Tax Exam 1

Lee inherited a partnership interest from Dale. The adjusted basis of Dale's partnership interest was $50,000, and its fair market value on the date of Dale's death (the estate's valuation date) was $70,000. What was Lee's original basis for the partnership interest?

$$70,000 Assets inherited have a basis equal to fair market value on the date of death.

ABC Partnership was formed on March 1 of the current year by three individuals. A contributed $20,000 cash for a 25% interest. B contributed property with an adjusted basis of $28,000 and fair market value of $32,000, subject to a $12,000 mortgage. C contributed property with an adjusted basis of $20,000 and fair market value of $64,000, subject to a $24,000 liability. B and C received 25% and 50% partnership interests, respectively. The partnership assumed both partners' liabilities. The partnership has no other liabilities. On March 1 of the current year, B's gain recognized on contribution and basis in partnership interest are

$0 gain, $25,000 basis 28,000 - 9,000 + 6,000

Donald is the only owner of an S corporation that had $130,000 income in the current year before he takes his salary. Donald takes a $40,000 salary that is considered reasonable. What is his income for federal income taxes and Social Security taxes?

$130,000 for federal income taxes and $40,000 for Social Security taxes./p>

Brad Troutman is a partner in the ABC Partnership. On October 1, 20X9, he transfers property (fair market value = $120,000, basis = $90,000) to the partnership. Eighteen months later the partnership transfers $60,000 to Brad. Brad and the partnership can't prove that the payment was unrelated to the contribution. How much income will Brad have to recognize on the contribution/distribution?

$15,000 @ Brad receives $60,000, or 1/2 of the $120,000 fair market value of the property he contributed. He will therefore have to recognize 1/2 of the built-in gain of $120,000 - $90,000 = $30,000. $30,000 × 1/2 = $15,000.

Partnership M, a law partnership, had the following items for the current year: Income from clients---200,000 Repairs---1,000 Depreciation---2,000 Dividends on capital stock---500 Other operating expenses---125,000 Charitable contributions---1500 SEC 1231 gain on sale---1,200 SEC 1245 gain on sale---1,000 What is Partnership M's ordinary income?

$73,000 200,000-1,000-2,000-125,000+1,000

Eng contributed the following assets to a partnership in exchange for a 50% interest in the partnership's capital and profits: Cash ..............$50,000 Equipment: Fair market value ....35,000 Adjusted basis................. 25,000

$75,000 50,000+75,000

Nash and Ford are partners who share profits and losses equally. For the year ended December 31, the partnership had book income of $80,000, which included the following deductions: Guaranteed salaries to partners: Nash--35,000 Ford 25,000 Charitable contributions---5,000 What amount should be reported as ordinary income on the partnership return for the year?

$85,000 80,000+5,000

At the beginning of the current year, W, an S corporation, was owned equally by two individual shareholders, D and K. During the year, W had ordinary income of $183,000, a net long-term capital gain of $91,500, and charitable contributions of $27,450. What is the amount of ordinary income, capital gain, and charitable contribution from W's activities that D and K must each report in the current year? Ordinary..... Capital..... Charitable Income....... Gain.... Contribution

$91,500 ....$45,750 ....$13,725 Accordingly, D and K will each report $91,500 (.50 x $183,000) of ordinary income from W. They will be passed through to D and K and will retain their character. Because D and K are equal shareholders, they will each report $45,750 (.50 x $91,500) of capital gains and $13,725 (.50 x $27,450) of charitable contributions resulting from W's activities.

The minimum number of members permitted for an LLC is

1

David and Robert form an equal partnership. David contributed $10,000 cash to the partnership and Robert contributed depreciable property with a fair market value of $10,000 and an adjusted basis of $4,000. What is the partnership's basis for depreciation of the property, and how is the depreciation deduction allocated to the partners (assuming the depreciation rate is 10% per year)? Partnerships annual depreciation basis for: 1) Deduction depreciation 2) David's share 3) Roberts share

1)$4,000 2) $400 3) $0 The basis of the asset to the partnership is $4,000. Thus, the depreciation for the year is $400 ($4,000 over 10 years). David's share of the depreciation would normally be $500 ($10,000 FMV x 1/10 x 50%); however, his share of the depreciation is limited to $400 because that is the maximum allowed the partnership.

What is the maximum number of shareholders allowable for eligibility as an S corporation in the current year?

100

What is the maximum number of stockholders allowable for eligibility as an S corporation?

100

An LLC has five members and 100 voting rights. The capital contributions are as follows: Member A $30,000 Member B $15,000 Member C $15,000 Member D $40,000 Member E $0 Under the corporate approach. Member B has how many votes?

15 Under the corporate approach, voting rights are based on the members' relative capital contributions. Member B has invested $15,000 of the LLC's $100,000 of capital ($30,000 + $15,000 + $15,000 + $40,000) and therefore should receive 15% of the voting rights (15 votes).

EJH Partnership was organized in the current year with three partners, E, J, and H. The three individuals elected to use the default classification when filing the entity's federal income tax return. The partnership wants to change its tax classification from being a partnership to being an association taxed as a C corporation. How long after changing to C corporation status must the EJH Partnership wait before it can make another change in classification by election?

60 months. If an entity makes an election to change its classification, it cannot reelect its classification by election during the 60 months following the effective date of the election. The taxpayer must specify the effective date of the election. The effective date cannot be more than 75 days before or 12 months after the date the election was filed.

Identify which of the following statements is true.

A partner's relief of debt is treated as if the partner receives a cash distribution.

Which one of the following statements regarding a partnership's tax year is true?

A partnership may elect to have a tax year other than the generally required tax year if the deferral period for the tax year elected does not exceed 3 months.

Which one of the following statements regarding a partnership's tax year is correct?

A partnership may elect to have a tax year other than the generally required tax year if the deferral period for the tax year elected does not exceed three months.

All of the following businesses, formed after 1996, are automatically classified as corporations except

A partnership that possesses at least three of the following characteristics: limited liability, centralized management, free transferability of interest, and continuity of life.

Which of the following statements is true regarding sole proprietorships?

A sole proprietorship located and registered in Florida may also conduct operations in Nevada and Michigan without having to formally register in those states.

Without obtaining prior approval from the IRS, a newly formed partnership may adopt

A taxable year which is the same as that used by one or more of its partners owning an aggregate interest of more than 50% in profits and capital.

In a general partnership, which of he following acts must be approved by all the partners?

Admission of a transferee as a partner.

Paul is an active member in his LLC and contributes significant work towards the daily operations. He is attempting to minimize self-employment taxes and wants to evaluate the strength of the arguments. Which of the following positions is least likely to stand up to IRS scrutiny?

Adopt the position that all LLC members are limited partners which eliminates the SE tax for all members.

Which of the following is a characteristic of a Qualified Subchapter S Subsidiary (QSub)?

All assets, liabilities, and items of income, deduction, and credit are treated as if they belong to the S corporation's parent corporation.

Which of the following is not a foreign LLC in the state of Hawaii?

An LLC formed in Hawaii by a resident of California.

For an S corporation, the IRS is concerned most about which of the following individuals receiving reasonable compensation?

An employee-owner.

All of the following are available tax classifications for a two-member entity under the check-the-box regulations except

An entity disregarded as a separate entity from the taxpayers.

Which of the following organizations formed after 1996 cannot be classified as a partnership?

An insurance company A tax-exempt organization A real estate investment trust

Guaranteed payments made by a partnership to partners for services rendered to the partnership, that are deductible business expenses under the Internal Revenue Code, are I. Deductible expenses on the U.S. Partnership Return of Income, Form 1065, in order to arrive at partnership income (loss) II. Included on Schedules K-1 to be taxed as ordinary income to the partners

Both I and II

At the entity level, what entity has the fewest restrictions on fringe benefits that are tax-exempt to the owner and deductible by the entity?

C corporation

An S corporation is not permitted to take a deduction for

Charitable contributions.

Which of the following entities is ineligible to be an S corporation shareholder?

Charitable remainder annuity trust.

For federal income tax purposes, all of the following statements regarding partnerships are true except

Co-ownership of property that is maintained and leased or rented is considered a partnership if the co-owners provide no services to the tenants.

Which of the following fringe benefits can an employee who owns 50% of an S corporation exclude from compensation provided if the benefit does not discriminate in favor of the owner?

Compensation for injury and sickness.

An S corporation may deduct

Compensation of officers.

For federal income tax purposes, a partnership, other than a publicly traded partnership, is

Considered to be a nontaxable entity but which must file an information return.

In computing the nonseparately stated income or loss of an S corporation, which of the following items can be deducted by the corporation?

Corporate organizational costs.

Which of the following may not own shares in an S corporation?

Corporations

The partnership (rather than the partner) must make elections as to the tax treatment of all the following items except

Deduction or credit of foreign taxes paid.

If an LLC has no operating agreement, what is the authority for governance of its operations?

Default provisions of law regarding LLCs in the state where it exists.

The holding period of property acquired by a partnership as a contribution to the contributing partner's capital account

Depends on the character of the property transferred.

All of the following items are taken into account in figuring the ordinary income or loss of a partnership except

Depletion allowance with respect to partnership oil and gas properties.

Which of the following items is not a separately stated item for Form 1120S shareholders?

Depreciation.

How is an S corporation owner taxed on distributions that do not exceed basis?

Distributions are generally not taxable and reduce basis.

All of the following entities are allowed to elect S status except

Domestic international sales corporation (DISC)

If no provisions are made in an agreement, a general partnership allocates profits and losses

Equally among the partners.

Liz and Erica each own a clinic, Liz's clinic is an S corporation, and Erica's clinic is a proprietorship. Each clinic earned $100,000, and Liz treated $50,000 of her profits as wages. Assuming the growth for all amounts grow in accordance with increases in Social Security, which of the following shows the proper treatment for Social Security for Liz and Erica?

Erica pays twice the Social Security taxes that Liz pays and Erica will receive more Social Security benefits upon retirement but not twice as much.

Donna exchanges property having an $18,000 adjusted basis and a $35,000 fair market value for 70 shares of the newly created Table Corporation stock. Evelyn exchanges legal services worth $15,000 for the remaining 30 shares of Table's stock. Which of the following is true?

Evelyn must recognize $15,000 of income, and Donna must recognize $17,000 gain on the exchange.

Each partner must take into account separately his/her share of any item which could result in a different tax liability if it were separately taken into account [Reg. 1.702-1(a)(8)(ii)]. Since there is a limit on Sec. 179 expensing of assets at the partner level (as well as at the partnership level), it must be taken into account separately by the partners and not deducted in computing partnership ordinary income.

False

Guaranteed payments made to a cash-basis partner for organizing the partnership are deductible by the partnership in the year paid.

False

S corporation can have multiple classes of stock, but are limited to 100 shareholders.

False S corporations may have only one class of stock and the number of shareholders is limited to 100.

When a conflict exists with regard to the authority for the governance of an LLC,

Federal or state law takes precedence over an operating agreement.

The limited liability protection offered to corporations and LLCs is not ignored when the entity is used

For a legitimate business purpose.

Identify which of the following statements is true.

For federal income tax purposes, formation of a partnership is governed by Sec. 721.

Margaret works for an owns interest in Piano Outlet, a limited liability company. Piano Outlet has two classes of ownership, general and limited, which are equally valued. Shares of the same class have identical right. Margaret owns 50% of the shares of each class of LLC interest. Margaret receives a guaranteed payment. Margaret must pay self-employment taxes of which classes of income from Piano Outlet.

Guaranteed payment and income from general shares.

In the computation of the ordinary income of a partnership, a deduction is allowed for

Guaranteed payments to partners.

A general partnership must

Have two or more partners.

When planning with a client for the choice of entity, what step(s) should the tax professional take?

Identify the client's goals and develop and coordinate a strategy to fulfill those goals.

The holding period of property acquired by a partnership as a contribution to the contributing partner's capital account

Includes the period during which the property was held by the contributing partner.

As a general rule for limited liability companies,

Income to a general partners is subject to self-employment tax but income to a limited partner is not.

Beck and Nilo are equal partners in B&N Associates, a general partnership. B&N borrowed $10,000 from a bank on an unsecured note, thereby increasing each partner's share of partnership liabilities. As a result of this loan, the basis of each partner's interest in B&N was

Increased

When a partner's share of partnership liabilities increases, that partner's basis in the partnership

Increases by the partner's share of the increase

A limited liability partnership (LLP)

Is typically adopted by providers of professional services.

Which of the following is a requirement for a small business corporation to elect S corporation status?

It has only one class of stock.

On March 12, Year 1, Duce Corp., a calendar year corporation, elected S corporation status and all shareholders consented to the election. There was no change in shareholders during the preelection portion of the year. What is the earliest date on which Duce can be recognized as an S corporation?

January 1, Year 1 A corporation requesting an S election within the first 2 months and 15 days of the year is retroactive to the beginning of the tax year.

Which of the following are common abbreviations for LLCs?

LC Limited Ltd.

Which statement about the liability of an LLC is true?

LLC members have liability for negligence.

LLCs can be dissolved by law. Which of the following is correct?

LLCs are less likely to be dissolved in today's business climate.

Why would a creditor not want to attach a debtor's interest in an LLC?

LLCs may not distribute cash to cover the creditor's tax liabilities.

Which of the following is a legal entity separate from its owners?

Limited Partnership LLP LLC

All of the following are available tax classifications for a single-member entity under the check-the box regulations except

Limited liability company

Which of the following statement is correct?

Management right include the right to manage the LLC and vote.

The owners of a limited liability company (LLC) are known as which of the following?

Members

Which of the following is not typical information that an LLC must keep:

Name and age of each current member

Which of the following statements regarding a limited partner is (are) usually true? I The limited partner is subject to personal liability for partnership debts. II The limited partner has the right to take part in the day-to-day management of the partnership.

Neither I or II

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

No gain or loss

Tau Corp., which has been operating since Year 1, has an October 31 year end, which coincides with its natural business year. On May 15, Year 7, Tau filed the required form to elect S corporation status. All of Tau's stockholders consented to the election, and all other requirements were met. The earliest date that Tau can be recognized as an S corporation is

November 1, Year 7 Since the election was not made within the first 2 months and 15 days of the corporation's tax year, the election will be effective at the beginning of the following tax year.

With respect to a partner who sells or exchanges his entire interest in a partnership, the closing of the partnership year occurs

On the date of the sale or exchange.

The liability of LLC members most closely resembles the liability of

Owners of a corporation.

Which of the following statements regarding capital and profit interests received for services contributed to a partnership is false?

Partners receiving capital interests must recognize the liquidation value of their capital interests as capital gain

KLM, a domestic limited liability company (LLC), is formed in March of the current year. The entity has two members and does not disregard its default classification for tax purposes. What is the default classification of KLM for tax purposes?

Partnership

What is the default IRS treatment for LLCs?

Partnerships that file Form 1065, U.S. Return of Partnership Income.

An interest in an LLC is

Personal property

The operating agreement of an LLC controls the sharing of which of the following?

Profits Losses Distributions

How is reasonable compensation determined for S corporation employee-owners?

Reasonableness is determined based on the surrounding facts and circumstances.

A partner's contribution of property to the partnership in exchange for a capital interest in the partnership:

Represents the partner's ownership rights in the partnership upon his withdrawal from the partnership or upon liquidation of the partnership.

The formation of a sole proprietorship

Requires a formal "doing business as" filing under state law if the proprietor will be conducting business under a fictitious name.

The creation of an LLC most likely is based on the

Revised Uniform Limited Liability Company Act (RULLCA).

Profitable LLCs, consisting of more than one owner, that want to reduce self-employment taxes most likely should elect

S corporation treatment

Contributions of noncash property will never be taxable when contributed to which type of entity?

Sole proprietorship

All of the following entities may experience conflict between managers and/or owners except

Sole proprietorships

Which of the following is false regarding the taxation of a sole proprietorship?

Sole proprietorships are subject to tax at both the business and individual level.

Sunshine LLC is formed in the current year with six members. Which of the following is a false statement about Sunshine's possible tax status under the check-the-box regulations?

Sunshine must wait 2 years after an election is filed before it can be taxed as a C corporation.

Towne Corporation was owned entirely by individual T from January 1 of the current year until October 1 of the same year, at which time she sold her entire stockholdings to individual A. During the year, Towne reported ordinary income of $146,000. It made a $30,000 cash distribution to T on July 1 of the current year. How much income should be reported by individuals T and A in the current year as a result of Towne Corporation's activities, assuming a valid S corporation election has been in effect at all times since its inception?

T, $109,200; A, $36,800. Towne Corporation reported ordinary income of $183,000 for the full year, which is $400 per day ($146,000 / 365 days). Therefore, T must report income of $109,200 (273 days x $400), and A must report income of $36,800 (92 days x $400). The cash distribution to T is not in excess of her basis for the stock and does not result in any further taxation to T (Sec. 1368), except that it reduced her basis so that she incurred a larger gain on the sale of the stock.

Ted and Jane form a cash-basis general partnership with cash contributions of $20,000 each. They share all partnership profits and losses equally. They borrow $60,000 and purchase depreciable business equipment. Jane, however, is required to pay the creditor if the partnership defaults. Which of the following is true?

Ted has a basis of $20,000 and Jane has a basis of $80,000 in the partnership.

Phil Justin and Mark Tyme are equal partners in the Justin Tyme partnership. On December 15, 20X8, Phil Justin transferred land with a fair market value of $100,000 to the Justin Tyme partnership. Phil had a basis in the land of $70,000. On June 1, 20X9, Phil withdrew cash of $50,000 from the Justin Tyme partnership. An IRS agent is currently reviewing Phil's 20X8 and 20X9 income tax returns.

The IRS agent will likely assert that the transaction was a disguised sale and that Phil should have reported $15,000 gain on the sale.

An advantage of a limited liability company (LLC) is

The ability to be taxed as a pass-through entity while have limited liability

Which of the following statements best describes the effect of the assignment of an interest in a general partnership?

The assignment transfers the assignor's interest in partnership profits and losses and the right to distributions.

Dissolution of an LLC occurs after which of the following events?

The happening of event specified in the articles of organization or operating agreement.

Which of the following statements is true when property is contributed in exchange for a partnership interest?

The holding period for a partner's partnership interest depends upon the type of assets a partner contributes

Which of the following is true regarding the taxation of limited partnerships?

The limited partnership is a pass-through (nontaxable) entity.

All of the following are considered when determining whether compensation for an S corporation employee-owner is reasonable except.

The owner's wealth.

The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date

The partner's holding period of the capital asset began

The method used to depreciate partnership property is an election made by

The partnership and may be any method approved by the IRS

Which one of the following statements is false?

The partnership is required to file a declaration of estimated tax in any year it anticipates a profit.

Maggie and Simon each have a 50% interest in a partnership that started business October 1. Maggie uses a calendar year while Simon has a fiscal year ending November 30. Which of the following is true?

The partnership may use the fiscal year ending September 30 provided a Sec. 444 election and payment are made, AND the partnership may use the fiscal year ending November 30 as that results in the least deferral.

A "tax matters partner" (TMP) has the authority to reach a settlement with the IRS on behalf of any partner who has not clearly stated that (s)he will not be bound by the TMP's settlement.

True

A corporation has perpetual existence unless the articles provide for a shorter life, or it is dissolved by the state or its owners.

True

A corporation, for federal income tax purposes, includes associations, joint stock companies, and insurance companies.

True

A fiscal-year partnership must file its partnership return on or before the 15th day of the fourth month following the close of the fiscal year, except when that day is a Saturday, Sunday, or legal holiday.

True

A joint venture is treated as a partnership in most legal cases.

True

A new corporation electing to be an S corporation for a tax year beginning in the current year may make a Sec. 444 election to adopt a fiscal tax year only if the months between the beginning of the tax year elected and the close of the first required tax year is 3 months or less.

True

A newly formed partnership may not adopt a calendar year without the consent of the Commissioner of Internal Revenue if both partners report their income on a fiscal year basis ending June 30.

True

A partner's basis in a partnership interest is increased by the partner's share of tax-exempt receipts of the partnership.

True

A partnership does not pay a minimum tax. Each partner must separately take into account his/her distributive share of the partnership's tax preference items.

True

A taxpayer that has S corporation distributions reclassified as wages by the IRS can be subject to paying employment taxes.

True

Although transferability of ownership is easier for a corporation than for other forms of organization, selling the stock of a small business may still be difficult.

True

In general, a multiple-member LLC may be taxed as a partnership or corporation.

True

Partner N contributed property with an adjusted basis of $400 and a fair market value of $1,000 to Partnership B. Partner L contributed $1,000 cash. The partnership has no liabilities. Under the partnership agreement, each partner will have a capital account reflected in the partnership books of $1,000, but the adjusted basis of Partner N's interest is only $400.

True

Personal liability protection may be a client's primary objective.

True

S corporations report the business results on Form 1120-S, and the items of income and loss flow through to the shareholders.

True

Subchapter K rules apply both to general partnerships and to limited partnerships.

True

The IRS may waive the effect of an inadvertent termination caused by an entity's failure to obtain required shareholder consents.

True

The IRS must offer every partner in a partnership settlement terms consistent with those offered any one partner in the partnership.

True

The LLC is a legal entity created under state law.

True

The adjusted basis of the partnership interest is determined without considering any amount shown in the partnership books as a capital, equity, or a similar account.

True

The major reason for the delay in the widespread adoption of the LLC as a business entity was

Uncertainty about the tax treatment

Which of the following acts is more likely to cause a court to pierce the corporate veil?

Using corporate assets for the owner's personal purposes.

A shareholder's basis in the stock of an S corporation is increased by the shareholder's pro rata share of income from Tax-exempt interest Taxable interest

Yes Yes

When parties intend to create a partnership, they must agree to Conduct a Manage in a Business for Profit Full-Time Capacity

Yes No

By default, a partnership has which of the following characteristics? Pass-Through Entity for Limited Life Federal Income Tax

Yes Yes

Bob decides to start a bicycle repair shop. He is the sole proprietor and raises additional capital by borrowing from a local bank. Which of the following may become a risk if Bob defaults on the repayment of the loan? Assets of the Bob's Equity Bob's Bicycle Capital Personal Repair Shop Invested Assets

Yes Yes Yes

Which of the following should be used in computing the basis of a partner's interest acquired from another partner? Cash paid by transferee to transferor Transferee's share of partnership liabilities

Yes. Yes

The following information pertains to land contributed by Pink for a 50% interest in a new partnership: Adjusted basis to Pink $100,000Fair market value $300,000Mortgage assumed by partnership $30,000 The basis for Pink's partnership interest is

`$85,000 Under Sec. 722, the basis of a partner's interest in a partnership is the partner's adjusted basis in the contributed property. When the partnership assumes a mortgage or takes the property subject to a mortgage, the contributing partner is deemed to have received a distribution of cash to the extent of the relieved liability [Sec. 752(b)]. This deemed distribution reduces the partner's basis. p>Adjusted basis of land contributed $100,000 Less: Share of mortgage assumed by the other partners ($30,000 × 50%) (15,000)Basis $ 85,000

A, B, and C formed a calendar-year partnership. Profits and losses are to be shared equally. A contributed a building to be used in the business that had an adjusted basis to A of $100,000 and a fair market value of $130,000. The partnership also assumed A's $60,000 mortgage on the building. B and C each contributed $40,000 in cash to the partnership's capital. What is the partnership's basis for determining depreciation on the building?

$0

Dave Burr acquired a 20% interest in a partnership by contributing a parcel of land. At the time of Burr's contribution, the land had a fair market value of $35,000, an adjusted basis to Burr of $8,000, and was subject to a mortgage of $12,000. Payment of the mortgage was assumed by the partnership. Burr's basis for his interest in the partnership is

$0 Burr will have to report a $1,600 gain on the contribution of the asset to the partnership.The basis of the asset contributed ($8,000) was exceeded by the portion of the liability assumed by the other partners ($1,600 = $12,000 x 80%). The recognized gain will bring Burr's basis up to zero.

The following information pertains to land contributed by Bea Dott for a 30% interest in a new partnership: $ 42,000 -- Dott's adjusted basis $150,000 -- Fair market value $60,000 -- Mortgage assumed by partnership How much is Dott's basis for her partnership interest?

$0 Dott's basis is the $42,000 basis of the asset reduced by $42,000, the portion of the liabilities assumed by the other partners.

The following information pertains to Carr's admission to the Smith & Jones partnership on July 1, Year 8: Carr's contribution of capital: 800 shares of Ed Corp. stock bought in Year 1 for $30,000; fair market value of $150,000 on July 1, Year 8. Carr's interest in capital and profits of Smith & Jones: 25%. Fair market value of net assets of Smith & Jones on July 1, Year 8 after Carr's admission: $600,000.Carr's gain in Year 8 on the exchange of the Ed stock for Carr's partnership interest was

$0 No income is reported on the contribution of assets to a partnership unless boot is received.

The following information pertains to property contributed by Gray on July 1, Year 1, for a 40% interest in the capital and profits of Kag & Gray, a partnership: As of June 30, Year 1 Adjusted basis: $24,000 Fair market value: $30,000 After Gray's contribution, Kag & Gray's capital totaled $150,000. What amount of gain was reportable in Gray's return on the contribution of property to the partnership?

$0 No income reported on the contribution to a partnership.

Sue and Andrew form SA general partnership. Each person receives an equal interest in the newly created partnership. Sue contributes $10,000 of cash and land with a FMV of $55,000. Her basis in the land is $20,000. Andrew contributes equipment with a FMV of $12,000 and a building with a FMV of $33,000. His basis in the equipment is $8,000, and his basis in the building is $20,000. How much gain must the SA general partnership recognize on the transfer of these assets from Sue and Andrew?

$0 Partnerships don't recognize any gain on the receipt of contributed appreciated property. The built-in gain or built-in loss will be reported at the time of disposition of the asset. To ensure this result, the partnership's basis in the acquired property is a carryover basis.

The following information pertains to Carr's admission to the Smith & Jones partnership on July 1 of the current year: Carr's contribution of capital: 800 shares of Ed Corporation stock bought ten years ago for $30,000; fair market value $150,000 on July 1 of the current year. Carr's interest in capital and profits of Smith & Jones: 25%. Fair market value of net assets of Smith & Jones on July 1 of the current year after Carr's admission: $600,000. Carr's recognized gain in the current year on the exchange of the Ed stock for Carr's partnership interest was

$0 Under Sec. 721 no gain or loss is recognized by a partnership or its partners when property is contributed to the partnership in exchange for a partnership interest. Carr has a realized gain of $120,000 (25% of the $600,000 value of the partnership minus his $30,000 basis in his contribution). This gain is not recognized under Sec. 721. For assets contributed after March 31, 1984, the precontribution gain on the asset is allocated to the contributing partner when the partnership later sells the asset or distributes it to another partner within 7 years. Note that stock does constitute property under Sec. 721. But if the partnership would be an investment company if it were incorporated, the gain will be recognized. For this purpose, an investment company is one in which the partner has diversified his/her interest in stocks and securities and in which 80% or more of the partnership's assets are marketable stocks or securities.

On May 1 of the current year, Mr. Good contributed 500 shares of stock in Candid Corporation to the partnership of Murphy & Wooster for a 25% interest in the partnership's capital and profits. The stock, which he purchased 10 years ago for $20,000, had a fair market value on May 1 of $100,000. On May 1 of the current year, the fair market value of the partnership's net assets, after Good's contribution, was $400,000. What is the amount of Good's recognized gain in the current year on the exchange?

$0 Under Sec. 721, no gain or loss is recognized by a partnership or its partners whenproperty is contributed to the partnership in exchange for a partnership interest. Good has a realized gain of $80,000 (25% of the $400,000 value of the partnership minus his $20,000 basis in his contribution). This gain is not recognized under Sec. 721. For assets contributed after March 31, 1984, the precontribution gain on the asset is allocated to the contributing partner when the partnership later sells the asset. Note that stock does constitute property under Sec. 721. But if the partnership would be an investment company if it were incorporated, the gain will be recognized. For this purpose, an investment company is one in which the partner has diversified his/her interest in stocks and securities and in which 80% or more of the partnership's assets are marketable stocks or securities.

Earl acquired a 20% interest in a partnership by contributing property that had an adjusted basis to him of $8,000 and that was subject to a mortgage of $12,000. Which of the following results is correct? Capital Gain Basis of Recognized Partnership Interest

$1,600 $0

A and B formed a calendar-year partnership on April 1 of the current year. Certain costs were incurred before beginning business September 1 of the current year: Legal fees in drawing up agreement--- 900 Cost of placing notice required by local law in newspapers--- 600 Commissions paid to sell limited partners' interests--- 5,400 Costs of filing with the state--- 300 What is the allowable deduction for organizational costs in the current year?

$1,800 900+ 600+300

On June 1 of the current year, Kelly received a 10% interest in Rock Co., a partnership, for services contributed to the partnership. Rock's net assets at that date had a basis of $70,000 and a fair market value of $100,000. In Kelly's current year income tax return, what amount must Kelly include as income from the transfer of the partnership interest?

$10,000 ordinary income. An individual must recognize compensation income when a partnership interest is received in exchange for services (whether current or past) rendered [Reg. 1.721-1(b)(1)]. The receipt of a capital interest in a partnership for services must be included in the year of receipt under Sec. 83. The income that should be recognized is the $10,000 (10% x $100,000) fair market value of the partnership interest received unless the interest is nontransferable or subject to a substantial risk of forfeiture. The income is ordinary because it is compensation for services.

Bow, Inc., an S corporation, has three equal stockholders. For the year ended December 31, Year 1, Bow had taxable income and current earnings and profits of $300,000. Bow made cash distributions totaling $120,000 during Year 1. For Year 1, what amount from Bow should be included in each stockholder's gross income?

$100,000 Each shareholder reports his or her share of the S corporation's income for the year. The income will increase the shareholder's basis and any distributions are not income but decrease the shareholder's basis.

The partnership agreement for Own Associates, a general partnership, provided that profits be paid to the partners in the ration of their financial contribution to the partnership. Moore contributed $10,000, Noon contributed $30,000, and Kale contributed $50,000. For the year ended December 31, Owen had losses of $180,000. What amount of the losses should be allocated to Kale?

$100,000 The partnership agreement specifies that profits are to be allocated based on financial contributions. The RUPA provides that, unless otherwise agreed, losses are allocated in the same manner as profits. Hence. Kale will be allocated loses of $100,000 ($180,000 x ($50,000 / ($10,000 + $30,000 + $50,000))).

Dunn and Shaw are partners who share profits and losses equally. In the computation of the partnership's current-year book income of $100,000, guaranteed payments to partners totaling $60,000 and charitable contributions totaling $1,000 were treated as expenses. What amount should be reported as ordinary income on the partnership's current-year tax return?

$101,000 100,000 + 1,000 charitable contributions

You transfer property with an adjusted basis of $20,000 and a fair market value of $31,000 in exchange for 100% of the stock in a new corporation. You receive 100 shares of stock having a fair market value of $16,000 and $10,000 in cash. The corporation also assumes a $5,000 mortgage on the property. Which of the following is true?

$11,000 gain realized; $10,000 recognized. The gain realized on this transaction is $11,000 [($16,000 FMV of stock + $10,000 cash + $5,000 assumption of liability) - $20,000 adjusted basis of transferred property]. However, the transaction qualifies under Sec. 351 for nonrecognition. Transfer of mortgaged property to a controlled corporation does not require the recognition of gain unless the liabilities transferred or assumed are greater than the basis of all the property transferred. Accordingly, the only gain that must be recognized is the gain attributable to the amount of boot property received. The $10,000 cash received is boot property.

A partnership has three general and two limited partners. Each of the limited partners contributed $5,000. The partnership liabilities are Accounts payable.......... $20,000 Accrued expenses.......... 25,000 Mortgage payable (nonrecourse - secured only by a partnership building with a basis of $150,000) ............75,000 Nonrecourse notes payable (personallyguaranteed by general partners)............ 40,000 If all partners have equal shares of partnership income, loss, and minimum gain, what is each limited partner's share of the liabilities?

$15,000 But limited partners cannot share in nonrecourse debt guaranteed by a general partner. In this question, there is no minimum gain. Therefore, each limited partner's share of liabilities is limited to 20% of the nonrecourse mortgage (20% x $75,000 = $15,000).

Jeffrey, the sole proprietor of a hardware business, hired Eastwood on January 1, year 1 for an agreed salary and a promise to give him a 25% ownership interest if he were still employed at the end of 3 years, and an additional 25% interest if he continued in the business for a second 3-year period. On January 1, year 4, a partnership was formed and Eastwood received a 25% interest in the capital and profits of the business. On that date the net worth of the partnership was $60,000. The partnership has no liabilities. What is Eastwood's tax basis of his partnership interest at January 1, year 4, and what amount should be added to his gross income for year 4? Basis for Addition to Partnership Interest Gross Income

$15,000. & $15,000

For the current year, the Gil and Bill Partnership had book income of $37,000, which included the following: Dividend income---1,000 Short term capital loss---(4,000) SEC 1231 gain---7,000 Sec 1245 gain---1,500 Interest income---750 The partners share profits and losses equally. What amount of partnership income (excluding all partnership items which must be reported separately) should each partner report on his individual income tax return for the current year?

$16,125 37,000+4,000-7,000-1,000-750=32,250/2=16,125

On January 1 of the current year, the Pizza Partnership was formed. Tony acquired a 25% share in the partnership by contributing both an oven that had an adjusted basis to him of $10,000 and $5,000 in cash. The oven was subject to a $2,000 liability. During the year, the partnership also incurred a $20,000 nonrecourse loan and paid off the entire $2,000 liability attached to the oven. There are no guarantees or loss limitation agreements associated with the nonrecourse loan. Operations for the current year resulted in a $2,000 ordinary loss. What is Tony's basis in the partnership at the end of the current year?

$17,500

Doug sold 50% of his business to his son, Ben. The resulting partnership had a profit of $60,000. Capital is a material income-producing factor. Doug performed services worth $24,000, which is reasonable compensation, and Ben performed no services. What is the maximum amount of profit that Ben can report from the partnership for the tax year?

$18,000 Guaranteed payments are deductible by the partnership. After deducting the payment, the partnership's remaining income is $36,000. This income is split between the partners on a 50% basis. Thus, Ben will report his share, which is $18,000.

In return for a 20% partnership interest, Kathy contributed land having a $60,000 fair market value and a $30,000 basis to the partnership. The partnership assumes Kathy's $15,000 liability arising from her purchase of the land. The partnership's liabilities arising from its purchases of assets is $4,000 immediately prior to the contribution. What is Kathy's basis in her partnership interest?

$18,000 Kathy's basis in her partnership interest will be the $30,000 basis of the land to the partnership, decreased by the $12,000 (80% x $15,000) liability assumed by the partnership, and increased by her $800 ($4,000 x 20%) share of partnership liabilities. Therefore, Kathy's basis is $18,800 ($30,000 - $12,000 + $800).

For the current calendar year, the partnership of Bicent and Tennial reported ordinary income of $260,000, which included the following items of expenses and losses: Salaries paid(other than to partners)---70,000 Real estate taxes for partership office---8,000 Charitable contributions---2,000 Repairs---1,000 Foreign income taxes---5,000 Loss on sale of machinery held 7 years---12,000 As a result of the above items, the partnership should adjust its ordinary income and report what amount separately on its tax return?

$19,000 2,000+5,000+12,000

A and B formed a partnership by transferring the following assets to the partnership: A transferred $25,000 in cash and equipment which cost $27,000, had an adjusted basis of $19,800, and had a fair market value of $30,000; B transferred cash of $50,000. The partnership's basis in equipment transferred to the partnership by A is

$19,800

Bern Corp., an S corporation, had an ordinary loss of $36,500 for the year ended December 31, Year 1. At January 1, Year 1, Meyer owned 50% of Bern's stock. Meyer held the stock for 40 days in Year 1 before selling the entire 50% interest to an unrelated third party. Meyer's basis for the stock was $10,000. Meyer was a full-time employee of Bern until the stock was sold. Meyer's share of Bern's Year 1 loss was

$2,000 Income and losses must be allocated on a per-share, per-day basis. $36,500 x 40/365 x 1/2 = $2,000

Mr. G and Mr. H do business as a partnership. They file partnership and individual returns on a calendar-year basis. The partnership had a loss of $12,000 in year 1 and a profit of $10,000 in year 2. Mr. G's distributive share of the loss in year 1 was $6,000 and his share of the profit in year 2 is $5,000. The adjusted basis of his partnership interest before the year 1 loss was $3,000. What is Mr. G's adjusted basis of his partnership interest at the end of year 2?

$2,000 n year 1, Mr. G can deduct only $3,000 of his $6,000 share of the partnership loss because of the basis limitation. After deducting this loss, Mr. G's adjusted basis is zero. In year 2, Mr. G's adjusted basis is increased by his $5,000 share of partnership income. He may also deduct the remaining $3,000 share of the year 1 partnership loss, leaving him with an adjusted basis of $2,000 ($0 + $5,000 - $3,000). Whether the passive loss rules apply has no effect on basis. Basis is decreased by losses even if the losses are not currently deductible under the passive loss rules.

G and H each contributed $25,000 to a newly formed partnership. The partnership agreement provides that G is entitled to a fixed annual salary of $10,000 without regard to the income of the partnership for managing the business. Any profit or loss after the deduction of G's salary is to be shared equally between the two partners. The first year's operation resulted in a loss of $15,000 after G's salary was deducted. What amount of net income or loss from the partnership should G report on his individual income tax return assuming he is a material participant in the partnership's business?

$2,500 income The recipient partner includes the guaranteed payment as ordinary income. G's share of the partnership loss is $7,500 (50% x $15,000). The $10,000 guaranteed payment income minus the $7,500 loss produces net income for G of $2,500. Since G is a material participant in the partnership's business, the passive loss rules do not apply. Note that both the guaranteed payment and the partnership loss should be separately reported, not netted.

At June 30, year 1, Burns and Cooper were equal partners in a partnership with net assets having a tax basis and fair market value of $100,000. On July 1, year 1, Todd contributed securities with a fair market value of $50,000 (purchased 10 years ago at a cost of $35,000) to become an equal partner in the new firm of Burns, Cooper, and Todd. The securities were sold on December 15, year 2 for $65,000. How much of the partnership's capital gain from the sale of these securities should be allocated to Todd?

$20,000 (50,000FMV-35,000 basis)=15,000 Plus 1/3 of postcontribution appreciation (65,000 proceeds - 50,000 7/1/year fmv) =5,000 Todd's share of the capital gain=20,000

The ABC Partnership, consisting of 20 partners, timely filed its year 1 partnership return on April 15, year 2 but failed to include all the necessary information on the return. On October 8 of year 2, it provided the required information but was unable to show reasonable cause for the omission. What is the amount of the penalty to be assessed against the partnership?

$20,000 Under Sec. 6698, the penalty for failing to file a complete partnership return is $200 permonth (or part of a month) that the partnership return is late or incomplete, up to a maximum of 5 months,times the number of persons who were partners at any time during the tax year. The penalty in this case is $20,000 ($200 per month x 5 months x 20 partners).

Arnold Money invested $20,000 for a one-third interest in capital and profits of a partnership. Subsequent to his investment, the partnership had taxable income of $30,000 and nontaxable income of $6,000, and Money withdrew $9,000. After this series of events, the tax basis of Money's interest in the partnership is

$23,000 10,000(1/3*30,000) + 2,000(1/3*6,000) - 9,000= 23,000

Charles Jordan files his income tax return on a calendar-year basis. He is a 3% partner of a partnership reporting on a June 30 fiscal-year basis. Jordan's share of the partnership's ordinary income was $24,000 for the fiscal year ended June 30, year 1, and $72,000 for the fiscal year ended June 30, year 2. How much should Jordan report on his year 1 return as his share of taxable income from the partnership?

$24,000

On January 1 of the current year, the Hack Partnership was formed. Bill acquired a 20% interest in the partnership by contributing a computer system that had an adjusted basis to him of $15,000 and was subject to a $5,000 liability. During the year, the partnership paid off the entire $5,000 liability. The partnership reported ordinary income of $75,000 on its first partnership return. What is the amount of Bill's basis in the partnership on December 31 of the current year?

$25,000 15,000 - 4,000(80%*5,000) - 1,000(20%*5,000) + 15,000(20%*75,000)

The Salt and Pepper Partnership was formed in January of the current year when Salt and Pepper each contributed $10,000 cash and together began to operate a business as equal partners. Both work full-time in the partnership. The partnership borrowed $40,000 on a nonrecourse basis during the year. There are no guarantees or loss limitation agreements. Operations in the year resulted in a $5,000 ordinary loss, $2,000 tax-exempt income, and an $800 charitable contribution. What is Salt's basis at the end of the current year?

$28,100 10,000 + 20,000(50%*40,000) + 1,000(50%*2,000) - 2,500(50%*5,000) - 400(50%*800)

Ben Krug, sole proprietor of Krug Dairy, hired Jan Karl in year 1 for an agreed salary and the promise of a 10% partnership capital interest if Karl continued in Krug's employ until the end of year 4. On January 1, year 5, when the net worth of the business was $300,000, the partnership was formed as agreed. On what amount will Karl have to pay tax in year 5 for the partnership capital interest received by him?

$30,000 : Ordinary income is recognized if services are rendered in return for property. The transaction is treated as if Jan received an undivided 10% interest in each of the enterprises's assets and then contributed them to the partnership. The partnership's basis in the assets deemed contributed by Jan will be their FMV. Jan should recognize income of 10% of the $300,000 net worth of the enterprise, or $30,000.

The Haas Corp., a calendar year S corporation, has two equal shareholders. For the year ended December 31, Year 1, Haas had income of $60,000, which included $50,000 from operations and $10,000 from investment interest income. There were no other transactions that year. Each shareholder's basis in the stock of Haas will increase by

$30,000 Each shareholder must report his or her share of each passthrough item from the S corporation. Each partnership item also increases or decreases the shareholder's basis in the S corporation.

On December 31, Year 1, Edward Baker gave his son, Allan, a gift of a 50% interest in a partnership in which capital is a material income-producing factor. For the year end December 31, Year 2, the partnership's ordinary income was $100,000. Edward and Allan were the only partners in Year 2. There were no guaranteed payments to partners. Edward's services performed for the partnership were worth a reasonable compensation of $40,000 for Year 2. Allen has never performed any services for the partnership. What is Allan's distributive share of partnership income for Year 2?

$30,000 Edward Baker must receive a share of the partnership profits for the services he contributes before the remaining profit or loss is divided among family members. $100,000 - $40,000 = $60,000 / 2 = $30,000

Mr. McRich is a limited partner with a 60% loss interest and a 30% profit interest in the XYZ Partnership. Mr. McRich contributed $10,000 cash for his partnership interest. At the time of his contribution, the partnership had recourse liabilities of $100,000 and nonrecourse liabilities of $70,000. There is no minimum gain related to the nonrecourse debt. For the recourse debt, economic risk of loss is shared by the partners based on each partner's loss interest. Mr. McRich's basis in his partnership interest is

$31,000 All partners, including limited partners, share true nonrecourse debts first as the minimum gain is shared with the excess shared in the same proportion as profits. Mr. McRich's basis in the partnership includes the $10,000 cash contributed plus his share of nonrecourse liabilities based on his profit interest. His total basis in the partnership is $31,000 [$10,000 + $21,000 (30% x $70,000) of nonrecourse liabilities].

Gilroy, a calendar-year taxpayer, is a long-time partner in the firm of Adams and Company, which has a fiscal year ending June 30. The partnership agreement provides for Gilroy to receive 25% of the ordinary income of the partnership. Gilroy also receives a guaranteed payment of $1,000 monthly, which is deductible by the partnership. The partnership reported ordinary income of $88,000 for the year ended June 30, year 2 and $132,000 for the year ended June 30, year 3. How much should Gilroy report on his year 2 return as total income from the partnership?

$34,000 (25%*88,000)=22,000 (1,000*12)=12,000 22,000+12,000=344,000

Clark and Kent share profits and losses of 60% and 40%, respectively. The tax basis of each partner's interest in the partnership as of December 31, year 1, was as follows: Clark....................... $24,000 Kent 18,000 During year 2, the partnership had ordinary income of $50,000 and a long-term capital loss of $10,000 from the sale of securities. There were no distributions to the partners during year 2. What is the amount of Kent's tax basis as of December 31, year 2?

$34,000 18,000 + 20,000(40%*50,000) - 4,000(40%*10,000)= 34,000

Elton received a 25% capital interest in Z Associates, a partnership, in return for services rendered plus a contribution of assets with a basis to Elton of $25,000 and a fair market value of $40,000. The fair market value of Elton's 25% interest was $50,000. The partnership has no liabilities. How much is Elton's basis for his interest in Z?

$35,000 Adjusted basis of assets contributed: $25,000 + Income recognized for services rendered: $10,000

Mojo is a calendar-year, accrual-basis partnership. At the beginning of the current year, the partnership had three partners, Mark, Roger, and Monica. Under the partnership agreement, profits and losses are to be shared in proportion to their contributions. As of January 1 of this year, this was 40% for Mark, 40% for Roger, and 20% for Monica. On November 1 of this year, Monica withdrew from the partnership. The new profit and loss ratios, as of November 1, were 50% for Mark and 50% for Roger. For its tax year ended December 31 of the current year, Mojo had net income of $90,000 which was earned in substantially equal amounts over the course of the year. What is the amount of partnership income that Mark should include on his current-year individual federal income tax return?

$37,500 90,000*10/12*40%=30,000 90,000*2/12*50%=7,500 30,000+7,500=37,500

CDH Partnership, a fiscal year partnership, is equally owned by C, D, and H. The partnership reported net income of $120,000 for the tax year ending October 31, year 1. Partner C, a calendar year taxpayer, withdrew $25,000 from his capital account during the fiscal year. The partnership reported net income of $90,000 for the tax year ending October 31, year 2. What is the amount of partnership income C must report on his year 1 income tax return?

$40,000 Here, CDH Partnership's fiscal year ending October 31, year 1, ended within C's calendar-year return for year 1. C must report $40,000 (his 1/3 share of the $120,000 partnership income for the fiscal year ending October 31, year 1). The withdrawal from C's capital account is merely a reduction in his basis.

For the current year, the Murray and Parker Partnership had book income of $100,000, which included the following: Long-term capital gain---7,000 SEC 1231 loss---(3,000) Dividends---200 Interest paid to partners for use of capital---12,000 The partners share profits and losses equally. What amount of partnership income (excluding all partnership items which must be reported separately) should each partner report in his/her individual income tax return for the current year?

$47,900 100,000+3,000-7,000-200=95,800/2=47,900

Don Kerr received a 10% interest in the capital of Rev Company, a partnership, for services rendered. Rev's net assets at June 1 had a basis of $35,000 and a fair market value of $50,000. What income must Kerr include in his tax return for the partnership interest transferred to him by the other partners.

$5,000 ordinary income. Income is reported when a share of a partnership is received for services rendered. The income is equal to the FMV received and it is ordinary income.

Ralph Elin contributed land to the partnership of Anduz & Elin. Elin's adjusted basis in this land was $50,000 and its fair market value was $75,000. Under the partnership agreement, Elin's capital account was credited with the full fair market value of the land. Anduz made a $75,000 cash contribution to the partnership. Thus, each partner's capital account was credited for $75,000. Elin and Anduz share profits and losses equally. The partnership has no liabilities. What is the adjusted basis of Elin's partnership interest?

$50,000

Anna transferred land with an adjusted basis to her of $20,000 and a fair market value of $56,000 to Elm Corporation in exchange for 100% of Elm Corporation's only class of stock. The land was subject to a liability of $26,000, which Elm assumed for legitimate business purposes. The fair market value of Elm's stock at the time of the transfer was $30,000. What is the amount of Anna's recognized gain?

$6,000

Den and Carr are partners in the Den-Carr Partnership. Under the terms of the partnership agreement, Den is to receive 25% of all partnership income or loss plus a guaranteed payment of $80,000 per year. In the current tax year, Den-Carr had $72,000 of ordinary income before the deduction for Den's payment. What will Carr report as her income (loss) from the partnership assuming she materially participates in the partnership business?

$6,000 ordinary loss. The $80,000 payment to Den is treated as a guaranteed payment, and it will cause an $8,000 loss to the partnership ($72,000 - $80,000). Since Den is to receive 25% of the partnership income, Carr must receive 75% of the income or loss. This results in a $6,000 ordinary loss (75% x $8,000).

Partnership LIFE's profits and losses are shared equally among the four partners. The adjusted basis of Partner E's interest in the partnership on December 31, year 1 was $25,000. On January 2, year 2, Partner E withdrew $10,000 cash. The partnership reported $200,000 as ordinary income on its year 2 partnership return. In addition, $5,000 for qualified travel, meals, and entertainment was shown on a separate attachment to E's Schedule K-1 of Form 1065. Due to the limitation, $2,500 of the $5,000 is unallowable as a deduction. What is the amount of E's basis in the partnership on December 31, year 2?

$60,000 25,000 + 50,000(25%*200,000) - 10,000 - 5,000

The partnership of Truman, Inc. and Bill Hanover realized the following items of income during the current year: Net income from sales--- 62,000 Dividends from domestic corporations--- 4,000 Interest on corporate bonds---3,000 Net long-term capital gains---5,000 Net short-term capital gains---1,000 Net rental income---7,000 The total income which should be reported as ordinary income of the partnership for the current year is

$62,000

What is the nonseparately stated income amount of an accrual-basis, calendar-year S corporation with the following items? Gross Receipts--- 200,000 Interest income--- 12,000 Rental income--- 25,000 COGS and commissions---127,000 Net long-term capital gain--- 17,000 Compensation paid to shareholder--- 10,000

$63,000 Items of income, gain, expense, loss, and credit must be separately stated if those items are specially treated for tax purposes at the shareholder level. These items include interest income, rental income, and net long-term capital gains.

Hall and Haig are equal partners in the firm of Arosa Associates. On January 1, each partner's adjusted basis in Arosa was $40,000. During the year, Arosa borrowed $60,000 for which Hall and Haig are personally liable. Arosa sustained an operating loss of $10,000 for the year ended December 31. The basis of each partner's interest in Arosa at December 31 is

$65,000 Basis on Jan 1-- 40,000 Increase in Liab (50%*60,000)=30,000 Share of partnership loss (50%*10,000)=(5,000) basis on Dec 31--65,000

Sam and Terry formed the ST Partnership as equal partners on July 15 of the current year. As part of the formation, Sam contributed land with a basis to him of $70,000 and a fair market value of $200,000, and Terry contributed property with a basis equal to its $100,000 fair market value. On July 16 of the current year, the partnership mortgaged the land for $150,000 and distributed $100,000 cash to Sam. How much gain (loss) should Sam recognize from these transactions?

$65,000 Sec. 707(a)(2) will treat such a transaction as a sale of the property by Sam (when the transaction is essentially a sale) with respect to the portion of the property given up to the other partner(s). Therefore, Sam will be treated as having sold one-half of the property for $100,000 and contributed the other half to the partnership. His gain on the "sale" is $65,000 [$100,000 - (.50 x $70,000)]. He has no gain on his contribution of the remaining one-half of the land.

In January of the current year, Martin and Louis formed a partnership with each contributing $75,000 cash. The partnership agreement provided that Martin would receive a guaranteed salary of $20,000 and that partnership profits and losses (computed after deducting Martin's salary) would be shared equally. For the first year ending December 31, the partnership's operations resulted in a loss of $18,000 after payment of Martin's salary. The partnership had no outstanding liabilities as of December 31. What is the amount of Martin's partnership basis as of December 31 of the current year?

$66,000 75,000 - 9,000 (50%*18,000)= 66,000

Partnership K uses a fiscal year ending October 31 as its tax year and pays all guaranteed payments when they are deducted. J, a calendar-year partner, received guaranteed payments of $5,000 on November 30, year 1, $15,000 on October 28, year 2, and $15,000 on November 30, year 2. J's distributive share of partnership income for the year ended October 31 of year 2 was $75,000. How much income from the partnership must be included on J's year 2 income tax return?

$95,000 Therefore, the amount of partnership income included on J's return equals $95,000 ($5,000 + $15,000 + $75,000).

Arthur is to receive 30% of partnership income, but not less than $5,000. The partnership has net income of $10,000 before any allocation. How much income should the partners report? 1) Arthur's guaranteed payment 2) Other distributive share 3) Total distributive share

1) 2,000 2) 3,000 3) 5,000 Some guaranteed payments are in the form of a guaranteed minimum; that is, the partner is guaranteed a minimum amount from the partnership each year. In such a situation, the guaranteed payment is the excess of the partner's guaranteed minimum over the partner's distributive share. Arthur's guaranteed payment is $2,000 [$5,000 guaranteed minimum - ($10,000 x .30)] and is deductible by the partnership. Arthur's 30% distributive share of partnership income before the guaranteed payment is $3,000. Arthur reports it on his individual tax return [Sec. 702(a)]. The guaranteed payment of $2,000 is also reported as ordinary income on his individual tax return. Therefore, Arthur's total distributive share of income is $5,000.

Under a partnership agreement, Sybil is to receive 40% of the partnership's income, but not less than $15,000 a year. The partnership's net income for the year was $30,000 before considering the guaranteed amount. What amount can the partnership deduct, and what amount of income is Sybil required to report on her individual tax return? 1)Partnership 2) Sybil

1) 3,000 2) 15,000 Some guaranteed payments are in the form of a guaranteed minimum; that is, the partner is guaranteed a minimum amount from the partnership each year. In such a situation, the guaranteed payment is the excess of the partner's guaranteed minimum over the partner's distributive share. Sybil's guaranteed payment is $3,000 [$15,000 guaranteed minimum - ($30,000 x .4)] and is deductible by the partnership. Sybil's 40% distributive share of partnership income before the guaranteed payment ($30,000) is $12,000. She reports it on her individual tax return [Sec. 702(a)]. The guaranteed payment of $3,000 is also reported as ordinary income on her individual tax

Jones incorporated a sole proprietorship by exchanging all the proprietorship's assets for the stock of Nu Co., a new corporation. To qualify for taxfree incorporation, Jones must be in control of Nu immediately after the exchange. What percentage of Nu's stock must Jones own to qualify as "control" for

80.00% Section 351 provides the rules for a taxfree incorporation. It refers to Sec. 368(c) for the definition of "control." Section 368(c) defines "control" as the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation.

Which taxable year may a newly formed partnership not adopt without obtaining prior approval from the IRS?

A January 31 year-end if it is a retail enterprise with a natural business year ending January 31 and all of its majority and principal partners are on a calendar year.

Which of the following is most likely to qualify as a guaranteed payment under Sec. 707(c)?

A and B contribute cash to their partnership as a capital contribution and agree that the partnership will pay them an 8% annual payment for the use of their capital. The partnership pays the annual amount.

Which of the following tax years may an S corporation use for its taxable year beginning after 1986 (assuming no business purpose exists for another year and assuming an election is not made under Sec. 444)?

A calendar year.

Which one of the following conditions would prevent a corporation from qualifying as an S corporation in the current year?

A corporation that has nonresident aliens as shareholders.

What type of business organization may generally be formed without filing an organizational document or certificate with a state government agency or office?

A general partnership

Dowling is a promoter and has decided to use a limited partnership for conducting a securities investment venture. Which of the following is unnecessary to form the partnership.

All limited partners' capital contributions must be paid in noncash services to the limited partnership.

All of the following individuals do not take a salary. The IRS is most likely to recharacterize distributions as compensation for which of the following taxpayers?

An owner who serves as the primary consultant at a consulting firm.

When inventory that is contributed to the partnership in exchange for a partnership interest is eventually sold:

Any gain or loss the partnership recognizes is ordinary income or loss if the inventory is sold within five years of when it is contributed.

Most unincorporated businesses formed after 1996 can choose whether to be taxed as a partnership or a corporation. The regulations provide for a default rule if no election is made. If an election is not made and the default rules apply, which of the following is true?

Any new domestic eligible entity having at least two or more members is classified as a partnership. Any new domestic eligible entity with a single member is disregarded as an entity separate from its owner. If all members of a new foreign entity have limited liability, the entity is classified as an association.

During the process of assisting a client to choose a business entity, the best course of action for a tax professional is to

Apply professional judgment to an analysis of the client's situation and overall objectives.

Irving Aster, Dennis Brill, and Robert Clark were partners who shared profits and losses equally. On February 28 of the current year, Aster sold his interest to Phil Dexter. On March 31 of the same year, Brill died, and his estate held his interest for the remainder of the year. The partnership continued to operate and for the fiscal year ending June 30 of the current year had a profit of $45,000. Assuming that partnership income was earned on a pro rata monthly basis and that all partners were calendar-year taxpayers, the distributive shares to be included in current-year gross income should be

Aster $10,000, Brill $11,250, Estate of Brill $3,750, Clark $15,000, and Dexter $5,000. Accordingly, Aster and Dexter must prorate their share of partnership income based on the length of time of ownership. For tax years beginning after December 31, 1997, the tax year of a partnership with respect to a partner who dies closes at the date of death [Reg. 1.706-1(c)(3)]. Profit of $45,000 / 3 partners / 12 months = $1,250 monthly income per partner. Aster: 8 months x $1,250 = $10,000 Brill: 9 months x $1,250 = $11,250 Estate of Brill: 3 months x $1,250 = $3,750 Clark: 12 months x $1,250 = $15,000 Dexter: 4 months x $1,250 = $5,000

When a partner in a six-partner partnership dies, the partnership tax year must close

At the end of the regular partnership year for the surviving partners.

A group of six individuals organizes an LLC to conduct a software publishing business in Florida. No individual is specifically authorized to make the election. What individual(s) is (are) required to make the election?

Every member of the entity

Which of the following statements with respect to property contributed to a partnership is false?

Exchanges of partnership interests generally qualify for nontaxable treatment as exchanges of like-kind property.

Which of the following is not taken into account when determining if a gain or loss should be recognized on the transfer of property to a corporation in exchange for a controlling interest in stock of the corporation?

Fair market value of property transferred.

A partner's share of partnership liabilities will be determined in accordance with the partner's ratio for sharing profits under the partnership agreement.

False

A principal partner is one who owns more than half of the partnership's capital interests.

False

All partners are required to sign a partnership return.

False

As a general rule, a partnership tax year is closed by the death of a partner even though the partnership is not terminated.

False

Each of Partnership MNO's three equal partners has a different tax year. All three change their tax years at different times in the current year so that they have the same tax year. The partnership must also change to the same year if no business purpose exists for a fiscal year, and prior approval of the IRS is not required.

False

For federal income tax purposes, the specific allocations of income, credits, and deductions to the partners will be controlled by the partnership agreement even though it cannot be demonstrated that the allocations have substantial economic effect.

False

Helen, a calendar-year taxpayer, is a partner in a partnership that is on a fiscal year that ends January 31. Starting on February 1, year 1, Helen is entitled to a fixed monthly payment of $1,000 without regard to the income of the partnership. Helen should report the guaranteed payments of $11,000 on her year 1 individual income tax return.

False

Kelly Green's distributive share of income from the Shamrock Partnership was $22,000 in year 2. Kelly Green received a distribution of $15,000 of Shamrock Partnership's year 1 earnings on December 15, year 2. She should report $15,000 as ordinary income from Shamrock Partnership, a calendar-year partnership, on her year 2 individual return, Form 1040.

False

Mr. Y, a calendar-year taxpayer, died on September 1 of the current year. He was a partner in a March 31 fiscal-year partnership. Under applicable state law, the partnership terminated with the death of Mr. Y. Mr. Y's final return will include his share of the partnership items only from the partnership year ending March 31 of the current year, but not the period ending with his death.

False

The IRS is concerned that S corporation owners are receiving a salary that is too high.

False

The sole owner of an S corporation who provides services to the company can receive the same fringe benefits as his or her other employees.

False

There are bright line rules for determining how income from limited liability companies is treated for self-employment tax purposes.

False

Your adjusted basis for an interest in a partnership can be less than zero.

False

Z owns a partnership interest in XYZ Partnership. XYZ Partnership timely filed its fiscal-year Year 1 Form 1065 on March 1, Year 2. On the return, the partnership reported a loss. Z filed her Year 1 individual tax return on April 15, Year 2 and claimed her pro rata share of the loss. In April Year 4, the IRS assesses a deficiency on Z due to a misstatement attributable to the Year 1 XYZ Partnership loss. Because more than 3 years have elapsed from the time the partnership filed its Form 1065, the IRS is barred from assessing a deficiency against Z.

False

A charging order issued by a court gives a creditor the right to sell the debtor's interest in an LLC.

False A charging order does not give a creditor the right to sell the LLC interest; it only gives the creditor the right to wait for LLC distributions if and to the extent they are made.

A general partner may not also be a limited partners in the same partnership.

False A general partners assumes management of the partnership and has full personal liability for debts of the partnership. A person can be both a general partner and a limited partners with the rights and liabilities of each.

Limited partners are able to be active in the management of the limited partnership.

False A limited partners is an investor who makes a contribution of cash or other property to the partnership in exchange for an interest in the partnership. A limited partners is not active in management of the partnership.

A major advantage of a sole proprietorship is that it can easily raise equity capital other than the personal resources of the proprietor.

False A major weakness of a sole proprietorship is that it cannot raise equity capital other than the personal resources of the proprietor.

An LLC name must contain language clearly identifying it as a disregarded entity.

False An LLC name must contain language or an abbreviation clearly identifying it as an LLC. The "C" simply stands for company, not corporation.

General partnerships limit each partner's personal liability for all losses and debts of the business.

False General partners are exposed to unlimited liability. General partnership expose owners to liability risk because the owners may be liable for their partners' acts.

Mr. D and Mr. E formed a calendar-year partnership. Mr. D contributed land that had a basis to him of $5,000 and a fair market value of $10,000. The land was contributed subject to a mortgage of $3,000. Mr. E is to manage the partnership's business for which he will receive a one-half interest in the profits, losses, and capital of the partnership. Neither of the partners nor the partnership is required to recognize gain or loss on the formation of the partnership.

False In general, no gain or loss is recognized by the partnership or the partners when property is contributed to the partnership in exchange for a partnership interest [Sec. 721(a)]. However, Sec. 721 does not prevent a partner from recognizing compensation income when a partnership interest is received in exchange for services. Mr. E must recognize the fair market value of the partnership interest he received as ordinary income. The partners other than E will recognize gain with respect to the portion of the partnership assets transferred to E as compensation.

The rule that neither the partner nor the partnership recognizes a gain or loss when property is contributed to the partnership in exchange for a partnership interest applies only at the time the partnership is being formed.

False In general, under Sec. 721, no gain or loss shall be recognized by a partnership or any ofits partners when contributing property to the partnership in exchange for a partnership interest.

State law often requires a member of an LLC to give written notice of withdrawal at least 1 to 2 years in advance.

False It is fairly common for state law to condition the right to withdraw on written notice anywhere from 30 days to 6 months prior to the withdrawal, unless otherwise provided in the LLC's operating agreement.

LLCs may only use the cash method of accounting if they have C corporation members.

False LLCs, like S corporations and partnerships, may use the cash method if they do not have as members C corporations (other than personal service corporations) or allocate more than 35% of their losses to persons not active in the management of the LLC.

Losses and deductions are passed through for sole proprietorship, partnerships, and C corporations to the owners.

False Losses and deductions are passed through for sole proprietorships, partnerships, and S corporations (not C corporations) to the owners. However, the loses and deductions are limited to the owner's basis in the entity, the owner's at-risk basis, and the passive activity loss rules.

Mr. Diaz and Mr. Garcia are both dentists who maintain separate practices, but they share the same office space. They equally divide the expenses, such as receptionist salary, rent, and utilities. This arrangement is a partnership for federal income tax purposes.

False Partnerships include organizations that carry on a business, financial operation, or venture with a profit motive. A joint undertaking merely to share expenses is not a partnership [Reg. 301.7701-1(a)]. Mr. Diaz and Mr. Garcia do not have a partnership for federal income tax purposes.

S corporations are more beneficial than LLCs because LLC have relatively restrictive and inflexible requirements on the number of owners and types of owners.

False S corporations are creations of the federal tax law and have relatively restrictive and inflexible requirements on the number of owners (limited to 100) and types of owners (limited to U.S. citizens and residents and certain trusts and excluding corporations and partnerships).

Mr. P, Mr. W, and Mrs. S are the only shareholders in a domestic corporation. At a board of directors meeting on February 15 of the current year, W and S voted to elect S corporation status for the current year. Mr. P was available but would not sign the consent. W and S filed the election form, Form 2553, the next day. This constitutes a valid election for S corporation status.

False Sec. 1362(a)(2) states that an election for S corporation status is valid only if all personswho are shareholders consent to the election. Thus, if Mr. P does not consent to the election, it will not be valid. Under Sec. 1362(b)(5), the IRS has the ability to waive the effect of an invalid election caused by Mr. P failing to sign the consent form in a timely manner. Mr. P does have to file the consent for the election to be valid.

Sole proprietorships and partnerships can be transferred.

False Sole proprietorships cannot be transferred. If the business is sold, the owners reports the sale as if each asset were sold. Partners can transfer their ownership interests in the partnership to other individuals or entities.

Syndication fees, which are costs connected with the issuing and marketing of interests in a partnership, such as commissions, professional fees, and printing costs, must be capitalized and amortized over a period of 180 months.

False Syndication fees must be capitalized and cannot be amortized. However, Sec. 709(b) allows a partnership to amortize organizational expenses over a period of 180 months.

Best Bank, a mutual savings bank, uses the reserve method of accounting for bad debts. Best Bank is ineligible to elect S corporation status.

False The 1996 Tax Act reduces the types of financial institutions that are ineligible to elect S corporation status. The following financial institutions are eligible to elect S corporation status: (1) domestic building and loan associations, (2) any mutual savings bank, and (3) any cooperative bank without capital stock organized and operated for mutual purposes and without profit.

A disadvantage of an LLC is there can only be one class of stock.

False The advantages of limited liability and avoidance of double taxation may attract member-investors. LLCs may also have different classes of ownership (i.e., more than one class of stock).

amount shown in the partnership books as a partner's capital account is the same as the basis of a partner's interest in the partnership.

False The basis of a partner's interest in a partnership reflects the money and adjusted basis of any property contributed and includes the partner's share of liabilities. A partner's capital account, however, usually reflects the money and fair market value of property contributed and does not include liabilities. There is no requirement that the capital account and basis relate to each other.

Corporation X began operations on January 1 of this year and met all of the requirements to qualify as an S corporation. On March 15 of this year, X filed a valid Form 2553 to elect S corporation status. X cannot be treated as an S corporation until next year.

False The election to be taxed under Subchapter S is made on Form 2553 (election by small business corporation to tax corporate income directly to shareholders). Under Sec. 1362(b), the election becomes effective at the beginning of the current tax year if the form is filed during the previous tax year or during 2 1/2 months of the beginning of the current tax year.

The proprietor and the proprietorship are distinct legal entities.

False The proprietor and the proprietorship are not distinct entities, so the income/loss of the business is reported by the proprietor.

Corporation X began operations on January 1, 2022, and met all of the requirements to qualify as an S corporation. On March 15, 2022, X filed a valid Form 2553 to elect S corporation status. X cannot be treated as an S corporation until 2023.

False The requirements are met for a retroactive classification.

The termination of an LLC for state law purposes does not terminate the LLC for federal tax purposes.

False The termination of an LLC for state law purposes has no effect on whether an LLC terminates for federal tax purposes.

Mr. Snow and Ms. White formed a partnership. Snow contributed $20,000 in cash and White contributed equipment having a fair market value of $20,000 and an adjusted basis to her of $16,000. The partnership's basis in the equipment is $20,000.

False Under Sec. 723, the partnership's basis in property is the contributing partner's basis at the time of the contribution. Therefore, the partnership's basis in the equipment is Ms. White's adjusted basis of $16,000.

Elijah contributes land (basis of $80,000; fair market value of $400,000) for a 20% interest in a partnership. The land is subject to a mortgage of $50,000 which the partnership assumes. As a result of the transfer, Elijah:

Has a basis in the partnership of $40,000. Elijah's basis is $40,000 [$80,000 (basis in the land) - $40,000 (80% × $50,000—the portion of the mortgage assumed by the other partners). Elijah recognizes no gain on the transfer.

Which of the following will prevent a corporation from qualifying as an S corporation in the current year?

Having a partnership as a shareholder.

A major characteristic of the corporation is its status as a separate legal entity. As such, it may withstand attempts to "pierce the corporate veil." The corporation that is least likely to withstand such attempts successfully is one that

Hold assets only to defraud creditors.

Client is an LLC. What is required for your client to exist as an LLC within the state? I. Articles of organization filed with the state. II. Articles of organization accepted by the secretary of state. III. Articles of organization published and disseminated to the public by the state. IV. Articles of organization accepts by the Secretary of the U.S. Department of Commerce.

I and II only

Which of the following statement is (are) usually true regarding general partners' liability? I All general partners are jointly and severally liable for partnership torts. II All general partners are liable only for those partnership obligations they actually authorized.

I only

Which of the following is true? I. A member may be able to retire from an LLC. II. A member may be able to withdraw from an LLC. III. A member can be penalized for withdrawing from an LLC.

I, II, & III

Allowed contributions to the LLC from a member include I. Cash II. Property III. Services rendered IV. Promissory note

I, II, III, & IV

Jerry fully owns an S corporation which provides health insurance to his employees, including himself. Jerry takes a $70,000 salary and his health insurance premiums are $5,000. How does Jerry treat the amount paid for his own personal health insurance.

Jerry's W-2 includes the premiums paid as an addition to income for federal income tax purposes but not Social Security and Medicare. Jerry can take an above-the-line deduction for the premiums paid on Form 1040.

Leslie, Kelly, and Blair wanted to form a business. Which of the following business entities does not require the filing of organization documents with the state?

Joint venture

Alpha Partnership is on a fiscal year ending March 31. Partner Alf reports income on the fiscal year ending March 31, and Partner Omega reports income on the fiscal year ending September 30. Both partners have a 50% interest in partnership profits. Assume the partnership does not make a Sec. 444 election and does not establish a business purpose for a different period. The tax year that the partnership must use to file its tax return ends on

March 31

Mary and Paul are plumbers. They went into business together and decided that the corporation structure would be in their best interest. On January 1, Year 1, they formed the M & P Corp. They did not file a Form 2553. Mary and Paul filed an 1120S return at the end of the year and paid self-employment tax on their respective shares of the income. All of the following statements are true except

Mary and Paul have until March 16, Year 2 to make a valid election for Year 2.

Rachael and Ray form an equal partnership, R&R, on January 1, 20X1. Rachael contributes $100,000 in exchange for her one-half interest; Ray contributes land worth $100,000. Ray's adjusted basis in the land is $30,000. Which of the following statements is accurate with respect to this exchange?

Neither Rachael, Ray, nor R&R recognize any gain or loss on the transfer.

Tau Corporation, which has been operating for 15 years, has an October 31 year-end, which coincides with its natural business year. On May 15 of this year, Tau filed the required form to elect S corporation status. All of Tau's shareholders consented to the election, and all other requirements were met. The earliest date that Tau can be recognized as an S corporation is

November 1 of this year. Sec. 1362(b) allows a corporation to make a proper election within the first two months and 15 days of the year and be effective the first day of that tax year. An election made after the first two months and 15 days of the year is effective as of the next year. Since Tau Corporation filed its election outside the two months and 15 days period, the election will be effective for the first day of the next tax year beginning November 1 of this year. Under Sec. 1362(b)(5), the IRS may treat a late-filed election as timely filed if reasonable cause existed. Note that an S corporation may have a fiscal year that coincides with its natural business year (with IRS consent).

Aaron transferred property worth $75,000 and services worth $25,000 to the BJ Corporation. In exchange, he received stock in BJ valued at $100,000. Immediately after the exchange, Aaron owned 80% of the only class of outstanding stock. Which of the following is true with regard to Aaron's treatment of this transaction?

Ordinary income of $25,000.

In each of the following situations, assume that capital accounts are maintained in accordance with the Sec. 704 regulations, the allocation is reflected in the capital account, and liquidation is in accordance with capital accounts with deficit balances to be restored on liquidation. Which of these special allocations has substantial economic effect?

Partner A receives all depreciation deductions. Gains and losses from the sale of depreciable assets are allocated pro rata among the partners.

Under the Internal Revenue Code sections pertaining to partnerships, guaranteed payments are payments to partners for

Services or the use of capital without regard to partnership income

In the absence of a member agreement, in general, how are profits and losses shared by members of a limited liability company in a state that has enacted the Unform Limited Liability Company Act?

Shared equally.

Which one of the following is not a requirement to make an S corporation election?

Shareholder consent must be unanimous.

Which of the following is a false statement about the taxation of a limited liability company (LLC)?

Single-member LLCs must be taxed as corporations.

Bill and Ted form a partnership with cash contributions of $40,000 each. Bill is a limited partner. Under the partnership agreement, Bill and Ted share all partnership profits and losses equally. The partnership borrows $100,000 from a local bank to purchase depreciable equipment to be used in the partnership's business. Ted is required under the partnership agreement to pay the creditor if the partnership defaults. Based upon these facts, what are Bill's and Ted's bases in the partnership? Ted: Bill:

Ted: $140,000 Bill: $40,000

Which of the following is not a client objective in the decision of which entity to use?

The client needs to determine whether to produce or purchase a product.

Which one of the following will render a corporation ineligible for S corporation status?

The corporation has 200 unrelated stockholders.

Which of the following conditions will prevent a corporation from qualifying as an S Corporation?

The corporation has both common and preferred stock.

Which of the following is a characteristic of a sole proprietorship but not a general partnership without a majority partner?

The death of one owner causes the termination of the business.

Which of the following is a true statement with respect to a partnership electing under Sec. 444 a fiscal year which is not normally required and for which a business purpose does not exist?

The election requires a payment to approximate the tax the partners would have paid if the partnership switched to its required year.

Which one of the following is least important when reviewing the partnership agreement for income tax purposes?

The form of the agreement.

A partner's taxable income arising from the partner's interest in a partnership includes

The partner's share of partnership income, whether or not distributed to the partner during the year.

A partner's taxable income, arising from the partner's interest in a partnership, includes

The partner's share of partnership income, whether or not distributed to the partner during the year.

Which of the following statements is false with respect to partnership agreements?

The partnership agreement can be modified for a particular tax year after the close of the year, but not later than the date for filing the partnership return for that year, including extensions.

Rose and Irene each have a 50% interest in a partnership that started business on July 1. Rose uses a calendar year while Irene has a fiscal year ending November 30. Which of the following is true?

The partnership must use the fiscal year ending November 30 because it results in a deferral of 1 month.

On January 1 of the current year, Dan and Lee formed a partnership to manufacture furniture. Dan has been a developer and land dealer. He contributed land from the inventory of his other business that had a $25,000 basis and a fair market value at the time of the transfer of $30,000. Lee contributed $25,000 in cash. Both partners and the partnership use the calendar year and cash method. On October 31 of the current year, the partnership sold the land contributed by Dan for $35,000. Which of the following statements is true?

The partnership reports ordinary income of $10,000. The basis of the land to Dan was $25,000. The land is considered inventory by Dan so when it is sold it is considered ordinary income unless held by the partnership for more than 5 years. Here, the land is sold within 1 year so it retains ordinary income character. There is a $10,000 gain recognized by the partnership on the sale of the land ($35,000 sales price - $25,000 basis). The gain is all ordinary income. The first $5,000 of gain ($30,000 contribution - $25,000 basis) is precontribution gain and allocated to Dan. The remaining $5,000 gain is reported by the partnership as ordinary income and allocated to the partners according to their profits interests.

Both separately stated items and the nonseparately stated income or loss are passed through to the shareholders of an S corporation in proportion to their shareholdings.

True

Certain investing or operating agreement partnerships may be completely excluded from being treated as a partnership for federal income tax purposes. All of the members must choose to be excluded and the partnership has to file a partnership return, Form 1065, by the due date of the return, including extensions, for the first year it wishes to be excluded.

True

D, N, and S formed a partnership on December 1 of the current year. The partnership is on a calendar-year basis. The agreement calls for each of the partners to put up one-third of the capital required to buy a business by January 15 of next year. No other expenses are incurred. No partnership return is required for the current year.

True

Each partner is required either to treat items on his/her return consistently with the treatment on the partnership return or to file a statement with his/her return identifying the inconsistency.

True

For federal tax purposes, certain business entities formed after 1996 are automatically classified as corporations. Other business entities with at least two members can choose to be classified as either an association taxable as a corporation or a partnership. A business entity with a single member can choose either to be classified as an association taxable as a corporation or to be disregarded as an entity separate from its owner.

True

Guaranteed payments made by a partnership to a partner for services or for the use of capital, to the extent they are figured without regard to the income of the partnership, are treated by the partnership in the same way as payments made to a person who is not a partner. This treatment applies only for the purposes of determining gross income and deductible business expenses.

True

In contrast with limited partnerships, LLC liability is comparable to that of corporations in accordance with state law.

True

LLC operating agreements generally need not include organizational formalities.

True

Ms. M, a cash-basis, calendar-year taxpayer, became a partner in Partnership C on July 1, year 1 by purchasing her partnership interest for $10,000. C files its return for a fiscal year ending June 30. On December 31, year 1, C made a cash distribution to Ms. M of $5,000. Ms. M's share of C's partnership income for the year ending June 30, year 2 was $10,000. Ms. M does not have to report any income from the partnership on her year 1 return.

True

The character of a partner's distributive share of a partnership item of income, gain, loss, credit, or deduction that the partner must take into account separately, is determined as if the partner had realized it directly from the same source or incurred it in the same manner as it was realized or incurred by the partnership.

True

The limited liability protection offered to corporations and LLCs will be ignored when the entity is used to defeat the public interest.

True

The owners of an LLC who participate in management have limited liability.

True

Under Sec. 444, certain partnerships may elect to use a tax year that is different from their required tax year. A newly formed partnership that begins operations on December 1 and is owned by calendar year partners may make a Sec. 444 election to adopt a September 30 tax year, assuming they meet the other requirements.

True

Under the terms of a partnership agreement, Tom is entitled to a fixed annual payment of $10,000 without regard to the income of the partnership. Tom's distributive share of the partnership is 20%. The partnership has a $40,000 loss after deducting Tom's guaranteed payment. Tom must report the full amount of the guaranteed payment and separately take into account his share of the partnership loss.

True

WMW Partnership began operations on September 11, year 1, and is qualified to make a Sec. 444 election to use an October 31 year-end for its tax year beginning September 11, year 1. WMW must file Form 8716, Election to Have a Tax Year Other Than a Required Tax Year, by February 15, year 2, which is the due date of the partnership's tax return for the period September 11, year 1, to October 31, year 1.

True