Federal Income Taxation of Partners and Partnerships
Each partner's basis in his one third interest in blackacre is:
$10K
ABC LLC has three equal members and owns Whiteacre which has a basis of $1,000,000 a value of $2,000,000 and an interset only recourse laon of $800,000. Within the taxable year it is relatively certain that the loan will be refinanced to $950,000 and $50,000 will be distributed to each of A, B and C which of the following istrue.
A, B, and C can deduct $50,000 of depreciation, because the deduction is in accordance with the partners interest in the partnership
Explain the difference between "inside" and "outside" basis.
"Inside basis" is the basis of the partnership in the partnership assets. "Outside basis" is the basis of the partners in their partnership interests. Generally speaking, inside basis is determined under the normal basis rules of Section 1011 et. seq., applied at the entity (partnership) level. The two exceptions to these rules are the determination of basis of contributed assets (Section 723) and the special basis adjustment rules that apply on the transfer of a partnership interest or in connection with certain distributions from the partnership (Section 754 election).
D wants to reduce his interest to 1/5. All of the accounts receivable and a 1/6 interest in the land is distributed to D. Assume that the distribution is nontaxable. What is the basis of the accounts receivable and the 1/6 interest in the land in D's hands?
$0K, $5K
A and B form a general partnership AB Co. A contributes $10K and B contributes $90K. AB Co. Buys a piece of land for $100K down and $400k recourse loan. Profits are shared equally. Losses are shared in proportion to capital accounts until they are zeroed out and then losses are shared 50/50. A's share of the recourse debt is
$200K
The loan is nonrecourse. What is A's share of the nonrecourse liabilities?
$200K
XYZ Partnership owns three capital assets worth $30k, $60K and $90K. What is the basis of asset #1 in X's hands?
$20K
L,M and N form the equal LMN Co. (1/3 each). L contributes Blackacre wroth $40K with a basis of $15K. M contribures $40K. The stock is not a marketable security. L must recognize gain of
$25K
Assuming no transfers of partnership interests have occured, the basis of A's partnership interest is?
$30K
X receives Assets #2 in complete liquidation of X;s 1/3 partnership interest. What is X's basis in Asset #2?
$30K
AB forms a partnership by contributing $25K each. The AB Co. buys property for $50k which appreciates to $100K within one year. At the end of one year C contributes $50K to AB Co. and becomes an equal partner. Right after the contribution AB borrows $15,000 and distributes $15,000 to A. A's capital account immediately after the distribution would be
$35,000
What will result if the partnership distributed $45,000 in cash to A and ½ undivided interests in the land to B and C?
$5,000 capital gain to A
If the partnership sells the land during 20X4 for $100 cash, what is the amount and character of its gain or loss?
Capital loss. Section 724(c). Short-term or long-term depending on when acquired by B. Section 1223(2). If sale price were $80, $20 capital loss per Section 724(c), plus $20 Section 1231 loss, unless property held less than required period under Section 1231(b), then $20 ordinary loss
(a)Do any of the partners recognize any gain or loss on the contribution of the various assets to the partnership?
None of the partners recognizes gain or loss A. No issue, he contributes only cash. B. Section 721(a) provides for no loss recognition. C. Are accounts receivable "property" for purposes of Section 721(a)
What are the tax consequences to Calvin and the partnership when Calvin's interest vests in 18 months?
On June 30, 20X2 (18 months later), Calvin's 1/3 interest in ABC is treated as becoming substantially vested
What if P sold his interest for $15,000 three weeks after he received it?
On these facts, a court would probably hold that the interest was worth $15,000 when P received it and that P therefore recognizes $15,000 of ordinary income. These facts are similar to those in the Diamond case. Note that, per Notice 2005-43, amount would be taxable because resale was within two years of receipt.
Partnership minimum gain is
The excess of a nonrecourse debt over the basis (book or tax as applicable) of the property securing that debt.
The remedial method allows notional offsetting tax entries in order to balance book items with tax items
True
What types of transactions affect outside basis (ignoring debt)
(a) Contribution of money or other property (b) Distribution of money or other property (c) Flow-through of profits and losses (d) Transfer of partnership interest
What are the three exceptions to this relationship and what options do the partners have in re-establishing the relationship?
(a) Disposition of partnership interest -- treated as entity transaction (Sections 741, 742) (b) Recognition of gain or loss on a distribution -- treated as sale/exchange of partnership interest, an entity transaction (Sections 731, 741) (c) Gain or loss of basis with respect to an asset on distribution of the asset from the partnership -- Section 732).
If the inventory contributed by C was a lot in a subdivision which C developed but which the partnership uses in its business, what is the character of the partnership's gain if it sells the lot at 3 years at 6 years
(i) Ordinary income, Section 724(b). (ii) Section 1231 gain.
The equipment depreciates over 6 years on a straight line basis without a residual value. The debt is nonrecourse. On the first day of year 4 what is X's Tier 1 share of the nonrecourse debt assuming the income of the partnership is exactly equaled its expenses and that the principal of the debt was not reduced?
0
X and Y want to form a partnership. X owns land worth $100K with a basis of $50K. Y is a developer. X contributes the land to XY Co. X must recognize the following gain.
0
A transfer inventory worth $20k with an original cost of $10K and Greenacre (which A has held for more than 1 year) with a value of $30K and a basis of $20K to the AB Partnership. B transfers $50K of cash. The AB partnership is a 50/50 partnership. A's holding period in his partnership interest is
40% less than one year and 60% more than one year
What is a capital account?
A capital account is an abstract accounting concept. It is one of the types of accounts that appears on a partnership's "balance sheet" or "statement of assets, liabilities and capital." It is analogous to the stockholders equity accounts on a corporate balance sheet, or the net worth account on a proprietorship balance sheet. Under basic accounting principals, the total assets shown on the balance sheet will equal the total liabilities and capital accounts shown on that balance sheet.
L,M and N form the equal LMN Co. (1/3 each). L contributes Blackacre wroth $40K with a basis of $15K. M contribures $40K. Which Partner recognizes the $25K of gain?
L
G wants to reduce his interest to 1/5. $30K accounts receivable are distributed to G. Ignore the application of IRC Section 751. The accounts receivable are not collected by G for 18 months and at that time G sells the account receivable for $20K. G must recognize which of the following items of income on the sale of the ar
NOne of the above
What are the tax consequences to P of the receipt of his partnership interest?
No current tax consequences to P.
What will result if the partnership distributed $10,000 in cash, 1/3 of the inventory and 1/3 of the accounts receivable to each partner?
No gain or loss to any partner
What if the partnership distributes a 1/3 interest in the land to each partner and one month later distributes $20,000 in cash to each of them?
No gain to any partner
What will result if the partnership distributed $10,000 in cash, 1/3 of the accounts receivable and a 1/3 undivided interest in the land to each partner?
No gain to any partner
What will result if the partnership distributed $10,000 in cash, 1/3 of the inventory and a 1/3 undivided interest in the land to each partner?
No gain to any partner
What will result to the partners and the partnership if the partnership distributes $20,000 in cash and 1/3 undivided interests in the land to each partner?
No gain to any partner
What are the tax consequences of Calvin's receipt of a partnership interest in exchange for services? (
No income to Calvin in X1. The 1/3 partnership interest transferred to Calvin is treated as substantially non-vested at the time of transfer.
What is the partnership's cost recovery deduction for 20X4 with respect to the equipment?
The partnership's 1988 depreciation deduction is $21, since the partnership merely continues the ACRS schedule of C. Section 168(i)(7)
If a loan is secured by real property it is a nonrecourse loan
False
If two or more individuals own property as cotentants they will never be treated as a partnership and never need to file partnership returns
False
In order to determine a partners share of recourse debt, you multiply the partner's percentage share of losses times the total recourse liabilities
False
The CPA should be fired because he clearly misallocated the income among the partners
False
What is the difference between basis and capital account?
Basis measures tax; capital account measure economics.
ABCD Co. is a four man equal partnership In the year 2000 ABCD Co. makes $48,000 On September 30, 2000 A dies and the partnership interest becomes part of his probate estate. The probate estate must report $12,000 on its December 31, 2000 return.
False
A DRO must be expressly set forth in the partnership agreement in order to fall within the "general safe harbor test" under the Regs
False
A and B form a partnership which provides that gains and losses will be shred equally except for required Sectino 704(c) allocations. A contributes property Blackacre with a value of $10,000 and a basis of $5,000. B contributes "whiteacre" with a value of $20,000 and a basis of $10,000. Blackacre depreciates to $5,000 and is sold for that amount. Under the traditional method, B is entitled to take a $2,500 tax loss. Whiteacre sold in the same year of $25,000. B would only be required to report $10,000 of gain under the "traditional method."
False
A and B form a partnership which provides that gains and losses will be shred equally except for required Sectino 704(c) allocations. A contributes property Blackacre with a value of $10,000 and a basis of $5,000. B contributes "whiteacre" with a value of $20,000 and a bsis of $10,000. Blackacre depreciates to $5,000 and is sold for that amount. Under the traditional method, B is entitled to take a $2,500 tax loss
False
A does not die but rather sells his 25% partnership interest to Z. Z must report $12,000 of income on his December 31, 2000 return.
False
A partnership may elect any fiscal year end just like a C Corporation
False
AB form a partnership by contributing $25K each. The AB Co. buys property for $50k which appreciates to $100K within one year. At the end of one year C contributes $50K to AB Co. and becomes an equal partner. What are A's and B;s capital accounts immediately after the contribution by C.?
$50K
The safe harbor for substantial effect under 704(b) requires that the partnership agreement or state law provides for
All of the above
A and B form an equal partnership ABC Co. Each contribute $25,000 (total $50,000) and borrow $950,000 from Big Bank on a nonrecourse basis. There is no written partnership agreement. Depreciation deductions are allocated equally in the amount of $100K per year. Since there is no Minimum Gain Chargeback neither A nor B can deduct the depreciation expenses in excess of $25,000 each.
False
A partnership agreement provides for capital account maintenance pursuant to the Regs distributions on liquidation are required to be made in proportion to capital accounts and an express DRO. The allocation of interest has substantial economic effect under the Regs.
False
A partnership and an "S" corporation are subject to the same tax structures in California
False
A, B, and C form an equal limited liability compnay by contribution $10,000 each. A, B and C each have to recognize $10,000 of income at the end of the third year, because there has been a decrease of $30,000 in the partnership minimum gain.
False
ABC Co. is a partnership composed of A Inc. B Trust and C and individual. ABC Co. must always use the accrual method of accounting.
False
ABC Co. is a real estate venture which pays all of its bills on December 15 of each year for cash management reasons. ABC Co. is a cash basis partnershp and all three partners are equal. On December 1, 2000 D is admitted as an equal fourth partner. On December 15, 2000 ABCD Co. Pays $100,000 of bills of which all are deductible. resulting in a $100,000 loss for the year. D should received a $25,000 share of the loss.
False
ABC General partnership is a calendar year taxpayer. Inside and oustide bases are the same for all three equal partners. Each partner must recognize $20K of gain as a result of the distribution
False
Limited partnership agreements andLLC should always contain DROs so that the limited partners and members will be entitled to take deductions in excess of their capital accounts.
False
QRST CO. is a four man partnership. Q has a negative capital account of (10,000) QRST Co. has appreciated assets. Q sells his 25% interest to P for $50,000. P has a capital account of $50,000
False
The partnership must recognize $90K of gain on the distribution to the partners
False
The primary purpose of capital accounts is to track the tax attributes to be allocated among the partners
False
Under state law, a general partner must always contribute the amount of any deficit in his capital account on liquidiation of the partnership
False
Under the check the box regulations an entity which is a corporation under state law may elect subchapter K treatment
False
Under the traditional method if the book deductions exceed the allowable tax deductions, the excess can still be deducted for tax purposes
False
X is a dealer in real property. X transfers Blackacre to XY Co. a 50/50 partnership with Y. Blackacre is used in XY Co's trade or business of manufacuturing. Six years later Blackacre is solde for a $100K profit. X has $50K of ordinary income because he is a dealer
False
X transfers Blackacre to XY Partnership. Blackacre has a basis of $50K and a value of $25K. Y transfers $25K of cash. X realizes and recognizes a deductible loss of $25K.
False
What is the usual relationship between total inside and total outside basis?
Generally, total inside basis equals total outside basis.
What are the general rules for calculating basis?
Outside basis is increased by -- (a) the tax basis (not the value) of property contributed by a partner and by the amount of "money" (as will be seen, "money" can include more than cash; i.e., debt) contributed by the partner to the partnership (Section 722), and (b) the partner's "distributive share" of partnership earnings (which includes both taxable and tax-exempt earnings) (Section 705(a)) and is decreased by -- (c) the amount of money distributed to the partner (but not reduced below zero) and the basis (in the hands of the transferee partner) of distributed property (Section 733), and (d) the partner's "distributive share" of partnership losses (which includes both losses that are deductible for tax purposes and those that are not) (Section 705(a)). Also, on the transfer of a partnership interest, the basis in the hands of the transferee is originally determined under the rules of Section 1011 et seq. (Section 742). For reasons discussed below (question 7), there is a second way to calculate outside basis, which does not follow the "historical" approach, but takes advantage of the relationship between inside and outside basis (Section 705(b)), as discussed below.
Q R and S form an equal partnership. Q contributes Blackacre with a value of $100K, a basis of $10K and encumbered by a mortgage in the amount of $60K. R contributes Whiteacre with a value of $70K, a mortgage of $30K and a basis of $10K. S contributes $40K. Q and R must recognize gain as follows
Q -$20K R 0K
Z is a dealer in a subdivided residential real estate. The Burger King land is sold for $75K for a $75K loss.
QZ would have $90K of ordinary income and $75K capital loss
Where on the IRS Form 1065 and Schedule K-1 is basis reported? Where is capital account information reported? Does Schedule L and M reflect tax basis or capital account information? What is reported in line H of the K-1? Who has the responsibility for calculating a partner's partnership basis?
Surprisingly, outside basis is not reported on the K-1 at all. Schedules L and M and on line J of the K-1 is capital account information.
D forms a restaurant business with E in the year 2000. E puts up $100K and receives a capital account of $100K and an interest in profits and losses of 75%. D agrees to manage the business for a 25% interest in profits and losses but is not credit with a capital account. D sells his 25% interest in 2001 for $50K
The answer is not clear but probable that D would have to report the receipt of his partnership interest in the year 2000 as taxable event.
How is outside basis generally calculated?
The basic method of calculating outside basis is an "historical" approach -- an accounting (in tax, not economic, terms) of the total contributions, earnings, and distributions of the partnership. As such, it is easy to see the importance of the concept to partnership taxation, because it constitutes a "record" of the most significant partnership transactions.
For what purposes is outside basis used under Subchapter K?
The purposes are: (a) Measurement of gain or loss on distribution: Gain is recognized on a partnership distribution only to the extent of the distribution of "money" (a defined term) in excess of basis -- therefore, generally, money may be distributed tax free from the partnership (basis having been previously increased by the recognition of income by the partnership or the contribution of money or property with basis); or loss recognized only to the extent that a partner has unused basis after liquidation of his partnership interest (Section 731). (b) Measurement of basis of distributed property: Outside basis is both a measurement source of and a limit on the basis of distributed assets (Section 732). (c) Flow-through of losses: Partnership losses flow through to be used against non-partnership income only to the extent that a partners has basis in the partnership (Section 704(d) -- other limitation, such as the at-risk rules and passive loss rules apply at the partner level). (d) Measurement of gain or loss on disposition of a partnership interest: Regular "entity" rules apply
A "minimum Gain Chargeback" provision essentially provides that each partner who has previously been allocated a portion of the "partnership nonrecourse deductions" must, on disposition of an asset subject to a nonrecourse debt, report gain on that partner's share of "partnership minimum gain" allocable to that asset
True
A and B form a partnership which provides that gains and losses will be shred equally except for required Sectino 704(c) allocations. A contributes property Blackacre with a value of $10,000 and a basis of $5,000. B contributes "whiteacre" with a value of $20,000 and a bsis of $10,000. Blackacre depreciates to $5,000 and is sold for that amount. Under the "remedial method" $2,500 of capital loss could be allocated to B so long as an additional $2,500 of capital gain was allocated to A
True
A partners outside basis generally consists of a partners tax basis capital account plust the partner's share of liabilities ( assuming there has not been a transfer of the interest)
True
A partners share of nonrecourse liabilities equals the sum of i his share of minimum gain under 704(B) ii) his share of section 704(c) minimum gain and iii) his share of excess nonrecourse liabilities
True
A partnership under state law may operate pursuant to a written partnership agreement but elect out of subchapter K if the requirements of IRC Section 761 are satisfied
True
A qualified incoem offset ("QIO") acts as a substitute for a "DRO" subject to the limitation that losses which are allocated to a partner cannot exceed the partner's positive capital account.
True
A transfers $50K of cash to the ABC Partnership while B transfers Whiteacre and C agrees to develop Whiteacre into a shopping mall without any compensation for C's personal services. ABC agree that each will have one third of the interest in the P L and capital of ABC partnership
True
After 2017 for tax auditing purposes, a partnership is treated as an entity and subject to paying the tax arising from an audit unless the partnership properly makes and "opt out" or "push out" election
True
F and G form a partnership. F contributes land worth $50K with a basis of $10K. G contributes equipment worth $50K and a basis of $100K. F and G's opening book value capital accounts would be $50K each.
True
F and G form a partnership. F contributes land worth $50K with a basis of $10K. G contributes equipment worth $50K and a basis of $100K. F's tax capital account would be $10K and G's tax capital account would be $100K.
True
If a partnership has properly elected out of subchapter K treatment, then qualification of an exchange under Section 1031 and an election under Section 1033 must be made at the partner level rather than at the partnership level
True
It is important to determine a partner's outside basis, because it will limit the amount of deductions available to a partner from a partnership.
True
QRS Co. is an accounting partnership with a calendar year end. QRS Co. has historically been an equal three-way partnership. Q becomes sick on September 30, 2000. On february 1, 2001 QRS Co. amends its partnership agreement to allocate profits and losses 40%-R 40%-S and 20% to Q. This retroactive allocation is valid
True
X contributes a truck worth $15,000 with a tax basis of $5,000. Y contributes $15,000 cash. The truck is depreciable over five years without any residual value. The truck is leased for $3,000 per year. Under the "curative method" Y could be allocated $1000 of rental income and X could be allocated for $2000 of rental income to "make up" for Ys loss of $500 depreciation deductions due to the "ceiling rule"
True
X transfers Blackacre to the XY Partnership. Blackacre has a basis of $50K and a value of $25K. Y transfers $25k of cash. X has an outside basis of $50K. Assuming that Blackacre is not personal use property the XY Partnership has "inside basis" of $50K
True
XYZ is a partnership with each partner having a share of capital profits and losses as follows X - 51% Y 25% Z 25% X has a capital account of 51K Y 25K and Z 25K X sells his partnershpi interest to A for $100K on June 30, 2000. A's capital account is $51K
True
What are the timing rules for adjustment of basis? When is a partner's outside basis adjusted as a result of partnership operations? Contribution to a partnership? Distributions from a partnership?
Under the annual accounting rules of the tax code, "profits" and "losses" are not calculated until the end of the year.
If the partnership sells the inventory for $30, to whom is the $10 tax gain allocated?
Upon the sale of the inventory by the Partnership, the $10 gain must be allocated to C, the contributing partner
If an unincorporated association (which is not a disqualified organization) wants to elect subchapter K treatment, it must affirmatively make the election
fals
Capital accounts can be re-evaluated under the regulations when one partner sells a partnership interest to another
false
LMN Co. is a partnership with a fiscal year of June 30. L, M, and N are all calendar year taxpayers. LMN Co sells property for a capital gain of $10,000 on July 31, 2000. L, M and N must report this capital gain for the period ending December 31, 2000.
false
The three elements normally used to define a partnership under state law are: 1. two or more owners 2. engaged in a business or passive investment 3. For profit
false
What will the character of Dr. B's gain likely be?
ordinary income
X is a partner in ABC, an accounting partnership. At the beginning of the year X's basis was $10,000. During the year, ABC distributed to X $5,000 per month. At year end, X's distributive share of partnership income was $75,000. When -- and how much -- did X recognize gain?
the taxpayer must take his or her $75,000 distributive share of partnership income into account at the end of the year, so basis increases from $10,000 to $85,000. Then basis is reduced by $60,000 distributions, from $85,000 to $25,000. The distributions are not taken into account at the time they are made because they are considered as loans or "advances" against income.
X is a partner in AMC limited partnership and has both general and limited partnership interests in the partnership. He acquired his limited partnership interest in three separate pieces, one by contribution to the partnership on formation and two by later purchases at separate times. How is X's basis in the partnership calculated? How many K-1's should he receive from the partnership? How many capital accounts does he have?
there is no reason (other than partnership convenience, which might be a very compelling reason. ) for the partner receiving more than one unified K-1. However, there also is no prohibition against sending such partner more than one, and it is a very common practice. Under most accounting systems, it probably doesn't matter whether the partner has one or several capital accounts. However, the 704(b) regs provide that under that system of accounting, a partner has only one capital account
For what purposes are capital accounts maintained?
they are maintained for whatever purposes the books and records that include the balance sheet are kept
A partner in a partnership must generally treat all items on the partner's return consistently with reporting by the partnership
true
X contributes a truck worth $15,000 with a tax basis of $5,000. Y contribues $15,000 cash. The truck is depreciable over five years without any residual value. Under the Traditional Method, Y would receive a depreciation deduction of $1,000 and X would receive a 0 deprecition deduction
true