LVL 10 Partnership Cards
The taxpayer is ordered to pay $90,000 in treble damages. The award originated from a civil suit by a customer under the Clayton Antitrust Act. The taxpayer also pleaded guilty to an antitrust violation in criminal proceedings. The taxpayer may not deduct any of the payment. A. True. B. False.
A
14.5.6 The partnership of Truman inc., and Bill Hanover realized the following items of income during the current year: NI from sales- $62,000 div from domestic corps -4,000 interest on corp bonds -3,000 net LT cap gain - 5,000 net ST cap gain -1000 net rental income -7,000 the total income that should be reported as ordinary income of the partnership for the current year is
A. $62,000 ordinary income of a partnership consists of balance of taxable income which does not have to be separately stated
2 George, a sole proprietor, may deduct various taxes imposed by federal, state, local, and foreign governments, if he incurs them in the ordinary course of his business. All of the following are deductible on Schedule C, Form 1040, except A. Real estate taxes on real property used in his business. B. State and local income taxes on net income. C. Personal property taxes on personal property used in his business. D. Gasoline taxes included in the cost of fuel used in his business.
B.
Interest and penalties paid on an individual income tax deficiency are deductible as a business expense if the deficiency was related to income from a business. A. True. B. False.
B.
14.3.16 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 an FMV of $40,000. The FMV of Elton's 25% interest was $50,000. The partnership has no liabilities. How much is Elton's basis for his interest in Z?
B. $35,000 25,000 - adj basis of assets contributed 10,000 - income recognized for services rendered
14.3.11 The following info pertains to land contributed by Pink for a 50% interest in a new partnership: adj basis to pink $100,000 FMV $300,000 mortgage assumed by partnership $30,000 partnership has no other liabilities. the basis for pink's partnership interst is
B. $85,000 100,000- adj basis of land contributed (15,000)- 30,000 * 50% share of mortgage assumed by other partners ---------------------------------------------------------- $85,000 basis
14.4.3 Which one of the following statements regarding a partnership's tax year is true?
B. 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
Rhonda has 10 employees working in her ice cream shop. She withholds the employees share of FICA taxes from their wages and pays it to the government along with the employer's share. Who can claim an income tax deduction for the FICA taxes? A. Rhonda should not withhold FICA taxes from the employees' wages B The employees can claim a deduction on their personal returns for the amount withheld from their salaries C. Rhonda may deduct her share of the employees taxes, but the employees may not D. Both Rhonda and the employees can deduct the amount they paid for their own shares.
C
Which of the following payments incurred in a business are deductible for federal tax purposes? I.Sales tax on the purchase of equipment used in a business II. Federal income tax III. Federal unemployment insurance tax IV. Import duty tax A. I and II only B. III and IV only C. I,III, and IV only D. II, III, and IV only
C
AMJ Enterprises is a small book publisher. It incurred the following as its miscellaneous expenses: Bank service charges $ 70 Office supplies 100 Advertising 600 Fees to attorneys and CPAs 2,400 Interest for the entire period of a 5-year loan taken out on January 1 2,500 How much of the above may AMJ Enterprises deduct for the current year? A. $770 B. $3,570 C. $3,670 D. $5,670
C.
14.3.5 On June 1 of the current year, Kelly received a 10% interest in Rock Co., a partnership, for services contributed to the partnership, for services contributed to the partnership. Rock's net assets at the date had a basis of $70,000 and a FMV 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?
C. $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
14.3.15 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 adj basis to A of $100,000 and a FMV 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?
C. $100,000 the partnership's basis in property is the contributing partner's basis at the time of contribution.
14.3.6 Ralph Elin contributed land to the partnership of Anduz & Elin. Elin's adjusted basis in this land was $50,000, and its FMV was $75,000 Under the partnership agreement, Elin's capital account was credited with the full FMV 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?
C. $50,000 the adjusted basis of a partner's interest is the amount of money contributed plus the adjusted basis of property contributed.
14.3.9 Eng contributed the following assets to a partnership in exchange for a 50% interest in the partnerships' capital and profits: Cash $50,000 Equipment: FMV $35,000 adj Basis $25,000 the partnership has no liabilities. The basis for Eng's interest in the partnership is
C. $75,000 money contributed $50,000 adj basis of equipment $25,000 ---------------------------------- basis $75,000
14.3.1 Which of the following statements with respect to property contributed to a partnership is false?
C. Exchanges of partnerships interest generally qualify for nontaxable treatment as exchanges of like-kind property
14.1.2 For federal income tax purposes, all of the following statements regarding partnerships are true except
C. 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
14.5.1 In the computation of the ordinary income of a partnership, a deduction is allowed for
C. guaranteed payments to partners
14.4.2 With respect to a partner who sells or exchanges his entire interest in a partnership, the closing of the partnership year occurs
C. on the date of the sale of exchange
14.1.5 Which of the following statements is false with respect to partnership agreements?
C. the partnership agreement can be modified for 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
14.6.9 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 FMV at the time of transfer of $40,000. Lee contributed $25,000 in cash. Both partners and the partnership use the calendar year, 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?
C. the partnership reports ordinary income of $10,000 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.
All of the following expenses incurred in the course of operating a business are deductible business expenses except A. In-house de minimis lobbying expenses of less than $2,001 B. Public Service advertising that keeps the name of the business before the public C. Advertising in a concert program the local church is sponsoring D. Advertising in a convention program of a political party. The proceeds from the publication of the program are for the local use of the political party.
D
Mr. E, a sole proprietor, made the following payments in the current year. Which payment is not a capital expenditure? A. Freight paid on new equipment purchased B. Cost or rewiring a building to install a new computer C. A payment made to eliminate competition for 5 years D. A payment to have machinery moved from one location to another
D
Start-up expenditures of a business may be amortized over a period of not less than A. 12 months B. 60 months C. 90 months D. 180 months
D
Which of the following business-related insurance premiums are deductible? A. Insurance against loss of sole proprietor's earnings due to sickness B.Self-insurance reserve funds C. Workers' compensation on behalf of partners in a business partnership D. Life insurance premiums on the life of an employee when the employee's wife is the beneficiary
D
Which of the following expenditures may be fully deductible in the year incurred or paid? A.Sales taxes on equipment used in a business B. Business start-up expenditures of $6,000 C. Insurance on the loss of employer's earnings due to sickness or disability D. Cost of developing computer software.
D
Which of the following expenditures incurred in the operation of a business is not required to be capitalized? A. Cost of replacing an old shingle roof with a new tile roof B. Cost of changing from one heating system to another C. Cost of replacing an old truck used for business delivery D. Cost of replacing small tools
D.
14.3.10 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?
D. cap gain recognized $1600 basis of partnership interest $0 if amount of liab assumed by the partnership exceeds the contributing partner's basis in the partnership, the excess is treates as a cap gain. BASIS can never be NEGATIVE Earl's basis 8000- property contributed (9600)- 12,000 * 80% - relieved indiv liab ----------------------------------------- (1600) = cap gain
14.6.7 At June 30, Year 1, Burns and Cooper were equal partners in a partnership with net assets having a tax basis and FMV of $100,000. On July 1, Year 1, Todd contributed securities with a FMV 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?
D. $20,000 15,000(50 FMV -35 basis) precontribution appreciation 5000 - 1/3 of post contribution appreciation (65 proceeds - 50 FMV)
14.3.3 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?
D. $30,000 recognize 10% of $300,000 net worth. ordinary income is recognized if services are rendered in return for property.
14.2.6 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?
D. 60 months
14.6.12 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 the capital accounts with deficit balances to be restored on liquidation. Which of these special allocations had substantial economic effect?
D. Partner A receives all depreciation deductions. Gains and Losses from the sale of depreciable assets are allocated pro rata among the partners.
14.6.14 When the AQR partnership was formed partner Acre. Contributed land with a FMV of $100,000 and a tax basis of $60,00 in exchange for a 1/3 interest in the partnership. The AQR partnership agreement specifies that each partner will share equally in the partnership's profits and losses. During its first year of operation, AQR sold the land to an unrelated third party for $160,000. What is the proper tax treatment of the sale?
D. The first $40,000 gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership
14.1.4 Which one of the following is least important when reviewing the partnership agreement for income tax purposes?
D. The form of the agreement
14.6.10 which of the following statements is false?
D. The partnership is required to file a declaration of estimated tax in any year it anticipates profit the partnership tax return is only an informational return
14.1.1 Which of the following organizations formed after 1996 cannot be classified as a partnership?
D. all of the answers are correct A. an insurance compant B. a tax-exempt org C. a real-estate investment trust
14.4.1 When a partner in a six-partner partnership dies, the partnership tax year must close
D. at the end of the regular partnership year for the surviving partners
A partner's receipt of guaranteed payments is a form of qualified business income
True
A partnership generally must adopt the same tax year as its majority partners
True
A partnership will terminate and its tax year will close if the partnership ceases to carry on any business activity
True
If Margo and Bruce purchase and operate an ice cream store, for tax purposes they formed a partnership
True
If a partner has a more than 50 percent interest in a partnership, a capital gain resulting from the sale of property by the partner to the partnership will be taxed as ordinary income to the partner, provided the property is not a capital assets to the partnership
True
In general, income is recognized by the partner when a partnership interest is received in exchange for services rendered to the partnership
True
Ownership of a partnership interest by a taxpayers brother is considered indirect ownership by the taxpayer
True
The at risk acts to prevent tax shelters from generating large losses for their investors while exposing them to little personal risk
True
The holding period of property contributed to a partnership includes the period of time that the contributor has held the property
True
There is no general partner required in a limited company
True
Mr. X, an insurance broker, pays kickbacks to car dealers who refer insurance companies to him. There is a state law against such payments but the la is never enforced. There is no federal law against such payments. Mr. X can deduct the kickback payments. A. True B. False
A
The taxpayer is ordered to pay $60,000 in treble damages. The award originated from a civil suit by a customer under the Clayton Antitrust Act. No criminal proceedings for the antitrust violation ever occurred. The taxpayer may deduct the entire payment. A. True. B. False.
A
In the current year, Mr. X incurred $12,000 in qualified expenses to make a public transportation vehicle used in his business more accessible to handicapped people. Mr. X may deduct the expenses in the current year. A. True. B. False.
A
Mr. C, owner of a sole proprietorship, purchased an insurance policy that will pay for business overhead expenses in the event he is disabled for a long time. The premiums on this policy are deductible as an insurance expense. A. True. B. False.
A
All of the following insurance premiums are ordinarily deductible as a business expense except A. Workers' compensation on behalf of partners in a business partnership. B. Life insurance on the life of an employee with the employee's wife as the beneficiary. C. Group health insurance that does not contain continuation coverage to employees. D. Malpractice insurance covering a professional's personal liability for negligence resulting in injury to business clients.
A.
In the current year, if you are self-employed, you can deduct, as a business expense, 100% of the amount you pay for medical insurance for yourself and your family, as an adjustment to arrive at adjusted gross income on your individual income tax return. A. True. B. False.
A.
Mr. R is a self-employed over-the-road trucker who uses the cash method of accounting. Which one of the following expenses paid during the current year would be deductible on Mr. R's Schedule C? A. Penalty for late delivery of cargo paid to Corporation V. B. Fine for speeding in business truck paid to City A. C. Overweight fine paid to State B. D. Contribution to Bull Moose political party in an attempt to receive a trucking contract.
A.
Which of the following items generally cannot be deducted or amortized over its useful life over a statutory period? A. Commission to stockbroker for issuing and selling initial stock offering B. Business start-up cost C. Goodwill acquired as part of a bulk purchase of the assets of a business D. Attorney's fees paid in perfecting a patent application
A.
14.3.4 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 purchases 10 years ago for $20,00 had a FMV of May 1 of $100,000. On May 1 of the current year, the FMV 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?
A. $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
14.3.2 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 assumed 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?
A. $18,800 $30,000- basis of land (12,000) - 15,000 * 80% liability assumed by partnership 800 - 4,000 * 20% share of partnership liabilities --------------------------------------------------------- 18,800
14.3.17 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 FMV of $30,000; B transferred cash of $50,000. The partnership's basis in equipment transferred to the partnership by A is
A. $19,800 the partnership's basis for contributed property is the adjusted basis of such property to the contributing partner at the time of the contribution.
14.6.3 For the current year, the Murray and Parker partnership had book income of $100,000, which included the following: LT cap gain - $7,000 Sec 1231 loss - (3000) 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 or her individual income tax return for the current year?
A. $47,900 book income- $100,00 sec 1231 loss- 3000 LT cap gian (7000) dividends (200) ------------------------------ 95,800 95,800 * 50% = 47,900
An employer may deduct premiums paid on an ordinary life insurance policy covering the life of an officer-employee if the employer is the direct beneficiary. A. True B. False
B
Brian borrowed $10,000 from his local bank in order to fund the cost of a business venture. The bank required Brian to take out a life insurance policy on his own life as security for the loan. Premiums paid on this policy are deductible as a business expense since they are related to a business venture. A. True B. False
B
Mr. C considers it necessary to his business to pay kickbacks to the purchasing agents of his customers. The employers of the purchasing agents are unaware of these payments. The kickbacks are in violation of the law in the state in which Mr. C resides and the law is generally enforced. Mr. C may deduct the kickbacks as a business expense. A. True. B. False.
B
Mr. K, a long-haul trucker, incurred fines in the current year for violation of state maximum highway weight laws. These fines are deductible because they are both ordinary and necessary in the operation of the business. A. True B.False
B
State X imposes a tax based upon the amount of fixed assets a business owns. An individual proprietor would deduct this tax on which schedule? A. Schedule A. B. Schedule C. C. Schedule E. D. Schedule SE.
B
14.2.4 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?
B. Every member of the entity
14.2.2 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?
B. Partnership
14.1.3 For federal income tax purposes, a partnership other than a publicly traded partnership is
B. considered to be a nontaxable entity but must file an information return
14.3.20 The holding period of property acquired by a partnership as a contribution to the contributing partner's capital account
B. includes the period during which the property was held by the contributing partner the holding period "tacks on" because the partnership receives a carryover basis in the contributed property
14.6.5 A partner's taxable income arising from the partner's interest in a partnership includes
B. the partner's share of partnership income, whether or not distributed to the partner during the year
A partnership may deduct a single personal exemption in calculating ordinary taxable income or loss
False
A partnership may not show a loss as a result of deducting guaranteed payments made to the partner
False
A partnership reports its income or form 1040
False
Because a partnership does not pay taxes, a partnership is not recognized as a legal entry under civil law
False
Guaranteed payments received from a partnership are included in the income of the partner receiving the payments on a cash basis, without regard to the parnership
False
Income from a partnership is taxed to the partner receives the income as a distribution during the year
False
Losses are disallowed for transactions between a partnership and a partner who has a 50 percent interest in the partnership
False
Losses on transactions between a partnership and its partners are always disallowed
False
Partnership income is taxed at the same tax rates as the income of corporations
False
Partnership losses that are not used because a partners basis in the partnership interest is zero may not be carried forward and are lost by the partner
False
The at risk rule does not apply to activities involving real estate
False
The at-risk rule applies, with limited exceptions, to all taxable activities
False
The basis of a partner's interest in a partnership is increased by losses of the partnership allocated to the partner
False
The tax year of a partnership generally closes upon entry of a new 20% partner
False
The following information pertains to property contrib-uted by Gray on July 1, 2010, for a 40% interest in the capital and profits of Kag & Gray, a partnership: As of June 30, 2010 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 2010 return on the contribution of property to the partner¬ship? a) $0 b) $ 6,000 c) $30,000 d) $36,000
a) $0 The requirement is to determine the amount of gain reportable in Gray's return as a result of Gray's contribution of property in exchange for a 40% partnership interest. Generally, no gain or loss is recognized on the contribution of property in exchange for a partnership interest. Note that this nonrecognition rule applies even though the value of the partnership capital interest received (40% × $150,000 = $60,000) exceeds the fair market value of the property contributed ($30,000).
The partnership of Felix and Oscar had the following items of income during the taxable year ended Decem-ber 31, 2010. -Income from operations: $156,000 -Tax-exempt interest income: $8,000 -Dividends from foreign corporations: $6,000 -Net rental income: $12,000 What is the total ordinary income of the partnership for 2010? a) $156,000 b) $174,000 c) $176,000 d) $182,000
a) $156,000 The requirement is to determine the ordinary income of the partnership. Income from operations is considered ordinary income. The net rental income and the dividends from foreign corporations are separately allocated to partners and must be excluded from the computation of the partnership's ordinary income. Tax-exempt income remains tax-exempt and must also be excluded from the computation of ordinary income. Thus, ordinary income only consists of the income from operations of $156,000.
Jones and Curry formed Major Partnership as equal partners by contributing the assets below. [Tax6Question10.PNG] (same one as 10) The land was held by Curry as a capital asset, subject to a $12,000 mortgage, that was assumed by Major. What was Jones' initial basis in the partnership interest? a) $51,000 b) $45,000 c) $39,000 d) $33,000
a) $51,000 The requirement is to determine Jones' initial basis for the 50% partnership interest received in exchange for a contribution of cash of $45,000. Since partners are individually liable for their share of partnership liabilities, an increase in partnership liabilities increases a partner's basis in the partnership by the partner's share of the increase. Jones' initial basis consists of the $45,000 of cash contributed, increased by the increase in Jones' individual liability resulting from the partnership's assumption of Curry's mortgage ($12,000 × 50% = $6,000). Thus, Jones' initial basis for the partnership interest is $45,000 + $6,000 = $51,000.
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 valuation date) was $70,000. What was Lee's original basis for the partnership interest? a) $70,000 b) $50,000 c) $20,000 d) $0
a) $70,000 The requirement is to determine the original basis of Lee's partnership interest that was received as an inheritance from Dale. The basis of property received from a decedent is generally its fair market value as of date of death. Since fair market value on the date of Dale's death was used for estate tax purposes, Lee's original basis is $70,000.
On January 4, 2010, Smith and White contributed $4,000 and $6,000 in cash, respectively, and formed the Macro General Partnership. The partnership agreement allocated profits and losses 40% to Smith and 60% to White. In 2010, Macro purchased property from an unrelated seller for $10,000 cash and a $40,000 mortgage note that was the general liability of the partnership. Macro's liability a) Increases Smith's partnership basis by $16,000. b) Increases Smith's partnership basis by $20,000. c) Increases Smith's partnership basis by $24,000. d) Has no effect on Smith's partnership basis.
a) Increases Smith's partnership basis by $16,000. The requirement is to determine the effect of a $40,000 increase in partnership liabilities on the basis for Smith's 40% partnership interest. Since partners are individually liable for their share of partnership liabilities, a change in the amount of partnership liabilities affects a partner's basis for a partnership interest. When partnership liabilities increase, it is effectively treated as if each partner individually borrowed money and then made a capital contribution of the borrowed amount. As a result, an increase in partnership liabilities increases each partner's basis in the partnership by each partner's share of the increase. Here, Smith's basis is increased by his 40% share of the mortgage (40% × $40,000 = $16,000).
Dunn and Shaw are partners who share profits and losses equally. In the computation of the partnership's 2010 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 2010 return? a) $100,000 b) $101,000 c) $160,000 d) $161,000
b) $101,000 The requirement is to determine the amount to be reported as ordinary income on the partnership's return given partnership book income of $100,000. The $60,000 of guaranteed payments to partners were deducted in comput ing partnership book income and are also deductible in com puting partnership ordinary income. However, the $1,000 charitable contribution deducted in arriving at partnership book income must be separately passed through to partners on Schedule K-1 and cannot be deducted in computing part nership ordinary income. Thus, the partnership's ordinary income is $100,000 + $1,000 = $101,000.
On September 1, 2010, James Elton received a 25% capital interest in Bredbo 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. How much is Elton's basis for his interest in Bredbo? a) $25,000 b) $35,000 c) $40,000 d) $50,000
b) $35,000 The requirement is to determine Elton's basis for his 25% interest in the Bredbo partnership. Since Elton received a capital interest with a FV of $50,000 in exchange for property worth $40,000 and services, Elton must recognize compensation income of $10,000 ($50,000 - $40,000) on the transfer of services for a capital interest. Thus, Elton's basis for his partnership interest consists of the $25,000 basis of assets transferred plus the $10,000 of income recognized on the transfer of services, a total of $35,000.
On January 1, 2010, Kane was a 25% equal partner in Maze General Partnership, which had partnership liabilities of $300,000. On January 2, 2010, a new partner was admitted and Kane's interest was reduced to 20%. On April 1, 2010, Maze repaid a $100,000 general partnership loan. Ignoring any income, loss, or distributions for 2010, what was the net effect of the two transactions for Kane's tax basis in Maze partnership interest? a) Has no effect. b) Decrease of $35,000. c) Increase of $15,000. d) Decrease of $75,000.
b) Decrease of $35,000. The requirement is to determine the net effect of the two transactions on Kane's tax basis for his Maze partnership interest. A partner's basis for a partnership interest consists of the partner's capital account plus the partner's share of partnership liabilities. A decrease in a partner's share of partnership liabilities is considered to be a deemed distribution of money and reduces a partner's basis for the partnership interest. Here, Kane's partnership interest was reduced from 25% to 20% on January 2, resulting in a reduction in Kane's share of liabilities of 5% × $300,000 = $15,000. Subsequently, on April 1, when there was a $100,000 repayment of partnership loans, there was a further reduction in Kane's share of partnership liabilities of 20% × $100,000 = $20,000. Thus, the net effect of the reduction of Kane's partnership interest to 20% from 25%, and the repayment of $100,000 of partnership liabilities would be to reduce Kane's basis for the partnership interest by $15,000 + $20,000 = $35,000.
The holding period of property acquired by a partnership as a contribution to the contributing partner's capital account a) Begins with the date of contribution to the partnership. b) Includes the period during which the property was held by the contributing partner. c) Is equal to the contributing partner's holding period prior to contribution to the partnership. d) Depends on the character of the property transferred.
b) Includes the period during which the property was held by the contributing partner. The requirement is to determine the holding period for property acquired by a partnership as a contribution to the contributing partner's capital account. Generally no gain or loss is recognized on the contribution of property to a partnership in exchange for a capital interest. Since the partnership's basis for the contributed property is determined by reference to the contributing partner's former basis for the property (i.e., a transferred basis), the partnership's holding period includes the period during which the property was held by the contributing partner.
The method used to depreciate partnership property is an election made by a) The partnership and must be the same method used by the "principal partner." b) The partnership and may be any method approved by the IRS. c) The "principal partner." d) Each individual partner.
b) The partnership and may be any method approved by the IRS. The requirement is to determine the correct statement regarding a partnership's election of a deprecia tion method. The method used to depreciate partnership property is an election made by the partnership and may be any method approved by the IRS. The partnership is not restricted to using the same method as used by its "principal partner." Since the election is made at the partnership level, and not by each individual partner, partners are bound by whatever depreciation method that the partnership elects to use.
On June 1, 2010, 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 2010 income tax return, what amount must Kelly include as income from transfer of the partnership interest? a) $ 7,000 ordinary income. b) $ 7,000 capital gain. c) $10,000 ordinary income. d) $10,000 capital gain.
c) $10,000 ordinary income. The requirement is to determine the amount that must be included on Kelly's 2010 income tax return as the result of the receipt of a 10% partnership interest in exchange for services. A taxpayer must recognize ordinary income when a capital interest in a partnership is received as compensation for services rendered. The amount of ordinary income to be included on Kelly's 2010 return is the fair market value of the partnership interest received ($100,000 × 10% = $10,000).
Jones and Curry formed Major Partnership as equal partners by contributing the assets below. [Tax6Question10.PNG] The land was held by Curry as a capital asset, subject to a $12,000 mortgage, that was assumed by Major. What was Curry's initial basis in the partnership interest? a) $45,000 b) $30,000 c) $24,000 d) $18,000
c) $24,000 The requirement is to determine Curry's initial basis for the 50% partnership interest received in exchange for a contribution of property subject to a $12,000 mortgage that was assumed by the partnership. Generally, no gain or loss is recognized on the contribution of property in ex change for a partnership interest. As a result, Curry's initial basis for the partnership interest received consists of the $30,000 adjusted basis of the land contributed to the partner ship, less the net reduction in Curry's individual liability resulting from the partnership's assumption of the $12,000 mortgage. Since Curry received a 50% partnership interest, the net reduction in Curry's individual liability is $12,000 × 50% = $6,000. As a result, Curry's basis for the partnership interest is $30,000 - $6,000 = $24,000.
Ola Associates is a limited partnership engaged in real estate development. Hoff, a civil engineer, billed Ola $40,000 in 2010 for consulting services rendered. In full settlement of this invoice, Hoff accepted a $15,000 cash payment plus the following: [Tax6Question3.PNG] What amount should Hoff, a cash-basis taxpayer, report in his 2010 return as income for the services rendered to Ola? a) $15,000 b) $28,000 c) $32,000 d) $40,000
c) $32,000 The requirement is to determine the amount that Hoff, a cash-basis taxpayer, should report as income for the services rendered to Ola Associates. A cash-basis taxpayer generally reports income when received, unless constructively received at an earlier date. The amount of income to be reported is the amount of money, plus the fair market value of other property received. In this case, Hoff must report a total of $32,000, which includes the $15,000 cash, the $10,000 FV of the limited partnership interest, and the $7,000 FV of the surveying equipment received. Note that since Hoff is a cash-basis taxpayer, he would not report income at the time that he billed Ola $40,000, nor would he be entitled to a bad debt deduction when he accepts $32,000 of consideration in full settlement of his $40,000 invoice.
The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date a) The partner is admitted to the partnership. b) The partner transfers the asset to the partnership. c) The partner's holding period of the capital asset began. d) The partner is first credited with the proportionate share of partnership capital.
c) The partner's holding period of the capital asset began. The requirement is to determine the correct statement regarding the holding period for a partnership interest acquired in exchange for a contributed capital asset. The holding period for a partnership interest that is acquired through a contribution of property depends upon the nature of the contributed property. If the contributed property was a capital asset or Sec. 1231 asset to the contributing partner, the holding period of the acquired partnership interest includes the period of time that the capital asset or Sec. 1231 asset was held by the partner. For all other contributed property, a partner's holding period for a partnership interest begins when the partnership interest is acquired.
The following information pertains to Carr's admission to the Smith & Jones partnership on July 1, 2010: Carr's contribution of capital: 800 shares of Ed Corp. stock bought in 1997 for $30,000; fair market value $150,000 on July 1, 2010. Carr's interest in capital and profits of Smith & Jones: 25%. Fair market value of net assets of Smith & Jones on July 1, 2010, after Carr's admission: $600,000. Carr's gain in 2010 on the exchange of the Ed Corp. stock for Carr's partnership interest was a) $120,000 ordinary income. b) $120,000 long-term capital gain. c) $120,000 Section 1231 gain. d) $0.
d) $0. The requirement is to determine the amount of gain recognized on the exchange of stock for a partnership interest. Generally no gain or loss is recognized on the transfer of property to a partnership in exchange for a partnership interest. Since Carr's gain is not recognized, there will be a carryover basis of $30,000 for the stock to the partnership, and Carr will have a $30,000 basis for the 25% partnership interest received.
At partnership inception, Black acquires a 50% interest in Decorators Partnership by contributing property with an adjusted basis of $250,000. Black recognizes a gain if I. The fair market value of the contributed property exceeds its adjusted basis. II. The property is encumbered by a mortgage with a balance of $100,000. a) I only. b) II only. c) Both I and II. d) Neither I nor II.
d) Neither I nor II. The requirement is to determine which statements are correct regarding Black's recognition of gain on transferring property with an adjusted basis of $250,000 in exchange for a 50% partnership interest. Generally, no gain is recognized when appreciated property is transferred to a partnership in exchange for a partnership interest. However, gain will be recognized if the transferred property is encumbered by a mortgage, and the partnership's assumption of the mortgage results in a decrease in the transferor's individual liabilities that exceeds the basis of the property transferred. Here, the basis of the property transferred is $250,000, and the net decrease in Black's individual liabilities is $50,000 (i.e., $100,000 × 50%), so no gain is recognized.
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 a) No - Yes b) Yes - No c) No - No d) Yes - Yes
d) Yes - Yes The requirement is to determine whether cash paid by a transferee, and the transferee's share of partnership liabilities are to be included in computing the basis of a partner's interest acquired from another partner. When an existing partner sells a partnership interest, the consideration received by the transferor partner, and the basis of the transferee's partnership interest includes both the cash actually paid by the transferee to the transferor, as well as the transferee's assumption of the transferor's share of partnership liabilities.