000. What is Jane's gain or loss on the sale? a. $0. b. $9,000 gain. c. $11,000 gain. d. $9,000 loss. e. $11,000 loss

C Jane is a 20 percent partner and shares in 20 percent of the partnership's taxable and tax-exempt income, or $8,000. Her basis is reduced by the cash distribution during the year. Jane's ending basis is calculated as follows: $40,000 beginning basis + $8,000 [20% × ($30,000 + $10,000)] - $10,000 distribution. Selling price of $49,000 less a basis of $38,000 equals an $11,000 gain.

Manuel contributed property to the newly formed HOME Partnership. The property had a $100,000 adjusted basis to Manuel 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, Olivia, shares 30 percent of the partnership income, gain, loss, deduction, and credit. Under IRS Regulations, Olivia's share of the nonrecourse debt for basis purposes is: a. $100,000. b. $20,000. c. $30,000. d. $120,000. e. $36,000.

C The § 704(c) portion of the debt must first be allocated to the contributing partner, Manuel. The § 704(c) portion of the nonrecourse debt that is allocated to Manuel under this rule is $20,000 ($120,000 - $100,000 basis). The rest of the nonrecourse debt is allocated in the manner that the partners share in the deductions that relate to the debt. Therefore, Olivia shares in $30,000 ($100,000 × 30%) of the remaining nonrecourse debt.

Book income is reconciled to taxable income on Schedule: a. M-2. b. L. c. M-1. d. K-2. e. None of these choices are correct.

C Book income is reconciled to taxable income on either Schedule M-1 or Schedule M-3. Schedule M-1 is found on page 5 of Form 1065. Schedule M-3 is a separate three-page form and is often required (in lieu of Schedule M-1) for larger partnerships.

Gray is a 50% partner in Fabco Partnership. Gray's tax basis in Fabco at the beginning of the year was $5,000. Fabco made no distributions to the partners during the year and recorded the following: Ordinary income $ 20,000 Tax exempt income 8,000 Portfolio income 4,000 What is Gray's tax basis in Fabco at the end of the year? a. $16,000 b. $10,000 c. $21,000 d. $12,000

C Choice "C" is correct. A partner's basis is increased by the partner's share of partnership ordinary income, separately stated income, and tax exempt income. $5,000 + 50% x ($20,000 + $8,000 + $4,000)=$21,000.

Jane contributed property with a basis of $40,000 and a value of $50,000 to the JO Partnership in exchange for a 20 percent interest in partnership capital and profits. During the first year of partnership operations, JO had net taxable income of $30,000 and tax-exempt interest income of $10,000. The partnership distributed $10,000 cash to Jane. Jane's adjusted basis (outside basis) for her partnership interest at year-end is: a. $70,000. b. $36,000. c. $38,000. d. $60,000. e. None of these choices are correct.

C Jane is a 20 percent partner and shares in 20 percent of the partnership's taxable and tax-exempt income, or $8,000. Her basis is reduced by the cash distribution during the year. Jane's ending basis is calculated as follows: $40,000 beginning basis + $8,000 [20% × ($30,000 + $10,000)] - $10,000 distribution.

Stephanie is a 40 percent partner in the SKY Partnership. During the current tax year, the partnership reported ordinary income of $210,000 before payment of guaranteed payments and distributions to partners. The partnership made an ordinary cash distribution of $30,000 to Stephanie and paid guaranteed payments to partners Stephanie, Kirsten, and Yule of $30,000 each ($90,000 total). What is Stephanie's share of the partnership's income? a. $88,000. b. $78,000. c. $48,000. d. $66,000. e. None of these choices are correct.

C SKY reports ordinary income of $120,000 ($210,000 less the $90,000 of guaranteed payments). The distribution to Stephanie is not deducted by the partnership and is not taxable to her. Stephanie's share of partnership income is $48,000 (40% × $120,000). In addition, she will have to pay tax on the guaranteed payment

Tempe LLC incurred the following costs during its first year: Legal fees for drafting the operating agreement $18,000 Syndication costs $19,000 Preopening advertising expenses $20,000 Accounting fees for tax advice of an organizational nature $15,000 Training costs for new employees before opening the business $12,000 The amount of Tempe's startup costs is: a. $39,000. b. $84,000. c. $32,000. d. $37,000. e. $69,000.

C Startup costs include the preopening advertising expenses and the training costs for new employees before opening the business ($20,000 + $12,000 = $32,000). The legal fees and accounting fees are organizational costs.

Tempe LLC was organized on June 1 and began business on August 1 of 2018. Tempe has adopted a calendar year and incurred the following costs during 18: Legal fees for drafting the operating agreement $18,000 Syndication costs $19,000 Preopening advertising expenses $20,000 Accounting fees for tax advice of an organizational nature $15,000 Training costs for new employees before opening the business $12,000 The maximum amount Tempe can deduct as startup costs on its tax return for 2018 is: a. $6,800. b. $5,000. c. $5,750. d. $2,133. e. None of these choices are correct.

C Startup costs include the preopening advertising expenses and the training costs for new employees before opening the business ($20,000 + $12,000 = $32,000). The partnership may deduct up to $5,000 of startup costs in the year in which it begins business. This amount must be reduced, however, by startup costs that exceed $50,000. Excess expenditures are amortizable over 180 months, beginning with the month in which the partnership begins business. August thru December 31 is 5 mths Permitted deduction $5,000 Amortization ($32,000 - $5,000)/180 months × 5 months 750 Total deduction $5,750

Pita is a limited partner in the PIE Partnership, which is not publicly traded. Her allocable share of PIE's passive ordinary losses from a nonrealty activity for the current year is ($60,000). Pita has a $40,000 adjusted basis (outside basis) for her interest in PIE (before deduction of any of the passive losses). Her amount "at risk" under § 465 is $30,000 (before deduction of any of the passive losses). She also has $25,000 of passive income from other sources. How much of her ($60,000) allocable loss can Pita deduct on her current year's tax return? a. $60,000. b. $30,000. c. $25,000. d. $40,000. e. None of these choices are correct.

C The $60,000 passive loss must be limited first by Pita's $40,000 outside basis for her partnership interest. The "at risk" rules further limit her deduction to $30,000, the amount she is "at risk" in PIE. She can deduct $25,000 of this loss because that is the amount she has of passive income from other sources.

Mark's outside basis in the River Works partnership, an LLC, is $260,000. The LLC distributes $60,000 cash to Mark. Based on these facts: a. Mark recognizes a $75,000 long-term capital gain. b. Mark recognizes a $75,000 ordinary gain. c. Mark's outside basis will be $200,000. d. Mark's inside basis will be $260,000. e. None of these choices are correct.

C The distribution reduces Mark's inside and outside basis to $200,000 ($260,000 - $60,000 = $200,000).

Melissa sells land (basis of $60,000, fair market value of $75,000), to the MT Partnership, in which she controls a 75% capital interest. The partnership pays her $40,000 for the land. The partnership later sells the land to an outsider for $85,000. The partnership will recognize a _____ on its sale of the land. a. $20,000 loss. b. $25,000 loss. c. $25,000 gain. d. $20,000 gain. e. None of these choices are correct.

C The partnership has a gain of $45,000 on the sale of the land ($85,000 selling price less $40,000 basis). However, the partnership can reduce this realized gain on the sale by the amount of Melissa's $20,000 ($40,000 selling price less $60,000 basis) unrealized loss. The MT Partnership has a recognized gain of $25,000.

On December 31, after receipt of his share of partnership income, Clark sold his interest in a limited partnership for $30,000 cash and relief of all liabilities. On that date, the adjusted basis of Clark's partnership interest was $40,000, consisting of his capital account of $15,000 and his share of the partnership liabilities of $25,000. The partnership has no unrealized receivables or substantially appreciated inventory. What is Clark's gain or loss on the sale of his partnership interest? A. Ordinary gain of $15,000. B. Capital gain of $15,000. C. Capital loss of $10,000. D. Ordinary loss of $10,000.

Choice "b" is correct. A partner who sells his interest in a partnership has a recognized gain or loss that is measured by the difference between the amount realized for the sale and the adjusted basis of the partnership interest. If there are any partnership liabilities allocated to the interest and transferred to the buyer, they are considered part of the amount realized. Any gain that represents a partner's share of "hot assets" (unrealized receivables of appreciated inventory) is treated as ordinary income if cash is taken. Clark's capital gain on the sale is calculated as follows: 30000+25000= 55000-40000=15000 ordinary gain

On January 1 of the current year, Annabelle and Paul form an equal partnership. Annabelle makes a cash contribution of $80,000 and a property contribution (adjusted basis of $120,000; fair market value of $160,000) in exchange for her interest in the partnership. Paul contributes property (adjusted basis of $190,000; fair market value of $240,000) in exchange for his partnership interest. Which of the following statements is true concerning the income tax results of this partnership formation? a. Paul has a $240,000 tax basis for his partnership interest. b. The partnership has a $160,000 adjusted basis in the property contributed by Annabelle. c. Paul recognizes a $50,000 gain on his property transfer. d. Annabelle has a $200,000 tax basis for her partnership interest. e. None of these choices are correct.

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 reduction of a partner's share of partnership liabilities will have what effect on the partner's basis in the partnership interest? A There is no effect on partnership basis. B The same result (basis reduction and/or gain recognition) as if the partner received a distribution of that same amount of cash. C A reduction of the partner's basis by the amount of the partner's share of liability reduction, without regard to the amount of the partner's basis before the liability share reduction. D An increase in the partner's basis by the amount of the partner's share of liability reduction, without regard to the amount of the partner's basis before the liability share reduction.

D An increase in a partner's share of partnership debt is treated as a cash contribution by the partner to the partnership and increases the partner's basis. A decrease in a partner's share of partnership debt is treated as a cash distribution from the partnership to the partner and decreases the partner's basis.

ABC Partners was formed during the current tax year. It incurred $10,000 of organizational expenses, $80,000 of startup expenses, and $5,000 of transfer taxes to retitle property contributed by a partner. The property had been held as MACRS property for 10 years by the contributing partner and had an adjusted basis to the partner of $300,000 and fair market value of $400,000. Which of the following statements is correct regarding these items? a. ABC's startup expenses are amortized over 60 months. b. ABC must amortize the $10,000 of organizational expenses over 180 months. c. ABC treats the contributed property as a new MACRS asset placed in service on the date the property title is transferred. d. ABC must capitalize the transfer tax and treat the contributed property as a new asset placed in service on the date the property is contributed. e. None of these choices are correct.

D "ABC treats the contributed property as a new MACRS asset placed in service on the date the property title is transferred" is incorrect because the partnership "steps into the partner's shoes" with respect to depreciation of contributed property. "ABC must amortize the $10,000 of organizational expenses over 180 months" is incorrect because the first $5,000 of organizational costs may be deducted if total organizational costs are less than $50,000. "ABC's startup expenses are amortized over 60 months". is incorrect because the portion of startup costs that cannot be currently deducted must be amortized over 180 months.

Isabel is a 40 percent partner in the ICE Partnership. During the current year, ICE reported gross receipts of $160,000 and a charitable contribution of $10,000. The partnership paid office expenses of $100,000. In addition, ICE distributed $10,000 each to partners Isabel and Edith, and the partnership paid partner Tonya $20,000 for administrative services. Isabel reports which of the following income from ICE during the current tax year? a. $4,000 ordinary income. b. $8,000 ordinary income; $4,000 charitable contribution. c. $12,000 ordinary income. d. $16,000 ordinary income; $4,000 charitable contribution. e. None of these choices are correct.

D ICE's net ordinary income is $40,000 ($160,000 ordinary income - $100,000 of office expenses - $20,000 payment to Tonya). The cash distributions to Isabel and Edith are not deductible. Isabel's share of this income is $16,000. In addition, Isabel reports her $4,000 share of the partnership's charitable contribution.

Miguel and Ann formed a partnership. Miguel received a 40 percent interest in partnership capital and profits in exchange for land with a basis of $100,000 and a fair market value of $140,000. Ann received a 60 percent interest in partnership capital and profits in exchange for $210,000 of cash. Three years after the contribution date, the land contributed by Miguel is sold by the partnership to a third party for $160,000. How much taxable gain will Miguel recognize from the sale? a. $35,000. b. $110,000. c. $0. d. $48,000. e. $68,000.

D Section 704(c)(1)(A) requires that any precontribution gain must be allocated entirely to Miguel. The total gain is $60,000 ($160,000 selling price less the $100,000 basis). Miguel's precontribution gain is $40,000 ($140,000 fair market value less $100,000 basis). The $40,000 precontribution ("built-in") gain is allocated all to Miguel plus 40 percent ($8,000) of the $20,000 postcontribution gain. Problem #3 - Correct

At the beginning of the tax year, Zack's basis for his partnership interest and his amount at risk in the partnership was $30,000. His share of partnership items for the year consisted of tax-exempt interest income of $2,000 and an ordinary loss of $44,000. He also received a distribution from the partnership of $20,000 cash during the year. For the tax year, Zack will report: a. An ordinary loss of $44,000 and a nontaxable distribution of $20,000. b. A nontaxable distribution of $20,000, an ordinary loss of $10,000, and a suspended loss carryforward of $34,000. c. An ordinary loss of $32,000, a suspended loss carryforward of $12,000, and a taxable distribution of $20,000. d. A nontaxable distribution of $20,000, an ordinary loss of $12,000, and a suspended loss carryforward of $32,000. e. None of these choices are correct.

D The $20,000 distribution and the $2,000 share of partnership tax-exempt income combine to reduce Zack's basis for his partnership interest to $12,000 ($30,000 + $2,000 - $20,000). Zack will then be allocated the $44,000 partnership loss; $12,000 of which is deductible and $32,000 of which is suspended.

Mark's outside basis in the River Works partnership, an LLC, is $260,000. The LLC distributes $60,000 cash to Mark. Based on these facts: a. Mark recognizes a $75,000 long-term capital gain. b. Mark's inside basis will be $260,000. c. Mark recognizes a $75,000 ordinary gain. d. Mark's outside basis will be $200,000. e. None of these choices are correct.

D The distribution reduces Mark's inside and outside basis to $200,000 ($260,000 - $60,000 = $200,000).

Artie, Willy, and Thomas contributed assets to form the equal AWT Partnership. Artie contributed cash of $40,000 and land with a basis of $80,000 (fair market value of $60,000). Willy contributed cash of $60,000 and land with a basis of $50,000 (fair market value of $40,000). Thomas contributed cash of $60,000 and a fully depreciated property ($0 basis) valued at $40,000. Which of the following tax treatments is not correct? a. Thomas realizes a gain of $40,000 but recognizes $0 gain. b. AWT has a basis of $80,000, $50,000, and $0 in the land and property (excluding cash) contributed by Artie, Willy, and Thomas, respectively. c. Artie's basis in his partnership interest is $120,000. d. Willy realizes and recognizes a loss of $10,000. e. All of these choices are correct.

D Willy's basis in the partnership interest equals the $60,000 cash plus his $50,000 basis in the property contributed. He cannot recognize his $10,000 realized loss. The other three statements are correct. Artie's basis equals the cash contribution plus the $80,000 basis in the land. Thomas's basis equals the $60,000 cash contribution since he had no basis in the property he contributed; he does not recognize his $60,000 realized gain. The partnership takes a carryover basis in the three contributed properties

Nick, Chris, Stacey, and Mike are each 25% partners in Liberty Partnership, a general partnership. During the current year, the partnership had revenues of $300,000 and nonseparately allocated business expenses of $100,000, including a guaranteed payment of $30,000 to Nick for services rendered. Also, during the current year, the partnership had interest income of $10,000 and charitable contributions of $16,000. With regard to activity in the partnership, what should Stacey report on her income tax return for the current year? Ordinary income Interest Income Charitable Contributions A. Ordinary income= $200,000 Interest Income=$10,000 Charitable Contributions=$16,000 B. $80,000 $2,500 $4,000 C. $57,500 $2,500 $4,000 D. $50,000 $2,500 $4,000

D. $50,000 $2,500 $4,000 ordinary = (300000-100000)=200,000 *.25 = 50000 interest = 10,000*.25 = 2500 charity = 16000*.25= 4000

Regarding partnership reporting: a. An automatic two month extension can be requested. b. For a calendar year partnership, each partner must be given their K-1 by January 31. c. The partners make most of the elections regarding the treatment of partnership items. d. Form 1120 must be filed with the IRS. e. For a calendar year partnership, the due date is March 15.

E

In which of the following independent situations would the transaction most likely be characterized as a disguised sale? a. Partner Carl contributes appreciated property to the NICE Partnership, and three years later NICE distributes $100,000 proportionately to all the partners. b. Terrence contributes appreciated property to the TOM Partnership. Thirty months later, he receives a distribution from the partnership of $15,000 cash. None of the other partners received a distribution. There was no agreement that TOM would make the distribution, and Terrence would have made the contribution whether or not the partnership made the distribution. c. Abigail contributes property with a basis of $20,000 and a fair market value of $50,000 to the HAT Partnership in exchange for a 20 percent interest therein. The partnership agrees to distribute $20,000 to Abigail in 25 months, if partnership cash flows from operations exceed $100,000 at that time. The partnership does not expect to produce operating cash flows of over $100,000 for at least five years. d. All of these choices are correct. e. None of these choices are correct.

E 2 year time frame so 24 months to be a disguised sale according to IRS "Partner Carl contributes appreciated property to the NICE Partnership, and three years later NICE distributes $100,000 proportionately to all the partners" is not a disguised sale, because the partner is merely receiving his share of partnership cash flows. "Abigail contributes property with a basis of $20,000 and a fair market value of $50,000 to the HAT Partnership in exchange for a 20 percent interest therein. The partnership agrees to distribute $20,000 to Abigail in 25 months, if partnership cash flows from operations exceed $100,000 at that time. The partnership does not expect to produce operating cash flows of over $100,000 for at least five years" is not a disguised sale because the distribution is subject to entrepreneurial risk. "Terrence contributes appreciated property to the TOM Partnership. Thirty months later, he receives a distribution from the partnership of $15,000 cash. None of the other partners received a distribution. There was no agreement that TOM would make the distribution, and Terrence would have made the contribution whether or not the partnership made the distribution" is not a disguised sale because the contribution was not contingent on a future distribution being made. In addition, the distribution in "Terrence contributes appreciated property to the TOM Partnership. Thirty months later, he receives a distribution from the partnership of $15,000 cash. None of the other partners received a distribution. There was no agreement that TOM would make the distribution, and Terrence would have made the contribution whether or not the partnership made the distribution". meets the IRS's two-year time frame in which a distribution is generally not presumed to be part of a disguised sale. If a transaction appears to be a sale or exchange of property rather than a contribution, it is deemed a disguised sale and § 721 cannot be used to defer a gain or loss.

Marina and Nolan formed the MN Partnership. Marina contributed $20,000 of cash in exchange for her 50 percent interest in the partnership capital and profits. During the first year of partnership operations, the following events occurred: the partnership had a net taxable income of $10,000; Marina received a distribution of $8,000 cash from the partnership; and Marina had a 50 percent share in the partnership's $16,000 of recourse liabilities on the last day of the partnership year. Marina's adjusted basis for her partnership interest at year-end is: a. $20,000. b. $17,000. c. $33,000. d. $38,000. e. $25,000.

E Marina's adjusted basis consists of her $20,000 cash contribution, plus her $5,000 share of partnership income, minus the $8,000 cash distribution, plus her $8,000 share of partnership liabilities.

Which of the following statements is false regarding accounting methods available to a partnership? a. If a partnership has a partner that is a personal service corporation, it cannot use the cash method. b. If a partnership has a partner that is a C corporation, it cannot use the cash method. c. If a partnership is a tax shelter, it can use the cash method of accounting. d. None of these choices are correct. e. All of these choices are correct.

E - All of these are false If a partnership is a tax shelter, it can use the cash method of accounting" is false because a partnership must use the accrual method if it is considered to be a tax shelter. A partnership must often use the accrual method if it has a partner that is a C corporation ("If a partnership has a partner that is a C corporation, it cannot use the cash method" is false). However, the partnership can use the cash method if (1) the C partner is a personal service corporation ("If a partnership has a partner that is a personal service corporation, it cannot use the cash method" is false) or (2) the partnership has average annual gross receipts of $25 million or less for all prior three-year tax periods.

A limited liability company offers only some "members" the benefits of partnership taxation as well as protection from claims by the LLC's creditors. True or False?

False

Guaranteed payments for use of the partner's capital are subject to the self-employment tax. True False

False

Limited partners are personally liable for any partnership debt. True or False?

False

Section 721 provides that, in general, gain but not loss is recognized by the partnership or the partner on contribution of appreciated or depreciated property to a partnership in exchange for an interest in the partnership. True or False?

False

T/F Members have personal liability for entity debts in an LLC

False

Because the Code doesn't define "tax shelter," the IRS must judge whether any given partnership is a tax shelter on a case-by-case basis. True False

False A tax shelter is a partnership whose interests have been sold in a registered offering or a partnership in which 35 percent of the losses are allocated to limited partners.

If a partner contributes a capital asset to the partnership, the partner's holding period in the partnership interest begins on the date of the transfer. True or False?

False If a partner contributes a capital asset, the partner's holding period in the partnership interest is the same as that partner's holding period for the capital asset.

If the partners owning more than 50 percent of a partnership's capital and profits have the same tax year, then the partnership will not use the tax year of these majority partners. True or False

False If the partners owning more than 50 percent of a partnership's capital and profits have the same tax year, then the partnership uses the tax year of these majority partners. This is the first of three rules used to determine a partnership's required tax year.

Partners have an inside basis T or F?

False Partnerships only have an inside basis, a partner has an outside basis

A marketable security generally is treated as property rather than cash for purposes of the partnership distribution rules. True False

False A marketable security generally is treated as cash rather than property for purposes of the partnership distribution rules. The result is that a marketable security distribution can create a recognized gain for the distributee partner if the partnership's basis in the security is greater than the partner's basis in the partnership interest.

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

False A partner only recognizes a gain on receipt of a proportionate liquidating distribution when the distributed cash exceeds the partner's basis in the partnership interest before the distribution. Daniella's $40,000 basis is first reduced by the cash distribution to $30,000. Thus, the accounts receivable take a $0 carryover basis, and the remaining $30,000 basis is allocated to the land.

Each partner has an inside basis for each asset the partnership owns. True False

False A partnership has an inside basis for each asset it owns, and each partner has an outside basis in the partnership interest.

A partnership's allocations of income and deductions to the partners are required to be proportionate to the partners' percentage ownership of partnership profits in order to meet the substantial economic effect tests. True False

False A partnership may allocate items of partnership income, gain, loss, deduction, or credit in any manner agreed upon by the partners, provided the allocation meets the three substantial economic effect tests or certain alternate tests for economic performance.

A partnership measures and reports two kinds of income: ordinary (operating) income and investment income. True False

False A partnership measures and reports two kinds of income: ordinary (operating) income and separately stated items.

A proportionate current distribution of cash is never taxable to the partner. True False

False A proportionate current distribution of cash is taxable to the partner to the extent the distributed cash exceeds the partner's outside basis.

As a special allowance, individuals can offset up to $50,000 of passive activity losses from rental real estate against active and portfolio income. True False

False As a special allowance, individuals can offset up to $25,000 of passive activity losses from rental real estate against active and portfolio income. (This amount is phased out starting at $100,000 of modified adjusted gross income.) This deduction is available to those who actively (rather than materially) participate in rental real estate activities.

A partner's profits (loss) interest must be the same as their capital sharing ratio. True False

False Each partner's profit-, loss-, and capital-sharing ratios are reported on that partner's Schedule K-1. In many cases, the three ratios are the same. However, if the partnership agreement provides for special allocations or if capital contributions or distributions differed at some point from the profit- or loss-sharing percent, these ratios may differ for a given partner.

For a partner, qualified business income (QBI) includes guaranteed payments received for services provided to the partnership. True False

False For a partner, QBI does not include guaranteed payments received for services provided to the partnership or payments from the partnership under § 707(a) for services unrelated to the partnership's business (e.g., payments by a restaurant LLC to a member for providing accounting services).

A partner's adjusted basis in a newly formed partnership usually equals (1) the fair market value of any property (or cash) the partner contributed to the partnership plus (2) the fair market value of any services the partner performed for the partnership. True False

False For property (or cash) contributed to the partnership, the adjusted basis is used, not the fair market value.

Hot assets include cash, inventory, and accounts receivable. True False

False Hot assets include unrealized receivables and inventory.

If a corporation distributes property in a complete liquidation, the corporation recognizes no gain or loss. True False

False If a corporation distributes property in a complete liquidation, the corporation recognizes gain or loss as if it sold all of its property at fair market value.

If a partner contributes appreciated property to a partnership, the contributing partner recognizes gain if the property is distributed to another partner within ten years of the contribution date. True False

False If a partner contributes appreciated property to a partnership, the contributing partner recognizes gain if the contributed appreciated property is distributed to another partner within seven years of the contribution date.

If a partnership makes a payment on behalf of a partner for medical expenses, the partnership can deduct the payment as a medical expense.

False If a partnership makes a payment on behalf of a partner, such as for alimony, medical expenses, or other items that constitute deductions to individuals, the partnership treats the payment as a distribution or guaranteed payment to the partner, and the partner determines whether to claim the deduction.

If the partnership interest being sold is classified as a "carried interest," any gain on the sale of that interest is treated as a short-term capital gain, unless the interest has been held for more than one year. True False

False If the partnership interest being sold is classified as a "carried interest," any gain on the sale of that interest is treated as a short-term capital gain, unless the interest has been held for more than three years.

Meredith and Katie form an equal partnership during the current year. Meredith contributes cash of $160,000, and Katie contributes property (adjusted basis of $90,000, fair market value of $260,000) subject to a nonrecourse liability of $100,000. As a result of these transactions, Katie has a basis in her partnership interest of $40,000. True False

False Katie is allocated the first $10,000 of debt ($100,000 debt - $90,000 basis), plus one-half of the remaining debt. She has an adjusted basis for her partnership interest of $45,000, calculated as follows: Basis, property transferred $90,000 Less: liability assumed by partnership (100,000) Plus: § 704(c) allocation of debt 10,000 Basis before remaining allocation $-0- Remaining allocation of debt ($90,000 × 50%) 45,000 Katie's basis $45,000

Losses that cannot be deducted because of the basis limitation are carried back for two years. True False

False Losses that cannot be deducted because of the basis limitation are suspended and carried forward (never back) for use against future increases in the partner's adjusted basis.

Nonrecourse debt is allocated based on each partner's economic risk of loss. True False

False Nonrecourse debt (including qualified nonrecourse financing) is allocated among all the partners. It is generally allocated to the partners in accordance with their profit sharing ratios.

Travis and Granger are equal partners in the TG Partnership. Just before TG liquidated, Travis's capital account balance was $50,000, and Granger's capital account balance was $30,000. To meet the substantial economic effect requirements, any liquidating cash distribution must be allocated equally between the partners. True False

False One of the three requirements of the economic effect test is that the partnership agreement must provide that liquidating distributions will be in proportion to the partners' ending capital account balances. In addition to the "economic effect" test, all allocations must meet the "substantial" requirement.

Items that are not required to be passed through separately from a partnership to the partners include charitable contributions and taxes paid to foreign countries. True False

False Partnership income and loss items must be separately stated if they could differently affect the tax liabilities of two or more partners. This is true also for other partnership items and information (not necessarily income or loss amounts), such as charitable contributions and the information a partner might need for calculating the foreign tax credit.

After a partner is admitted to a partnership, the partner's proportionate share of any increase in partnership liabilities results in a decrease in the partner's adjusted basis in the partnership. True False

False Partnership liability is positively, not negatively, correlated to the partner's adjusted basis in the partnership.

Proportionate liquidating distributions must consist of a series of distributions. True False

False Proportionate liquidating distributions consist of a single distribution or a series of distributions that result in the termination of the partner's entire interest in the partnership.

Schedule M-2 must be prepared using generally accepted accounting principles. True False

False Schedule M-2 can be prepared using any of several methods, including the tax basis, generally accepted accounting principles (GAAP), or the "§ 704(b) book" method.

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

False The overall limitation of § 704(d) must first be met. This means the allocated loss cannot exceed the partners' basis in the partnership interest. Any loss that meets the overall limitation must be tested under the at-risk rules of § 465. Any losses that pass the at-risk rules are evaluated. If the loss is a passive loss under § 469, it is combined with passive income and losses from other sources to determine whether or not it may be deducted. If a loss passes these three limitations, a noncorporate taxpayer must consider whether the excess business loss limitation might apply.

The partner's capital account must equal the partner's basis in the partnership interest. True False

False The partner's ending capital account balance is rarely the same amount as the partner's tax basis. For example, a partner's tax basis includes the partner's share of partnership liabilities; these liabilities are not included in partner's capital.

Even if the partnership properly makes an election for treatment of a specific tax item, the partner may elect out of that treatment. True or False

False The partnership makes elections regarding everything from the partnership's taxable year to the depreciation method for partnership assets. Each partner is bound by the decisions made by the partnership relative to these partnership level elections.

A proportionate distribution occurs when the distribution increases or decreases the distributee partner's interest in certain ordinary income-producing assets. True False

False This describes a disproportionate distribution.

Syndication costs arise when partnership interests are being marketed to investors. These costs are deducted on the partnership's first tax return. True False

False Under § 709, these costs are neither amortizable nor deductible.

Stork Partnership incurred $15,000 of organizational costs and $75,000 of startup costs in 2017. Stork may deduct $5,000 each of organizational and startup costs, and the remaining costs ($10,000 of organizational costs and $70,000 of startup costs) may be amortized over 180 months. True or False

False For organizational and startup costs, the first $5,000 may be deducted, provided total expenses in that category do not exceed $50,000. If costs in the category exceed the base amount, the deduction is phased out, dollar for dollar. When costs exceed the phaseout amount in that category, no portion of the current deduction is permitted. Any amount that may not be deducted is amortized over 180 months.

If the partnership holds hot assets, the selling partner will incur only ordinary income on the sale of the interest. True False

False If the partnership holds hot assets, the selling partner will incur both ordinary income (loss) and capital gain (loss) on the sale of the interest.

A newly formed partnership must adopt the accrual method of accounting. True False

False A newly formed partnership may adopt either the cash or accrual method of accounting or a hybrid of the two methods.

Syndication cost are deductible or amortized True False

False, never deducted or amortized under code 709

All partners are general partners who can participate in management. What kind of partnership?

General Partnership

Who has liability in a limited partnership?

General partners

In the current year, the GHI Partnership received revenues of $200,000 and paid the following amounts: $50,000 in rent and utilities and $20,000 as a distribution to partner Hanna. In addition, the partnership earned $6,000 of long-term capital gains during the year. Partner Igor owns a 50 percent interest in the partnership. How much income must Igor report for the tax year? a. $75,000 ordinary income; $3,000 of long-term capital gains. b. $65,000 ordinary income; $3,000 of long-term capital gains. c. $78,000 ordinary income. d. $68,000 ordinary income. e. None of these choices are correct.

The partnership's ordinary income is calculated as follows: Revenues $200,000 Less: rent and utilities (50,000) Ordinary income $150,000 The distribution to Hanna is not deductible. Igor's share of GHI's ordinary income is $75,000. The $6,000 of long-term capital gains is a separately stated item, of which Igor's share is $3,000.

Startup costs include costs before openning the business True False

True

If the loss is a passive loss under § 469, it is combined with passive income and losses from other sources to determine whether or not it may be deducted. True False

True If the loss is a passive loss under § 469, it is combined with passive income and losses from other sources to determine whether or not it may be deducted.

Partnership taxable income and any separately stated items flows through to each partner at the end of the partnership's taxable year. True False

True Partnership taxable income (and any separately stated items) flows through to each partner at the end of the partnership's taxable year. A partner's taxable income, then, includes the distributive share of partnership income for any partnership taxable year that ends during the partner's tax year.

"Average annual gross receipts" is the average of gross receipts for the three tax years ending with the tax period prior to the tax year in question. True False

True "Average annual gross receipts" is the average of gross receipts for the three tax years ending with the tax period prior to the tax year in question.

A disproportionate distribution occurs when the distribution increases or decreases the distributee partner's interest in certain ordinary income-producing assets. True False

True A disproportionate distribution occurs when the distribution increases or decreases the distributee partner's interest in certain ordinary income-producing assets.

An increase in a partner's share of partnership debt is treated as a cash contribution by the partner to the partnership. True False

True An increase in a partner's share of partnership debt is treated as a cash contribution by the partner to the partnership and increases the partner's basis.

Any disallowed business interest expense is passed through to the partners. True False

True Any disallowed business interest expense is passed through to the partners (reducing their basis in the partnership interest) and can be used to offset the partnership's "excess taxable income" in future years.

Dividends allocated from a partnership are treated as net investment income (NII). True False

True Certain types of income allocated from a partnership are treated as net investment income (NII), including dividends, interest, passive activity income, and gains from property not used in a trade or business

With distributions, the partner's outside basis is reduced by the amount of cash received. True False

True Distributions don't typically cause the partner to recognize income or gain. Instead, the partner's outside basis is reduced by the amount of cash received.

A partner's profits (loss) interest may differ from their capital sharing ratio. True False

True Each partner's profit-, loss-, and capital-sharing ratios are reported on that partner's Schedule K-1. In many cases, the three ratios are the same. However, if the partnership agreement provides for special allocations or if capital contributions or distributions differed at some point from the profit- or loss-sharing percent, these ratios may differ for a given partner.

If the required tax year is undesirable to the partnership, they may be able to establish to the IRS's satisfaction that a business purpose exists for a different tax year. True False

True If the required tax year is undesirable to the partnership, they may be able to establish to the IRS's satisfaction that a business purpose exists for a different tax year. This will typically be a "natural business" year that ends following a peak season or shortly thereafter.

If the transferee sells the property at a gain, the disallowed loss reduces the gain the transferee would otherwise recognize. True False

True If the transferee sells the property at a gain, the disallowed loss reduces the gain the transferee would otherwise recognize.

Julia purchased her partnership interest from Christina on the first day of the current year for $40,000 cash. She received a $10,000 cash distribution from the partnership during the year, and her share of partnership income is $15,000. If her share of partnership liabilities on the last day of the partnership year is $20,000, her outside basis for her partnership interest at the end of the year is $65,000. True False

True Julia's adjusted basis at the end of the year is $65,000, determined as follows: $40,000 cash (paid to acquire interest) + $15,000 (share of income) + $20,000 (share of partnership liabilities) - $10,000 (cash distribution).

Recourse debt is partnership debt for which the partnership or at least one of the partners is personally liable. True False

True Recourse debt is partnership debt for which the partnership or at least one of the partners is personally liable.

The capital account analysis is shown on the partner's K-1. True False

True The capital account analysis (sometimes called a "rollforward" or "reconciliation") is shown on the partner's Schedule K-1. This calculation shows the change in the partner's capital account from the beginning to the end of the tax year.

The cash method may not be adopted by a partnership that has one or more C corporation partners. True False

True The cash method may not be adopted by a partnership that has one or more C corporation partners. However, a partnership may be able to use the cash method of accounting if the partnership has never had "average annual gross receipts" in excess of $25 million in any prior three-year period, if the C corporation partner is a qualified personal service corporation, or if the partnership is engaged in the farming business.

No loss is recognized on a sale of property between a person and a partnership when the person owns, directly or indirectly, more than 50 percent of partnership capital or profits. True False

True The disallowed loss might not vanish entirely, however. If the transferee eventually sells the property at a gain, the disallowed loss reduces the gain the transferee would otherwise recognize.

The sum of the partner's ending basis on Schedule K-1 does not equal the total of the partner's ending capital account on Schedule L. True False

True The partner's basis is not shown on Schedule K-1 or anywhere else on the tax return. The partner's capital account is shown on Schedule K-1, but it does not generally equal the partner's basis. The amounts are not equal for various reasons, one being that the partner's share of partnership debt is not included in the capital account.

Partnership liability is positively, not negatively, correlated to the partner's adjusted basis in the partnership. True False

True The partner's proportionate share of any increase in partnership liabilities results in an increase to the partner's adjusted basis

The partnership makes the election as to what cost recovery methods and assumptions are used. True or False

True The partnership makes elections regarding everything from the partnership's taxable year to the depreciation method for partnership assets.

Condor LLC is equally owned by three corporations. Two corporations have June 30 fiscal year-ends, and the third is a calendar year taxpayer. Condor will use a June 30 year-end under the majority partners' tax year rule because more than 50 percent of the partnership's capital and profits is owned by partners with the same taxable year. True False

True The partnership year-end is determined by reference to the first of three tests that is met by the partnership. The first test is the majority partners' tax year test. If more than 50 percent of the partnership's capital and profits interests are owned by partners with the same tax year, that year is required under the majority partner tax year rule. The June 30 year-end corporations, combined, own 66 2/3 percent of partnership capital and profits, so that year-end is used.

Three principal partners do not have the same year-end. Therefore, the least aggregate deferral method must be used to determine the partnership's year-end. True or False

True Three principal partners do not have the same year-end. Therefore, the least aggregate deferral method must be used to determine the partnership's year-end.

Syndication costs include brokerage fees, legal fees, and registration fees incurred in connection with marketing interests in partnerships. True or False?

True Syndication costs include brokerage fees, legal fees, and registration fees incurred in connection with marketing interests in partnerships. Under § 709, these costs are neither amortizable nor deductible.

Peter, a 25% partner in Gold & Stein Partnership, received a $20,000 guaranteed payment in the current year for deductible services rendered to the partnership. Guaranteed payments were not made to any other partner. Gold & Stein's current-year partnership income consisted of: Net business income before guaranteed payments $ 80,000 Net long-term capital gains 10,000 What amount of income should Peter report from Gold & Stein Partnership on his current-year tax return? a $37,500 b $27,500 c $22,500 d $20,000

a (20 + [80+10-20]/4 = 37.5K)

Interest from services performed for partnership

carried interest

A _ in a partner's share of partnership debt is treated as a cash distribution from the partnership to the partner and decreases the partner's basis.

decrease

The_ concept treats partners and partnerships as separate units and gives the partnership its own tax "personality."

entity

Distributions don't typically cause the partner to recognize _. Instead, the partner's _ basis is reduced by the amount of cash received.

income outside basis

A _ in a partner's share of partnership debt is treated as a cash contribution by the partner to the partnership and increases the partner's basis.

increase

Rent income from real or personal property generally is passive activity income. True False

true Rent income from real or personal property generally is passive activity income, regardless of the partner's level of participation. The primary exception is that rental real estate is not treated as a passive activity for a person who qualifies as a real estate professional.