Income Taxation II- Chapter 21 Partnerships
Distributions don't typically cause the partner to recognize income or gain. True False
True. Distributions don't typically cause the partner to recognize income or gain. Instead, the partner's outside basis is reduced by the amount of cash received. The partnership's inside basis in assets is also reduced.
A disproportionate distribution occurs when the distribution increases or decreases the distributee partner's interest in certain ordinary income-producing assets. True False
True. Each distribution is classified based on whether it is proportionate or disproportionate. In a proportionate distribution, a partner receives the appropriate share of certain ordinary income-producing assets of the partnership. A disproportionate distribution occurs when the distribution increases or decreases the distributee partner's interest in these assets.
If a partner contributes depreciable property to the partnership, the partnership continues to use the depreciation schedule and calculations the partner used. True False
True. If a partner contributes depreciable property to the partnership, the partnership generally "steps into the shoes" of the contributing partner and continues to use the depreciation schedule and calculations the partner used.
If the loss is a passive loss under § 469, it is combined with passive income and losses from other sources to determine whether or not it may be deducted. True False
True. If the loss is a passive loss under § 469, it is combined with passive income and losses from other sources to determine whether or not it may be deducted. Passive losses can generally only be deducted to the extent they offset passive activity income.
Recourse debt is partnership debt for which the partnership or at least one of the partners is personally liable. True False
True. Recourse debt is partnership debt for which the partnership or at least one of the partners is personally liable. This personal liability can exist through the operation of state law or through personal guarantees that a partner makes to the creditor.
Rent income from real or personal property generally is passive activity income. True False
True. Rent income from real or personal property generally is passive activity income, regardless of the partner's level of participation. The primary exception is that rental real estate is not treated as a passive activity for a person who qualifies as a real estate professional.
The capital account analysis is shown on the partner's K-1. True False
True. The capital account analysis (sometimes called a "roll forward" or "reconciliation") is shown on the partner's Schedule K-1. This calculation shows the change in the partner's capital account from the beginning to the end of the tax year.
A partner's basis is important for establishing the deductibility of partnership losses. True False
True. The partner's basis is important for determining the treatment of distributions from the partnership to the partner and establishing the deductibility of partnership losses. When a partnership interest is sold (or liquidated by the partnership), the partner's gain or loss is determined by reference to the adjusted basis of the partnership interest.
The purchasing partner includes any assumed indebtedness as part of the consideration paid for the partnership interest. True False
True. The purchasing partner includes any assumed indebtedness as a part of the consideration paid for the partnership interest, just as the selling partner includes the share of liabilities in the basis in the partnership interest.
A partner's capital interest is measured by a partner's capital sharing ratio. True False
True. A capital interest is measured by a partner's capital sharing ratio, which is the partner's percentage ownership of the capital of the partnership. Generally, this is the share of capital the partner would receive if the entity was liquidated.
The LLP is currently the organizational form of choice for professional service entities, such as accounting firms. True False
True. An LLP partner is not personally liable for any malpractice committed by other partners; therefore, the LLP is currently the organizational form of choice for the large accounting firms.
A limited liability partnership does not have to pay state franchise taxes on its operations. True False
True. Because the LLP is treated as a general partnership in certain respects, it does not have to pay any state franchise taxes on its operations. This is an important difference between LLPs and LLCs in states that impose franchise taxes on LLCs.
For the purpose of the gross receipts test, "average annual gross receipts" is the average of gross receipts for the three tax years ending with the tax period of the tax year in question. True False
False. "Average annual gross receipts" is the average of gross receipts for the three tax years ending with the tax period prior to the tax year in question. If the gross receipts test is not met, the partnership must change to the accrual method the next tax year.
A newly formed partnership must adopt the accrual method of accounting. True False
False. A newly formed partnership may adopt either the cash or accrual method of accounting or a hybrid of these two methods.
Each partner has an inside basis for each asset the partnership owns. True False
False. A partnership has an inside basis for each asset it owns, and each partner has an outside basis in the partnership interest.
Jane's basis for her partnership interest at the beginning of the year was $60,000. For the year, her proportionate share of partnership items was as follows: partnership income of $10,000; partnership charitable contributions of $3,000; and a reduction of partnership liabilities of $5,000. Jane's adjusted basis (outside basis) for her partnership interest at year-end is: a. $62,000. b. $42,000. c. $72,000. d. $70,000. e. $60,000.
A. $62,000. Jane's ending basis is $62,000 ($60,000 + $10,000 - $3,000 - $5,000). The net income increases her basis, while the charitable contributions and decrease in partnership liabilities decrease her basis.
An individual taxpayer's net investment income (NII) is subject to an additional tax of 0.9%. True False
False. An individual taxpayer's net investment income (NII) is subject to an additional tax of 3.8% to the extent the taxpayer's modified adjusted gross income exceeds $250,000 for married taxpayers filing joint returns (or half that amount if a separate return is filed) or $200,000 for other taxpayers. The tax is calculated on Form 8960.
If the partnership holds hot assets, the selling partner will incur only ordinary income on the sale of the interest. True False
False. If the partnership holds hot assets, the selling partner will incur both ordinary income (loss) and capital gain (loss) on the sale of the interest.
Limited partners are personally liable for any partnership debt. True False
False. Limited partners are only liable for partnership debts to the extent of any unpaid contributions they have contractually agreed to make to the partnership.
Nonrecourse debt is allocated based on each partner's economic risk of loss. True False
False. Nonrecourse debt is debt for which no partner is personally liable. Nonrecourse debt (including qualified nonrecourse financing) is allocated among all the partners in accordance with their profit sharing ratios.
All payments from a partnership to a partner are treated as distributions. True False
False. Not all payments from a partnership to a partner are treated as distributions. One example of a payment not considered a distribution is rent paid by a partnership to a partner for use of the partner's property.
Partnership debt includes accounts payable of a cash basis partnership. True False
False. Partnership debt includes any partnership obligation that creates an asset; results in an expense to the partnership; or results in a nondeductible, noncapitalizable item at the partnership level. The definition also includes most debt that is considered a liability under financial accounting rules. However, partnership debt does not include accounts payable of a cash basis partnership.
Items that are not required to be passed through separately from a partnership to the partners include charitable contributions and taxes paid to foreign countries. True False
False. Partnership income and loss items must be separately stated if they could differently affect the tax liabilities of two or more partners. This is true also for other partnership items and information (not necessarily income or loss amounts), such as charitable contributions and the information a partner might need for calculating the foreign tax credit.
After a partner is admitted to a partnership, the partner's proportionate share of any increase in partnership liabilities results in a decrease in the partner's adjusted basis in the partnership. True False
False. Partnership liability is positively, not negatively, correlated to the partner's adjusted basis in the partnership.
Schedule M-2 must be prepared using generally accepted accounting principles. True False
False. Schedule M-2 can be prepared using any of several methods, including the tax basis, generally accepted accounting principles (GAAP), or the "§ 704(b) book" method.
Section 721 provides that, in general, gain but not loss is recognized by the partnership or the partner on contribution of appreciated or depreciated property to a partnership in exchange for an interest in the partnership. True False
False. Section 721 provides for nonrecognition of either gain or loss on a contribution of property to the partnership. The realized gain or loss is deferred, rather than forgiven
The capital account analysis must be prepared using GAAP. True False
False. The capital account analysis can be prepared using any of several methods, including the tax basis, GAAP, or the § 704(b) book method. The method selected is indicated on the Schedule K-1 and should be the same method that was used in preparing the partnership's Schedule M-2 (Analysis of Partners' Capital Accounts).
One of the advantages of an LLC is the abundance of case law interpreting the various state statutes. True False
False. The disadvantages of an LLC stem primarily from the lack of Final Regulations in certain areas. There is only a limited body of case law interpreting the various state statutes, so the application of some provisions is uncertain. An additional uncertainty for LLCs that operate in more than one jurisdiction is which state's law will prevail and how it will be applied.
The partner's basis is shown on Schedule K-1. True False
False. The partner's basis is not shown on Schedule K-1 or anywhere else on the tax return.
The partnership form of business should only be used by small business operations. True False
False. The partnership can be used by large or small businesses. For smaller business operations, a partnership enables several owners to combine their resources at low cost. It offers simple filing requirements, the taxation of income only once, and the ability to discontinue operations relatively inexpensively. For larger businesses, a partnership offers a unique ability to raise capital with low filing and reporting costs compared to corporate stock or bond issuances.
When determining the partner's adjusted basis, distributions are subtracted before basis is increased for taxable income. True False
False. When determining basis, a certain order must be followed. Basis is first increased for contributions, and the partner's share of taxable income, exempt income items, and excess of depletion deductions over adjusted basis of property subject to depletion. Then the partner's distributions and withdrawals, including decreases in the partner's share of partnership debt, are subtracted.
A formal, written partnership agreement is always required. True False
False. While a formal agreement is not always required, an agreement that sets forth the obligations, rights, and powers of the partners would provide some certainty as to the tax consequences of the partners' actions.
For self-employment (SE) tax, a taxpayer could save up to 15.3% of any distributive share by being treated as a general partner. True False
False. For SE tax, a taxpayer could save up to 15.3% of any distributive share by being treated as a limited partner. As a result, this has been a contentious area for the IRS.
If the partnership holds hot assets, the selling partner will incur ordinary income (loss) but not capital gain (loss) on the sale of the interest. True False
False. If the partnership holds hot assets, the selling partner will incur both ordinary income (loss) and capital gain (loss) on the sale of the interest.
Syndication costs are deducted on the partnership's first tax return. True False
False. Syndication costs arise when partnership interests are being marketed to investors. Under § 709, these costs are capitalized, but are neither amortizable nor deductible.
The closing of the tax year causes the buying partner to report the share of income on the sale date rather than at the end of the partnership's tax year. True False
False. The closing cost of the tax year causes the selling partner to report report the share of income on the sale date rather than at the end of the partnership's tax year. There are several acceptable methods of determining the partner's share of income.
Jane contributed property with a basis of $40,000 and a value of $50,000 to the JO Partnership in exchange for a 20% interest in partnership capital and profits. During the first year of partnership operations, JO had net taxable income of $30,000 and tax-exempt interest income of $10,000. The partnership distributed $10,000 cash to Jane. On January 1 of year 2, Jane sells her partnership interest for $49,000. What is Jane's gain or loss on the sale? a. $9,000 loss b. $0 c. $11,000 loss d. $11,000 gain e. $9,000 gain
D. $11,000 gain Jane is a 20% partner and shares in 20% of the partnership's taxable income, or $8,000. Her basis is reduced by the cash distribution during the year. Jane's ending basis is calculated as follows: $40,000 beginning basis + $8,000 (20% × $40,000 income) - $10,000 distribution. Selling price of $49,000 - basis of $38,000 = $11,000 gain.
Angie sells her one-third interest in the ANG Partnership to Gerard for $60,000 cash plus the assumption of her $4,000 share of partnership debt. On the sale date, the partnership balance sheet and agreed-upon fair market values were as follows: Basis FMV Cash $30,000 $ 30,000 Receivables -0- $42,000 Land $60,000 $120,000 Total $90,000 $192,000 Notes payable $12,000 $ 12,000 Angie, capital $26,000 $60,000 Noreen, capital $26,000 $60,000 Gigi, capital $26,000 $60,000 Total $90,000 $192,000 As a result of the sale, Angie recognizes: a. A $38,000 capital gain. b. No gain or loss. c. $14,000 of capital gain and $24,000 of ordinary income. d. $14,000 of ordinary income and $20,000 of capital gain. e. A $34,000 capital gain.
D. $14,000 of ordinary income and $20,000 of capital gain. At the time of the sale, Angie's basis is $30,000 [$26,000 (capital balance) + $4,000 (her share of the partnership's liabilities)]. Angie's overall gain is $34,000 [$64,000 (selling price) - $30,000 (basis)]. Angie's share of the partnership's unrealized receivables is $14,000; thus, she must recognize this amount of the gain as ordinary income. The remaining $20,000 is treated as capital gain.
Opal receives a proportionate liquidating distribution when the basis of her partnership interest is $20,000. The distribution consists of $25,000 cash and noninventory property (adjusted basis to the partnership of $10,000; fair market value of $12,000). The partnership has no hot assets. How much gain or loss does Opal recognize, and what is her basis in the distributed property? a. $5,000 ordinary income; $0 basis in property b. $0 gain or loss; $10,000 basis in property c. $5,000 capital gain; $10,000 basis in property d. $5,000 capital gain; $0 basis in property e. $0 gain or loss; $12,000 basis in property
D. $5,000 capital gain; $0 basis in property Opal's $20,000 basis is first reduced by the $25,000 cash distribution she receives, which results in a $5,000 ($25,000 - $20,000) capital gain (because the partnership has no hot assets). After this distribution, Opal's basis is $0. When the remaining partnership property is distributed, it also takes a $0 basis.
ABC Partners was formed during the current tax year. It incurred $10,000 of organizational expenses, $80,000 of startup expenses, and $5,000 of transfer taxes to retitle property contributed by a partner. The property had been held as MACRS property for 10 years by the contributing partner and had an adjusted basis to the partner of $300,000 and fair market value of $400,000. Which of the following statements regarding these items is true? a. ABC's startup expenses are amortized over 60 months. b. ABC cannot depreciate the contributed property. c. The partner continues to depreciate the property even after it is contributed to the partnership. d. ABC must capitalize the transfer tax and treat the contributed property as a new asset placed in service on the date the property is contributed. e. ABC must amortize the $10,000 of organizational expenses over 180 months.
D. ABC must capitalize the transfer tax and treat the contributed property as a new asset placed in service on the date the property is contributed. Legal fees and transfer taxes incurred in transferring assets to a partnership must be capitalized. Cost recovery for these amounts commences when the underlying property is placed in service. "ABC cannot depreciate the contributed property" and "The partner continues to depreciate the property even after it is contributed to the partnership" are incorrect because the partnership "steps into the partner's shoes" with respect to depreciation of contributed property. "ABC must amortize the $10,000 of organizational expenses over 180 months" is incorrect because the first $5,000 of organizational costs may be deducted if total organizational costs are less than $50,000. "ABC's startup expenses are amortized over 60 months" is incorrect because the portion of startup costs that cannot be currently deducted must be amortized over 180 months.
Which of the following statements regarding an LLC is false? a. Members of an LLC generally have limited personal liability for debts of the LLC. b. An LLC can specially allocate income items, as long as the substantial economic effect rules of § 704(b) are followed. c. A partnership can convert to an LLC with few, if any, tax ramifications. d. Members of an LLC cannot participate in management of the LLC. e. An LLC is usually taxed like a partnership.
D. Members of an LLC cannot participate in management of the LLC. All of these statements are true, except "Members of an LLC cannot participate in management of the LLC" All owners (members) of an LLC have the legal right to participate in the entity's management.
Jerome is the managing general partner of JAR, in which he owns a 30% interest. For the year, JAR reported income of $260,000 (after deducting all guaranteed payments). Jerome received a guaranteed payment of $40,000 for capital that he had loaned the partnership, and he received a guaranteed payment of $120,000 for services he performed for JAR. How much income from self-employment did Jerome earn from JAR? a. $198,000 b. $120,000 c. $380,000 d. $238,000 e. $160,000
A. $198,000 Jerome's income from self-employment includes his distributive share of partnership income of $78,000 ($260,000 × 30%). In addition, his SE income includes the guaranteed payment he received for services ($120,000), for total SE income of $198,000. The guaranteed payment for the use of Jerome's capital is not subject to SE tax.
Tempe LLC was organized on June 1 and began business on August 1 of 2020. Tempe has adopted a calendar year and incurred the following costs during 2020: Legal fees for drafting the operating agreement $18,000 Syndication costs $19,000 Preopening advertising expenses $20,000 Accounting fees for tax advice of an organizational nature $15,000 Training costs for new employees before opening the business $12,000 The maximum amount Tempe can deduct as startup costs on its tax return for 2020 is: a. $5,750. b. $2,133. c. $6,800. d. $6,400. e. $5,000.
A. $5,750. Startup costs include the preopening advertising expenses and the training costs for new employees before opening the business ($20,000 + $12,000 = $32,000). The partnership may deduct up to $5,000 of startup costs in the year in which it begins business. This amount must be reduced, however, by startup costs that exceed $50,000. Excess expenditures are amortizable over 180 months, beginning with the month in which the partnership begins business. Permitted deduction $5,000 Amortization ($32,000 - $5,000)/180 months × 5 months + $750 Total deduction $5,750
Kit and Min form the KM Partnership, with each receiving a 50% interest in the capital and profits of the partnership. Kit contributes land with a basis of $30,000 (fair market value of $50,000) and cash of $20,000 for a 50% interest in the partnership. Min contributes services worth $70,000 to the partnership. Which of the following reflects the results of these transactions? a. Kit has a basis of $50,000 in his partnership interest. b. Min's basis in the partnership interest is zero. c. Kit recognizes a gain of $20,000. d. Min has a capital gain equal to $70,000. e. The partnership's holding period for the land begins on the date of the transfer.
A. Kit has a basis of $50,000 in his partnership interest. Kit has a basis of $50,000 in his partnership interest ($30,000 adjusted basis of land + $20,000 of cash contributed). Services are not considered property that can be transferred to a partnership on a tax-free basis.
Isabel is a 40% partner in the ICE Partnership. During the current year, ICE reported gross receipts of $160,000 and a charitable contribution of $10,000. The partnership paid expenses of $120,000. In addition, ICE distributed $10,000 each to partners Isabel and Edith. Isabel reports which of the following income from ICE during the current tax year? a. $24,000 ordinary income; $6,000 charitable contribution b. $16,000 ordinary income; $4,000 charitable contribution c. $12,000 ordinary income d. $4,000 ordinary income e. $8,000 ordinary income; $4,000 charitable contribution
B. $16,000 ordinary income; $4,000 charitable contribution ICE's net ordinary income is $40,000 ($160,000 ordinary income - $120,000 of expenses). The cash distributions to Isabel and Edith are not deductible. Isabel's share of this income is $16,000 ($40,000 × 40%). In addition, Isabel reports her $4,000 share ($10,000 × 40%) of the partnership's charitable contribution.
On January 1 of the current year, Annabelle and Paul form an equal partnership. Annabelle makes a cash contribution of $80,000 and a property contribution (adjusted basis of $120,000; fair market value of $160,000) in exchange for her interest in the partnership. Paul contributes property (adjusted basis of $190,000; fair market value of $240,000) in exchange for his partnership interest. Which of the following statements concerning the income tax results of this partnership formation is true? a. Paul has a $240,000 tax basis for his partnership interest. b. Annabelle has a $200,000 tax basis for her partnership interest. c. The partnership has a $200,000 adjusted basis in the property contributed by Annabelle. d. The partnership has a $160,000 adjusted basis in the property contributed by Annabelle. e. Paul recognizes a $50,000 gain on his property transfer.
B. Annabelle has a $200,000 tax basis for her partnership interest. The contributions are tax-free, and the carryover and substituted basis rules of §§ 722 and 723 apply. Paul's basis for his partnership interest will be the same as his $190,000 basis for the property contributed. Annabelle will have a $200,000 tax basis for her partnership interest ($80,000 cash contributed + $120,000 adjusted basis of the property contributed); the partnership will have a $120,000 adjusted basis for the property contributed by Annabelle; and neither Paul nor Annabelle will recognize a gain or loss on the property contribution.
Erica is a limited partner in the ART Partnership, which is not publicly traded. Her allocable share of ART's passive ordinary losses from a nonrealty activity for the current year is ($70,000). Erica has a $50,000 adjusted basis (outside basis) for her interest in ART (before deduction of any of the passive losses). Her amount "at risk" under § 465 is $40,000 (before deduction of any of the passive losses). She also has $35,000 of passive income from other sources. How much of her ($70,000) allocable loss can Erica deduct on her current year's tax return? a.$50,000 b.$35,000 c.$70,000 d.$55,000 e.$40,000
B.$35,000 The $70,000 passive loss must be limited first by Erica's $50,000 outside basis for her partnership interest, leaving $20,000 ($70,000 - $50,000) suspended under the § 704(d) limitation. The "at-risk" rules further limit her deduction to $40,000, leaving $10,000 suspended under the at-risk rules. She can deduct $35,000 of this loss because that is the amount she has of passive income from other sources, leaving $5,000 ($40,000 - $35,000) suspended under the passive loss rules. In summary, she can deduct $35,000 of the loss and has $35,000 in suspended losses ($20,000 + $10,000 + $5,000), thus accounting for her allocable $70,000 loss.
At the beginning of the year, Aretha's basis in the A&B Partnership interest is $60,000. She receives a proportionate nonliquidating distribution from the partnership consisting of $10,000 of cash, unrealized accounts receivable (basis of $0; fair market value of $30,000), and inventory (basis of $10,000; fair market value of $20,000). After the distribution, Aretha's bases in the accounts receivable, inventory, and partnership interest, respectively, are: a. $30,000, $10,000, and $10,000. b. $0, $20,000, and $30,000. c. $0, $10,000, and $40,000. d. $30,000, $20,000, and $0. e. $10,000, $0, and $40,000.
C. $0, $10,000, and $40,000. $60,000 (Aretha's basis) - $10,000 (cash distribution) = $50,000. Accounts Receivable and Inventory are distributed next and take carryover bases of $0 and $ 10,000, respectively. This reduces the basis in the partnership interest to $40,000 ($50,000-$10,000).
Jane contributed property with a basis of $40,000 and a value of $50,000 to the JO Partnership in exchange for a 20% interest in partnership capital and profits. During the first year of partnership operations, JO had net taxable income of $40,000. The partnership distributed $10,000 cash to Jane. Jane's adjusted basis (outside basis) for her partnership interest at year-end is: a. $60,000. b. $70,000. c. $38,000. d. $80,000. e. $36,000.
C. $38,000. Jane is a 20% partner and shares in 20% of the partnership's taxable income, or $8,000. Her basis is reduced by the cash distribution during the year. Jane's ending basis is calculated as follows: $40,000 beginning basis + $8,000 (20% × $40,000 income) - $10,000 distribution.
Marina and Nolan formed the MN Partnership. Marina contributed $20,000 of cash in exchange for her 50% interest in the partnership capital and profits. During the first year of partnership operations, the following events occurred: the partnership had a net taxable income of $10,000; Marina received a distribution of $8,000 cash from the partnership; and Marina had a 50% share in the partnership's $16,000 of recourse liabilities on the last day of the partnership year. Marina's adjusted basis for her partnership interest at year-end is: a. $20,000. b. $38,000. c. $17,000. d. $33,000. e. $25,000.
E. $25,000. Marina's adjusted basis at year-end is $25,000 ($20,000 cash contribution, + her $5,000 share of partnership income - $8,000 cash distribution, + her $8,000 share of partnership liabilities).
At the beginning of the year, Victoria's capital account balance in the VIP Partnership was $90,000. During the tax year, Victoria contributed property with a basis of $30,000 and a fair market value of $70,000. Her share of the partnership's loss was $12,000. At the end of the year, the partnership distributed $15,000 of cash to Victoria. Also, the partnership allocated $20,000 of recourse debt and $35,000 of nonrecourse debt to Victoria. What is Victoria's ending capital account balance? a. $117,000 b. $90,000 c. $147,000 d. $120,000 e. $93,000
E. $93,000 Victoria's ending capital account balance is $93,000. Victoria's beginning capital account balance of $90,000 is "rolled forward" by adding the basis of the property she contributed ($30,000). The basis is then reduced by her share of partnership loss ($12,000) and her distribution of ($15,000) ($90,000 + $30,000 - $12,000 - $15,000). Liabilities are not included in the partner's capital account.
Manuel contributed land to the newly formed HOME Partnership. The land had a $100,000 adjusted basis to Manuel and a $160,000 fair market value on the contribution date. The property was also encumbered by a $40,000 liability, which was assumed by the partnership on that date. Another partner, Olivia, contributes cash. The partnership borrows $30,000 to finance a building on the contributed land. Assume that Manuel and Olivia share equally in liabilities. At the end of the first year, the accrual basis partnership owes $4,000 in trade accounts payable. Manuel's basis in his partnership interest at the end of the year is: a. $36,000. b. $80,000. c. $40,000. d. $100,000. e. $97,000.
E. $97,000. Basis in contributed land $100,000 Less: Debt assumed by partnership ($40,000) Share of debt on land $20,000 Initial basis $80,000 Share of construction loan $15,000 Share of accounts payable (accrual basis) $2,000 Basis, end of first year $97,000
At the beginning of the year, Mark's capital account balance in the MAP Partnership was $80,000. During the tax year, Mark contributed property with a basis of $20,000 and a fair market value of $50,000. His share of the partnership's ordinary income and separately stated income and deduction items was $41,000. At the end of the year, the partnership distributed $10,000 of cash to Mark. Also, the partnership allocated $10,000 of recourse debt to Mark. What is Mark's ending capital account balance? a.$90,000 b.$80,000 c.$69,000 d.$151,000 e.$131,000
E.$131,000 Mark's ending capital account is $131,000. Mark's beginning capital account balance of $80,000 is "rolled forward" by adding the basis of the property he contributed ($20,000) and his share of partnership income ($41,000), and subtracting the distribution to him ($10,000) ($80,000 + $20,000 + $41,000 - $10,000). Liabilities are not included in the partner's capital account.
Lilly sells her 25% partnership interest to Luna for $50,000 on July 1 of the current tax year. Lilly's basis in her partnership interest at the beginning of the year was $40,000, including a $15,000 share of partnership liabilities. The partnership's income for the entire year was $100,000, and Lilly's share of partnership debt was $10,000 as of the date she sold the partnership interest. Assume the partnership has no hot assets and that its income is earned evenly throughout the year. Lilly recognizes a gain of $2,500 on the sale. True False
True. Lilly's $40,000 basis is reduced by the $5,000 decrease in her share of partnership debt and is increased by her $12,500 share of partnership income for one-half of the tax year ($100,000 × 25% × ½ year) to become $47,500. Thus, $50,000 (sale price) - $47,500 (adjusted basis) equals $2,500 gain on the sale.
A partnership can have partners who are individuals, corporations, trusts, associations, or even other partnerships. True False
True. Partnerships are governed by Subchapter K of the Internal Revenue Code. A partnership can have partners who are individuals, corporations, trusts, estates, associations, or even other partnerships.
An example of the "entity concept" underlying partnership taxation is the fact that the partnership must file an information tax return. True False
True. The entity concept treats partners and partnerships as separate units and gives the partnership its own "personality." For example, the partnership must file an information return that summarizes its activities for the tax year.
The capital account is an accounting calculation of the partner's ownership in the entity. True False
True. The partner's basis is not the same as the partner's capital account. The capital account can be thought of as an accounting calculation of the partner's ownership in the entity.
The partnership makes the election as to what cost recovery methods and assumptions are used. True False
True. The partnership makes elections regarding everything from the partnership's taxable year to the depreciation method for partnership assets.
An example of the "aggregate concept" underlying partnership taxation is the fact that the partners (rather than the partnership) pay tax on partnership income. True False
True. This is an example of the aggregate (or "conduit") principle of taxation. The aggregate concept treats the partnership as a channel through which income, credits, deductions, and other items flow to the partners. The partnership is regarded as a collection of taxpayers joined in an agency relationship.