Partnership Taxation
Individuals A, B, and C own 40%, 40%, and 20%, respectively, of a partnership. A sells property (with a basis of A of $32,000) to the partnership for its fair market value of $20,000. If A and C are related under IRC Section 267(c), how much of the resulting loss can A recognize for tax purposes? a.) $0 b.) $4,800 c.) $7,200 d.) $12,000
$0
V is to perform services in exchange for a 20% capital interest in a partnership. Both the services and the capital interest are valued at $30,000; however, the agreement between V and the partnership states that the capital interest is forfeited if V violates any part of the service contract during the next five years. V believes the market value of the interest at the end of the fifth year will be $70,000. (Assume that this number is accurate and becomes true.) If no special election is made, V recognizes: a.) $0 now and $70,000 at the end of the fifth year b.) $0 now and $70,000 when the capital interest is sold c.) $30,000 now and $40,000 at the end of the fifth year
$0 now and $70,000 at the end of the fifth year
In February 20X1, K contributed a machine ($200,000 market value and $100,000 basis) and cash of $50,000 to the KL partnership in exchange for a 50% partnership interest. What is K's taxable gain as a result of the transaction? a.) $0 b.) $50,000 c.) $100,000 d.) $150,000
$0; no gain or loss is recognized if property is transferred to a partnership for an interest in that partnership. All transfers were considered property.
Partner G (who owns more than 50% of the partnership) sells land having a basis of $30,000 to his partnership. The partnership pays $26,000 for the land. Later, the partnership sells the land to a nonpartner for $31,000. The partnership must recognize a gain of how much? a.) $0 b.) $1,000 c.) $4,000 d.) $5,000
$1,000
G and H are partners in the calendar-year GH partnership and share equally in its profits and losses. G had a basis of $5,000 in the partnership before his distributive share of a $14,000 ordinary loss reported by GH for 20X1. In 20X2, the partnership reports a $6,000 ordinary gain on Form 1065. What income or loss should G properly report on his 20X2 individual return? (Assume that there are no other transactions that affect G's basis in the partnership for 20X1 and 20X2). a.) $0 b.) $1,000 income c.) $2,000 income d.) $3,000 income
$1,000 income
F receives a nonliquidating distribution when the basis of F's partnership interest is $24,000. The distribution consists of property (fair market value of $21,500 and adjusted basis to the partnership of $17,300) and $5,000 in cash. How much is F's basis in the partnership after the distribution? a.) $0 b.) $1,700 c.) $2,500 d.) $19,000
$1,700 (24,000 - 5,000 - 17,300 = 1,700)
The ABC partnership has a general partner, A, who actively participates in the business. Partner A has a $30,000 distributive share of ordinary losses for 20X1. At the end of 20X1, the basis limitation of IRC Section 704(d) is $40,000 and the at-risk basis is $15,000. How much is the Section 704(d) basis on December 31, 20X1? a.) $10,000 b.) $15,000 c.) $25,000 d.) $40,000
$10,000
In return for ordinary and necessary services rendered to it by P, the LMN partnership transfers a one-fourth unrestricted ownership interest to P when it only has one asset - a tract of land with a basis of $28,000 and fair market value of $40,000. The partnership has no liabilities. As a result of this transaction, the LMN partnership will take a deduction of _______ and P will recognize ordinary income of ________. a.) $0; $10,000 b.) $10,000; $10,000 c.) $10,000; $0 d.) $7,000; $10,000
$10,000; $10,000
In February 20X1, K contributed equipment ($200,000 market value and $100,000 basis) to the KL partnership. The equipment had depreciation recapture potential under Section 1245 of $20,000. What is K's basis in KL as a result of the transaction? a.) $100,000 b.) $120,000 c.) $180,000 d.) $200,000
$100,000
Partners J and K each own a 40% interest in the capital and profits of the JKL partnership, an accrual-basis partnership. The remaining 20% interest is owned by L. Under the partnership agreement, J is to receive 40% of the partnership income, but in no event less than $40,000. In the current year, the JKL partnership has taxable income of $70,000 before considering the guaranteed payment to J. What is the amount of the guaranteed payment deductible by the partnership? a.) $0 b.) $12,000 c.) $28,000 d.) $40,000
$12,000
The ABC partnership has land with a fair market value of $21,000 and basis of $15,000. If D purchases C's one-third interest for $7,000, how much is the basis of the land to the partnership, assuming that there are no special elections? a.) $7,000 b.) $15,000 c.) $17,000 d.) $21,000
$15,000
D owns 10% of the ABC partnership from January 1, 20X1, through June 30, 20X1. On July 1, 20X1, D buys an additional 10% of the partnership. The ABC partnership ordinary income for 20X1 is $100,000 and it is earned evenly throughout the year. How much is D's distributive share of the ordinary income using the varying interest rule? (Year 20X1 is not a leap year) a.) $14,958 b.) $15,000 c.) $15,041 d.) $15,190
$15,041 [(100,000 x 181/365 x 0.10) + (100,000 x 184 / 265 x 0.20)]
F receives a nonliquidating distribution when the basis of F's partnership interest is $24,000. The distribution consists of property (fair market value of $21,500 and adjusted basis to the partnership of $17,300) and $5,000 in cash. How much is F's basis in the noncash property received? a.) $17,300 b.) $19,000 c.) $21,500 d.) $24,000
$17,300 (24,000-5,000 = 19,000 > 17,300)
P, a calendar-year partnership, elects to amortize $60,000 of organizational expenditures under IRC Section 709 for its first tax year beginning July 1, 20X1. What is the amount of the deduction for 20X1? a.) $0 b.) $2,000 c.) $5,000 d.) $60,000
$2,000
Partner T receives in a liquidating distribution cash of $8,000 and land with a fair market value of $12,000 and basis of $7,000. T's basis in the partnership prior to the distribution was $10,000. What is T's basis in the land? a.) $2,000 b.) $7,000 c.) $10,000 d.) $12,000
$2,000 (10,000 - 8,000)
Partners J and K each own a 40% interest in the capital and profits of the JKL partnership, an accrual-basis partnership. The remaining 20% interest is owned by L. Under the partnership agreement, J is to receive 40% of the partnership income, but in no event less than $40,000. In the current year, the JKL partnership has taxable income of $70,000 before considering the guaranteed payment to J. How much is partner K's share of income from the partnership for the current year? a.) $20,000 b.) $23,300 c.) $28,000 d.) $38,667
$20,000 (taxable income - guaranteed payment - J's distributable share = amount to be allocated to the remaining partners; 40/60 allocation)
On January 1, 20X1, F exchanged proprietorship equipment ($10,200 fair market value, $11,600 accumulated depreciation, and $8,400 basis) for a 20% capital interest in a partnership. The calendar-year partnership's 20X1 and 20X2 depreciation deductions for this equipment total $8,400. How much of the $8,400 should be allocated to F? a.) $0 b.) $240 c.) $1,680 d.) $2,040
$240
T sells a one-third partnership interest and receives the following in exchange: land ($15,000 fair market value and $10,000 basis) and $5,000 in cash. T was also relieved of her share of a $15,000 debt owed by the partnership. How much is T's amount realized on the sale? a.) $5,000 b.) $20,000 c.) $25,000 d.) $35,000
$25,000 [amount realized = cash plus the fair market value of the land plus T's pro rata share of the liability (1/3 x $15,000): $5,000 + $15,000 + $5,000 = $25,000]
At the formation of partnership AB, B contributes land ($30,000 fair market value and $10,000 basis) and A contributes cash of $30,000. When the land is sold two years later for $42,000, how much of a gain must B recognize? a.) $0 b.) $6,000 c.) $16,000 d.) $26,000
$26,000
Partnership ABC on a calendar year is owned 60%, 30%, and 10% by partners A, B, and C, respectively. Partner A sells her partnership interest to D for $24,000 during 2018. The only assets held by the partnership was land with a fair market value of $40,000 and basis of $30,000. If the new partnership BCD holds the land for six months and sells it for $40,000, how much gain is taxable to partner B, assuming that no Section 754 elections are in effect? a.) $0 b.) $1,200 c.) $3,000
$3,000 (30% of the $10,000 gain on the transaction)
Partners J and K each own a 40% interest in the capital and profits of the JKL partnership, an accrual-basis partnership. The remaining 20% interest is owned by L. Under the partnership agreement, J is to receive 40% of the partnership income, but in no event less than $40,000. In the current year, the JKL partnership has taxable income of $70,000 before considering the guaranteed payment to J. How much is partner J's income from the partnership for the current year? a.) $12,000 b.) $28,000 c.) $35,200 d.) $40,000
$40,000
An accrual-basis partnership has net income of $70,000 for 20X1 before the following item is considered: an $18,000 guaranteed salary to partner D is accrued on December 31, 20X1, but not paid until February 13, 20X2. D and E are the only partners and share profits and losses equally. D files a calendar-year return. How much is D's includible income for 20X1 from the partnership? a.) $18,000 b.) $26,000 c.) $35,000 d.) $44,000
$44,000 ($18,000 + [50% of ($70,000 - $18,000)])
F joins the AF partnership by contributing property ($16,000 market value and $10,000 basis) to it. Nine months later, F receives a distribution of $8,000 cash from the AF partnership. If these two transactions are collapsed and treated as a sale, how much will F's basis in the partnership after the distribution be? a.) $0 b.) $2,000 c.) $5,000
$5,000
D and S are equal profit and loss sharing partners in a continuing partnership. On December 31 of the current tax year, the partnership distributed to D cash of $8,000 and two land parcels. Land parcel A has an adjusted basis to the partnership of $10,000 and a fair market value of $12,000. Land parcel B has an adjusted basis to the partnership of $6,000 and a fair market value of $4,000. At the distribution date, the basis of D's partnership interest just prior to the distribution was $25,000. What is the basis of land parcel B to D? a.) $2,000 b.) $4,000 c.) $5,000 d.) $6,000
$6,000
Partnership ABC is owned 60%, 30%, and 10% by partners A, B, and C, respectively. Partner A sells his entire partnership interest to D for $24,000. The only asset held by the partnership was land with a fair market value of $40,000 and basis of $30,000. If partnership BCD holds the land for six months and sells it for $40,000, how much gain is taxable to partner D, assuming that no Section 754 elections are in effect? a.) $0 b.) $2,400 c.) $4,000 d.) $6,000
$6,000
Partner B in the ABC partnership sells his 20% interest for $12,000. The only asset in the partnership is equipment with a fair market value of $60,000, basis of $20,000, and Section 1245 depreciation potential of $30,000. B must treat what amount as an unrealized receivable? a.) $6,000 b.) $8,000 c.) $12,000 d.) $30,000
$6,000 (20% of $30,000)
T, with a 60% interest in the RST partnership, sells land with a fair market value of $30,000 and basis of $35,000 to the partnership for $30,000. The partnership holds the land for two years and then sells the property to unrelated party U for $41,000. What are the consequences of this transaction? a.) $5,000 gain to RST b.) $5,000 loss to T c.) $6,000 gain to RST d.) $11,000 gain to RST
$6,000 gain to RST
B formed an equal profit and loss partnership with N at the start of the current year by contributing land with an adjusted basis of $25,000 and a fair market value of $35,000. B also contributed $15,000 in cash to the partnership. N contributed a piece of land with an adjusted basis of $8,000 and a fair market value of $25,000. The land contributed by B was encumbered by $14,000 of debt; the land contributed by N was encumbered by $17,000 of debt. Immediately after formation, how much was the basis of N's partnership interest? a.) $(500) b.) $0 c.) $5,000 d.) $6,500
$6,500
L, with a 60% interest in the LM partnership, sells his antique automobile to the partnership for its value of $20,000. The asset was held by L as an investment and had a basis to L of $12,000. If the partnership plans to use the automobile in its trade or business, what is the amount of gain taxable to L? a.) $0 gain or loss b.) $8,000 capital gain c.) $8,000 ordinary gain d.) $8,000 Section 1231 gain
$8,000 ordinary again (although the asset is a capaital asset in L's hands, IRC Section 707(b)(2) recharacterizes the gain to ordinary gain if the asset is to be depreciated in the hands of the transferee partnership)
The partner's basis in the partnership interest equals the sum of the following (3):
1. The amount of any cash contribution, 2. the adjusted basis of any property contributed, 3. the amount, if any, of gain recognized
On Page 4 of Form 1065, which seven items must be shown:
1. net short-term capital gains and losses; 2. net long-term capital gains and losses; 3. Section 1231 gains and losses; 4. charitable contributions; 5. dividends eligible for a dividends-received deduction; 6. taxes paid to a foreign country or to a US possession; 7. any other items provided by the regulations
What are the three basic types of distributions that can result from a partnership?
1. nonliquidating distributions; 2. liquidating distributions; 3. disproportionate distributions
What are six forbidden deductions for partnerships that individuals can deduct?
1. personal exemptions, 2. additional itemized deductions for individuals, 3. taxes paid to a foreign country or to a US possession, 4. charitable contributions, 5. oil and gas depletion, 6. net operating loss (NOL) carryback or carryover
Expenditures that are not expensed in the year the business begins are amortized over a ______-year period.
15
The 1986 Tax Act that modified the required tax year specifically states that the ___-months-or-less deferral of income does not by itself constitute a business purpose. Thus, a calendar-year partnership that wants to adopt a Sept, Oct, or Nov year-end, must develop a business purpose that is independent of the deferral of income issue. a.) 6 b.) 1 c.) 2 d.) 3
3
IRC Section ___ provides that in computing the income tax for the short period, the income period must be annualized. It makes no difference whether the change is with or without the permission of the Commissioner.
443
Under IRC Section 707(b)(1), no loss can be deducted on the sale or exchange of property between a partnership and a person who directly or indirectly owns more than ___% of the capital or profits interest in the partnership.
50
What is the maximum percentage of ownership that a partner can have in a partnership and still recognize a loss when the partner sells property to the partnership? a.) 0% b.) 49% c.) 50%
50%
According to the terms of the Section 444 election, the partnership must make required payments on Form _____ that represent the amount of tax deferred by the use of the different tax year.
720
When a partner sells or exchanges a partnership interest that contains hot assets, an information return must be filed. This is form ______. a.) 8301 b.) 8032 c.) 8308 d.) 8309
8308
Partner A is on a calendar year-end and owns 40% of the ABC partnership. Partners B and C have a year-end of April 30 and own 32% and 28%, respectively. Which of the following statements is true? a.) A is the majority partner b.) A, B, and C are the majority partners c.) B and C are majority partners d.) There are no majority partners
B and C are majority partners
The regulations provide that when a partnership interest is exchanged for services, the service partner must recognize income to the extent of the ______ of the interest received.
FMV
Which of the following forms is used to request an automatic extension of time to file a partnership tax return? a.) Form 2688 b.) Form 4868 c.) Form 7004 d.) Form 8800
Form 7004
Regarding the sale of a partnership interest involving Section 751 assets, what information is required to be filed with respect to that partnership? a.) form 8308 must be attached to Form 1065 showing required information about the transferee and transferor b.) form 8308 must be attached to the selling partner's tax return c.) if a partner recognizes ordinary income, no form or attachment is necessary
Form 8308 must be attached to Form 1065 showing required information about the transferee and transferor
What form is the check-the-box election prepared on?
Form 8832, Entity Classification Election
How do you calculate alternate basis?
Inside basis + contribution of property +/- transfers of interests - distribution of property
A partner contributes a Section 1231 asset to a partnership on June 1, 20X2, in exchange for a 10% partnership interest. The partner purchased the asset on March 1, 20X0. On what date does the partner's holding period for the partnership interest begin? a.) March 1, 20X0 b.) January 1, 20X2 c.) June 1, 20X2 d.) June 2, 20X2
March 1, 20X0
Partnership ABC is owned 40%, 40%, and 20% by A, B, and C, respectively. Partnership BCD is owned 30%, 30%, and 40% by B, C, and D, respectively. If ABC sells land to BCD for its value of $30,000 and basis of $42,000, compute the amount of gain or loss taxable to ABC. [Assume that partners A, B, C, and D are not related under IRC Section 267(c)]. a.) No gain or loss to partnership ABC b.) A recognized loss to partnership ABC of $4,800 c.) A deferred loss to partnership ABC of $12,000 d.) A recognized loss to partnership ABC of $12,000
No gain or loss to partnership ABC
Which of the following will not be classified as unrealized receivables? a.) accounts receivable on a cash basis b.) accounts receivable on an accrual basis c.) Section 1231 gains d.) Section 1245 gains
Section 1231 gains
Which of the following is normally a separately stated item at the partnership level? a.) depreciation b.) net operating loss c.) partners' salaries d.) Section 179 expense
Section 179 expense
What is the last date that a calendar-year partnership (which is not an electing large partnership) can file a partnership tax return without a late-filing penalty? a.) March 15 without an extension b.) September 15 with a valid extension c.) October 15 with a valid extension
September 15 with a valid extension
T transfers a machine to the ABC partnership in exchange for a 30% partnership interest. The machine has a fair market value of $40,000, basis of $25,000, and Section 1245 recapture potential of $20,000. Which of the following statements is true regarding this exchange? a.) depreciation recapture is not considered as Section 721 property and will cause gain to be recognized b.) if the partnership sells the machine for $40,000, T must recognize $20,000 of ordinary income c.) T must recognize ordinary gain of $20,000 d.) T will recognize neither gain nor loss
T will recognize neither gain nor loss
According to the __________ Partnership Act, a partnership is "an association of two or more persons to carry on as co-owners of a business for profit."
Uniform
Which of the following penalties can be levied against a partnership? a.) a $50 fine against a partner for failure to report the tax-shelter registration number on a tax return b.) a $500 fine against a partnership for not providing a tax-shelter registration number to the investor c.) the lesser of $500 or 1% of the amount invested in the tax-shelter partnership for not being registered
a $50 fine against a partner for failure to report the tax-shelter registration number on a tax return
A Section 444 election remains in effect when which of the following events occurs? a.) a 30% partner sells her entire interest b.) the partnership becomes a member of another partnership c.) the partnership liquidates d.) the partnership willfully fails to make the required payments
a 30% partner sells her entire interest
Which of the following events will cause a partnership to terminate for a calendar year partnership prior to the 2017 Tax Cuts and Jobs Act? a.) a 30% partner sells her entire interest to the remaining 70% partner b.) a majority of partners agree to cease conducting business c.) a partner sells 50% of her partnership interest d.) one partner in a two-person partnership dissociates himself form the partnership
a 30% partner sells her entire interest to the remaining 70% partner
Which of the following payments would not be considered to be a guaranteed payment deductible by the partnership? a.) a general partner is paid a $12,000 salary b.) a partner owning 30% of the partnership is paid 50% of the net income it earns c.) a partner is promised 30% of partnership profits but never less than $92,000 d.) a partner is paid 40% of partnership gross sales
a partner owning 30% of the partnership is paid 50% of the net income it earns
In comparing a partner's capital account to a partner's basis, which of the following statements is true? a.) a partner's basis is generally the amount reflected in a partner's capital account b.) a partner's capital account can have a negative balance and a partner's basis cannot be negative c.) a partner's capital account reflects the adjusted basis of assets; a partner's basis reflects fair market value d.) liabilities are reflected in a partner's capital account as well as in a partner's basis
a partner's capital account can have a negative balance and a partner's basis cannot be negative
Which of the following events will not be considered in determining a partner's outside basis? a.) a partner acquires an interest in a partnership for $100,000 b.) a partner receives a cash distribution of $100,000 from a partnership c.) a partner's share in the appreciation of assets is $100,000 d.) a partner's share of nontaxable income earned by the partnership is $100,000
a partner's share in the appreciation of assets is $100,000
Besides the information required on Form 1065, there may be other required information (to be attached to the return or filed separately):
a. election of large partnership rules; b. designation of the partnership representative; c. tax-shelter registration
Which of the following is not a start-up cost amortizable under IRC Section 195? a.) accounting fees for setting up a bookkeeping system b.) amounts paid by an attorney to investigate acquisition of her own practice c.) marketing studies to determine the feasibility of a newly formed trade or business d.) preparing employee manuals before a business venture begins
accounting fees for setting up a bookkeeping system
Start-up costs are amounts paid or incurred for: - Creating an ____ trade or business; or - investigating the creation or acquisition of an active trade or business.
active
__________ income is income for which the taxpayer performs services. a.) active b.) portfolio c.) passive
active
Under the ______ theory, the partnership is not viewed as a taxpaying entity. Instead, it is treated as a collection of partners, with all partners individually reporting their respective shares of income and deductions.
aggregate
When the sale of a 60% interest in a partnership takes place for a calendar year partnership after 2017, which of the following rules will apply? a.) a new partnership is deemed to be formed b.) all elections remain in effect c.) the Section 754 election is terminated d.) the partnership must file two Form 1065s
all elections remain in effect
If a partner is unable to apply the general basis rules of IRC Section 705(a) in determining the outside tax basis, the IRC allow for an _________________ _________ rule.
alternate basis
The "check-the-box" rules generally permit eligible unincorporated organizations to elect to be treated as ________________ (taxable as a corporation) or as partnerships without regard to the number of corporate characteristics that an entity maintains.
associations
Items that may be subject to special tax treatment and that are reported separately on Schedule K of the partnership return include all of the following except which? a.) bad debts b.) capital gains and losses c.) charitable contributions d.) dividends
bad debts
A _______ interest refers to a partner's entitlement to a portion of the initial and subsequent contributions of capital to the partnership (in other words, an interest in the assets - net of any liabilities - of the partnership)
capital
The _________ account reflects the initial partnership contribution made by the partner, plus any subsequent contributions, less any capital distributions.
capital
The receipt of a ________ interest in exchange for services is taxable immediately at its fair market value (FMV).
capital
Because the terms are often interchanged, it is important to differentiate between a partner's basis in a partnership interest and the partnership ________ _______.
capital account
A partner's total capital usually consists of a __________ account and a ________ account.
capital; drawing
For the partnership, the guaranteed payment is treated as if it is made to an outsider. If the payment is for a service that is a capital expenditure (e.g., major repair services), the guaranteed payment must be _________. a.) sold b.) capitalized c.) reported
capitalized
The partnership will treat the amount of services performed in exchange for an interest as either a ___________ cost or as an _______ item. This treatment will vary depending on the nature of the services performed.
capitalized; expense
Partner T, with an outside basis of $10,000, receives a liquidating distribution of $8,000 in cash and accounts receivable of $10,000 (basis of zero). What is T's basis in the assets as a result of this distribution? a.) cash: $8,000; accounts receivable: $0 b.) Cash: $8,000; account receivable: $2,000 c.) cash: $8,000; accounts receivable: $10,000
cash: $8,000; accounts receivable: $0
Which of the following will generate ordinary income on the sale of a partnership interest? a.) a machine with a fair market value of $20,000, basis of $25,000, and depreciation recapture potential of $4,000 b.) accounts receivable of an accrual-basis partnership c.) collection on an installment sale of inventory on an accrual basis d.) land held as an investment
collection on an installment sale of inventory on an accrual basis
Unlike a partner's holding period, the partnership's holding period for contributed property will always include the holding period of the property in the hands of the __________ partner.
contributing
Generally, no gain or loss is recognized by either the partnership or the partner on the ___________ of ___________ to a partnership in exchange for a partnership interest.
contribution; property
Under IRC Section 705(b), the partner begins with the inside basis of assets and makes special adjustments to take into account any discrepancies due to the following: a. ___________ of property b. ________ of interest c. ___________ of property
contribution; transfers; distributions
Organizational costs are defined as follows: a. Those costs incident to the _________ of the partnership b. Those costs that would ordinarily be ______________ c. Those costs that would normally be ________ over the life of the partnership.
creation; capitalizable; amortized
If no gain is recognized, the adjusted basis of the property contributed carries over to the partnership and the partnership becomes responsible for the ____________ _____________.
depreciation recapture
Which of the following statements is true concerning the transfer of depreciable property in exchange for a partnership interest? a.) depreciation recapture is the responsibility of the partnership b.) depreciation recapture is the responsibility of the transferor partner at the time of the transfer c.) investment tax credit recapture is the responsibility of the partnership
depreciation recapture is the responsibility of the partnership
A partner's share of partnership losses in excess of basis is _________ in the current year and must be ______________ ____________ to be deducted in future years when the partner's basis increases.
disallowed; carried forward
_________________ distributions which affect the partner's share of ordinary income property of the partnership. a.) nonliquidating b.) liquidating c.) disproportionate
disproportionate
Each partner's ___________ share of the partnership's income must be reported.
distributive
The IRS will respect a special allocation if it meets one of the following three requirements: 1. the allocation has substantial ________ effect 2. the allocation is in accordance with the partner's ___________ in the partnership 3. the allocation is deemed to be in accordance with the partner's ____________ in the partnership
economic; interest; interest
The amount of partnership losses that a partner can deduct (including capital losses) is limited by IRC Section 704(d) to the basis of the partner's interest at the ______ of the partnership year.
end
In what manner can two individuals revoke the election to be excluded from the partnership provisions? a.) engage in an activity that no longer qualifies for the election b.) file an application to revoke the election to be taxed outside of Subchapter K within 30 days of the year-end c.) no info is required; just begin filing a partnership tax return
engage in an activity that no longer qualifies for the election
The ______ theory treats the partnership as a separate entity, distinct and separate from its owners. Under the _____ theory, the partnership has its own tax year, chooses its own accounting methods, and makes the most of the income tax elections that bind the partnership and the partners
entity; entity
A ______ partnership is one in which all the partners are general partners. a.) general b.) limited c.) small
general
A __________ payment is one determined without regard to the income of the partnership. The word income refers to net income and not gross income. a.) fixed b.) variable c.) fluctuating d.) guaranteed
guaranteed
Like salary or interest income, __________ payments are always ordinary income to the recipient. a.) fixed b.) variable c.) fluctuating d.) guaranteed
guaranteed
Which of the following statements is false regarding a restricted capital interest given to a service partner? a.) a service partner who receives a restricted capital interest can elect to be taxed currently rather than when the restriction is removed b.) if a service partner elects to be taxed currently, an offsetting deduction is allowed if the interest is subsequently forfeited c.) if a service partner elects to be taxed currently, the amount of includible income is the value of the interest on the date it was received, determined as if no restriction existed. d.) if no election is made, the income is reported by the service partner either when the restrictions are removed or when the capital interest is received
if a service partner elects to be taxed currently, an offsetting deduction is allowed if the interest is subsequently forfeited
T exchanges services for a 20% interest in the ABC partnership. The value of the entire partnership is $100,000. Based on this information, which of the following statements is true? a.) if the interests is a profits interest, T must recognize $20,000 in the year that the services are performed b.) if the interest is a restricted partnership capital interest, T must recognize $20,000 in the year the services are performed c.) if the interest is an unrestricted capital interest, no income will be recognized until the capital interest is sold or exchanged d.) if the interest is an unrestricted profits interest, the income will be recognized in the future as profits are recognized
if the interest is an unrestricted profits interest, the income will be recognized in the future as profits are recognized
Which of the following statements is true concerning the effects of a current distribution? a.) gain will be recognized by the distributee partner when hot assets (section 751 assets) exceed a partner's outside basis b.) gain will be recognized by the distributing partnership when the property distributed exceeds a partner's outside basis c.) if partners receive a current distribution, their interests in capital and profits must also be reduced d.) in a current distribution, loss cannot be recognized by the distributee partner
in a current distribution, loss cannot be recognized by the distributee partner
Which of the following statements is true concerning the nature of partnerships? a.) a general partner has no right to bind the entire partnership to any liabilities b.) a limited partner may participate in management of the partnership c.) in a general partnership, the general partners are personally liable for the debts of the partnership d.) in a limited partnership, the general partners are limited to the extent of their personal liability
in a general partnership, the general partners are personally liable for the debts of the partnership
If a partner loans money to a partnership, the payment of interest will be taxed as interest _________ to the partner and be deductible as interest ______ by the partnership.
income; expense
Because the partnership focus is on a ______ ______, a joint undertaking merely to share expenses is not a partnership (reg section 1.761-1(a))
joint profit
If neither the majority interest rule nor the principal partners rule applies, the partnership must select a tax year resulting in the least aggregate deferral of income to the partners. This describes: a.) majority interest b.) principal partners c.) least aggregate deferral of income
least aggregate deferral of income
Which of the following expenses would be considered as organizational expenditures eligible for the amortization election under IRC Section 709? a.) legal expenses for preparing the partnership agreement b.) pre-acquisition investigation expenses c.) printing of the partnership prospectus d.) the fee charged by the state to syndicate a limited partnership
legal expenses for preparing the partnership agreement
A ________ partnership consists of one or more general partners and at least one or more limited partners. a.) general b.) limited c.) small
limited
Termination of a Section 444 election can take place in one of four ways: 1. The partnership reverts back to its required year 2. the partnership __________ 3. the partnership willfully fails to file a return and make the requirement payments 4. the partnership becomes a member of a ____ _______.
liquidates; tiered structure
___________ distributions of cash and other property that will eliminate a partner's interest in the partnership. a.) nonliquidating b.) liquidating c.) disproportionate
liquidating
The partnership must adopt the tax year of the partners who own, in the aggregate, more than 50% of the capital and profits interest. This describes: a.) majority interest rule b.) principal partners rule c.) least aggregate deferral of income rule
majority interest rule
___________ distributions of cash and other property that will not result in the liquidation of the distributee partner's interest (often also referred to as "current" distributions) a.) Nonliquidating b.) liquidating c.) disproportionate
nonliquidating
A __________ _____ is a debt upon which there is no personal liability by any partner or the partnership. a.) recourse debt b.) nonrecourse debt c.) solo liability d.) long-term liability
nonrecourse debt
Generally, partnership organizational and syndication expenses are ____ deductible when incurred.
not
If the partnership has unrealized receivables or inventory items (referred to as hot assets), part of the gain or loss on the sale of the partnership interest will be ________ gain or loss.
ordinary
The advantage of making the election is to fix the amount of compensation currently so that any subsequent appreciation goes untaxed as _________ income.
ordinary
On December 11, 20X1, T contributes a parcel of land that has been held as an investment for 10 years to the ABC partnership in exchange for a partnership interest. ABC uses the land in its business and sells it on June 19, 20X2, for a gain of $5,000. Determine how the gain will be taxed to the partnership. a.) a long-term capital gain of $5,000 b.) a Section 291 gain of $5,000 c.) ordinary income of $5,000 d.) Section 1250 gain of $5,000
ordinary income of $5,000
B owns investment land that was purchased in 20X1 for $30,000. When the land is contributed to the AB partnership, the fair market value is $20,000. The loss is: a.) a capital loss b.) a Section 1231 loss c.) an ordinary loss d.) part capital loss and part ordinary loss
part capital loss and part ordinary loss
The statutory definition of the term _______ includes a syndicate, group, pool, joint venture, or other unincorporated organization that carries on any business, financial operation, or venture and that is not a trust, estate, or corporation as defined by the IRC (IRC section 761).
partnership
What are unrestricted interests?
partnership interests that are transferred for services without strings attached.
_________ income is income on passive activities. a.) active b.) portfolio c.) passive
passive
Which of the following transactions will fall within the general liquidating distribution rules? a.) payment to partner A's beneficiary, Z, following A's untimely death b.) payment to partner A's estate following A's untimely death c.) payment to partner A, who is retiring from the partnership d.) payment to partner A, who is withdrawing from the partnership to start a different business while the remaining partners wish to continue
payment to partner A, who is withdrawing from the partnership to start a different business while the remaining partners wish to continue
Which of the following is not used to calculate ordinary income (loss) on Form 1065? a.) COGS b.) guaranteed salaries to partners c.) ordinary income from other partnerships d.) payments to Keogh plans or IRAs for partners
payments to Keogh plans or IRAs for partners
Which of the following will not be classified as inventory for the purposes of IRC Section 751(d)? a.) accounts receivable b.) depreciation recapture c.) land held for sale to customers d.) petty cash
petty cash
___________ income is income from interest, dividends, annuities, and royalties not derived in the ordinary course of business. a.) active b.) portfolio c.) passive
portfolio
If no partner, or combination of partners, owning more than 50% of the profits and capital interests has the same tax year, the partnership tax year must be the same as that of the principal partners. (principal partners are those owning 5% or more in either profits or capital interests). This describes: a.) majority interest rule b.) principal partners rule c.) least aggregate deferral of income rule
principal partners rule
A ________ interest generally refers to the right to share in the future income of the partnership and in the appreciation in the value of the assets. The receipt of an interest for future profits is usually taxable only when and as those profits are actually realized.
profits
A ___________ _________ __________ (PTP) is a master limited partnership (MLP) whose units are registered with the Securities and Exchange Commission (SEC) and then sold on a public stock exchange.
publicly traded partnership
A _______________ ________ is defined as debt for which the partnership and one or more of the partners (or someone related to the partners) are personally liable. a.) recourse debt b.) nonrecourse debt c.) group liability d.) long-term liability
recourse debt
A _________ partnership interest for services is one that is nontransferable until some contingency is fulfilled and is subject to a substantial risk of forfeiture.
restricted
Taxable income is divided into the following categories: a.) grouped items and partnership ordinary income or loss b.) separately stated items and partnership ordinary income or loss
separately stated items and partnership ordinary income or loss
The election for organizational and _______ ________ should be made separately and as an attachment to the initial Form 1065.
start-up costs
Which of the following statements is true concerning the partnership agreement? a.) a partnership agreement must be in writing and attached to the initial tax return b.) oral amendments cannot be made to a partnership agreement c.) state law can override any partnership tax matters that are silent in the agreement
state law can override any partnership tax matters that are silent in the agreement
What type of expenses include the following items: a. expenses of issuing and marketing partnership interests, which include registration and brokerage fees b. accounting fees and legal fees relating to opinions included in the offering materials c. printing costs of the offering materials d. the fee paid by syndicated limited partnerships for the tax opinion used in the partnership's prospectus
syndication expenses
If a partnership is classified as a ______ ____________, the organizer is required to register the partnership with the IRS. The registration is made on Form 8264 and must be an original copy.
tax shelter
A partner's distributive share is actually the portion of partnership ________ and ____________ income that the partner has agreed to report for tax purporse.
taxable; nontaxable
The _______ partnership interest received in exchange for the services may be a capital interest, a ___ _________, or both.
taxable; profits interest
Which of the following is not a requirement for the $25,000 rental real estate deduction provided in IRC Section 469 to apply to a real estate partnership? a.) the $25,000 benefit must begin a phaseout when a partner's AGI exceeds $150,000 b.) the partner must be a general partner c.) the partner must have active participation in rental real estate activities d.) the partner must own at least 10% of the value of the partnership
the $25,000 benefit must begin a phaseout when a partner's AGI exceeds $150,000
A publicly traded partnership generates $8,000 of losses in Year 1, generates $2,000 of income in Year 2,and is disposed of in Year 3. Determine the appropriate tax treatment if the entity is treated as a partnership. a.) the $2,000 is passive income to be offset against passive losses from other activities b.) the $6,000 of unused losses will be allowed as a deduction against other income in Year 3 c.) the $8,000 is not deductible until the partnership is completely disposed of in year 3 d.) the $8,000 loss is treated as a portfolio loss on the partner's tax return
the $6,000 of unused losses will be allowed as a deduction against other income in Year 3
Partner B sells his 50% interest in the BC partnership to C on December 15, 2018. The only asset in the partnership is inventory with a fair market value of $20,000 and basis of $14,000. Based on these facts, which of the following statements is true? a.) a new partnership is formed with a basis of $20,000 in the inventory b.) a termination of the partnership does not take place c.) partner C's holding period begins on December 15, 2018, in the new partnership d.) the BC partnership terminates on December 15, 2018
the BC partnership terminates on December 15, 2018
In order for a partnership to make a special allocation of income or expenses, one of three conditions must be satisfied. Which of the following is not among those three? a.) the allocation is deemed to be in accordance with the partner's interest in the partnership b.) the allocation is in accordance with the partner's interest in the partnership c.) the allocation is tax neutral d.) the allocation must have substantial economic effect
the allocation is tax neutral
Concerning the election to be excluded from partnership taxation, which of the following statements is false? a.) a deemed election may be made based on all the surrounding facts and circumstances b.) once made, the election is irrevocable without the permission of the IRS c.) the election exempts the partners from partnership treatment under the IRC d.) the election must be made by attaching a statement to Form 1065
the election exempts the partners from partnership treatment under the IRC
Partnership ABC is owned 60%, 30%, and 10% by partners A, B, and C, respectively. A sells her entire partnership interest to D for $24,000. The only asset held by the partnership was land held for sale to customers with a fair market value of $40,000 and a basis of $30,000. If partnership BCD holds the land as investment property, what is the property's basis and what will its character be if it is sold within five years? (Assume that no Section 754 election is in effect). a.) the land will continue to have a $30,000 basis and will be taxed as ordinary income when it is sold b.) the land has a $36,000 basis and will be taxed as ordinary income when it is sold c.) the land has a $40,000 basis and will be taxed as a capital asset when it is sold
the land will continue to have a $30,000 basis and will be taxed as ordinary income when it is sold
Which of the following statements is false regarding guaranteed payments? a.) the net effect of a guaranteed payment is to reduce the outside basis of the partner earning the payment b.) they are determined without regard to partnership income c.) they are either deductible expenses or capital expenditures to the partnership d.) they are includible ordinary income to the partner receiving the payment
the net effect of a guaranteed payment is to reduce the outside basis of the partner earning the payment
Which of the following statements is not true concerning the sale of a partnership? a.) hot assets are assets that are taxed as ordinary income b.) the amount realized must be bifurcated between the capital assets and the ordinary assets c.) the ordinary income recognized will be the amount realized attributed to the sale of hot assets d.) the sale of a partnership is taxed under the aggregate theory
the ordinary income recognized will be the amount realized attributed to the sale of hot assets
A guaranteed payment for services performed is not considered ordinary income to a partner under which of the following circumstances? a.) the partner bases such salary on a percentage of gross sales b.) the partner has a restricted interest and has not made a Section 83 election c.) the partner has liquidated her interest in a prior year but is being paid out of current-year partnership profits d.) the partner is a limited partner
the partner has a restricted interest and has not made a Section 83 election
Which of the following illustrates an application of the aggregate theory of taxation? a.) a 60% partner sells a machine to a partnership in which she is a partner b.) the partner reports a capital gain of $10,000 from securities sold by the partnership c.) the partners set up November 30 as a year-end date d.) the partnership elects to amortize its organization costs
the partner reports a capital gain of $10,000 from securities sold by the partnership
Which of the following conditions must exist for partnership AB to be able to elect a noncalendar year? a.) the partnership can establish a business purpose, and the deferral is not more than three months b.) the principal partners owning more than 40% of the partnership interest have the same noncalendar year c.) more than 50% of the partnership interest is owned by partners with the same noncalendar year d.) the principal partners owning more than 50% of the partnership interest have the same noncalendar year
the partnership can establish a business purpose, and the deferral is not more than three months
If the IRS reclassifies a partnership as a corporation, which of the following rules will apply? a.) the partners must pay the corporate tax on the income b.) the partners must reorganize as a corporation under applicable state law c.) the partnership must file a corporate tax return (form 1120) and pay the corporate tax d.) the partnership must file a partnership return (form 1065) and pay the corporate tax
the partnership must file a corporate tax return (form 1120) and pay the corporate tax
Concerning the effects of a current distribution, which of the following statements is false? a.) the character of any gain recognized is considered to be gain from the sale or exchange of a partnership interest b.) the holding period of property received generally includes the holding period of the partnership c.) the partner's basis in the property received cannot be greater than the partner's outside basis unless gain is recognized d.) the partnership must recognize gain or loss on the distribution of property in a current distribution
the partnership must recognize gain or loss on the distribution of property in a current distribution
The QRS partnership is owned by 24 corporations, each owning 3%, on a September 30 year-end and by an individual owning 28% on a June 30 year-end. Based on this ownership, which of the following statements is true? a.) the 24 corporations combined equal a principal partner b.) the partnership must use a calendar year c.) the partnership's year-end is September 30
the partnership's year-end is September 30
Which of the following will not require gain or loss to be recognized in the creation of a partnership? a.) the transfer of a secret process in exchange for a 20% partnership interest b.) the transfer of Exxon stock in exchange for a 20% interest in an investment partnership c.) the transfer of property in exchange for a 20% partnership interest followed shortly thereafter by a large cash distribution to the transferor partner d.) the transfer of services in exchange for a 20% partnership interest
the transfer of a secret process in exchange for a 20% partnership interest
Form 8301 must included the following: 1. the names, addresses, and ID numbers of the ___________ and _____________ 2. the date of the exchange 3. other information required by form 8308
transferees; transferors
Partner loss recognition: A loss may not be recognized by the distributee partner unless the distribution results in the liquidation of the partner's entire interest in the partnership. Thus, losses will never be recognized in current distributions. (true/false)
true
A partnership is classified as a tax shelter if the following two criteria are met: 1. The investor is entitled to ______ her investment (including tax credits) as deductions over the first five years of operation 2. The partnership is subject to securities regulation, or five or more investors contribute at least $___________.
twice; 250,000
Concerning payments to a retiring partner, which of the following statements is false? a.) everything not taxed as property will be taxed as ordinary income b.) goodwill may be taxed as ordinary income under IRC section 736(a) c.) section 736(a) payments can be treated as distributions of income d.) unrealized receivables may be taxed as property payments under IRC section 736(b)
unrealized receivables may be taxed as property payments under IRC section 736(b)
A distribution cannot reduce a partner's basis in the partnership interest below _________. a.) zero b.) 12 c.) 5
zero
