Regulation-Part 5-Part II

Partnership P has an operating loss of $10,000 for the year. Partner A had a 50% interest in the partnership, with a basis of $5,000 at the beginning of the year. P distributed $2,000 to A during the year. What amount of loss is deductible by A? $2,000 $3,000 $5,000 $7,000

$3,000 Correct! A's share of the partnership loss is $5,000 ($10,000 × 50%). The ordering rules for computing partnership basis provide that distributions reduce basis before losses. The $2,000 distribution reduces the basis to $3,000 ($5,000 basis − $2,000). Thus, only $3,000 of the loss can be used to reduce the basis to zero. The remaining $2,000 loss is carried forward to future tax years.

Abe, Betsy, and Dan decide to form the equal ABD partnership at the beginning of Year One. Abe contributed depreciable assets that he has owned for five years that have a basis of $15,000 and a value of $20,000. Betsy contributed $20,000 cash. Dan contributed $12,000 in cash and land with a basis of $5,000 and a value of $8,000. How much income is allocated to Abe if the partnership sells the assets contributed by Abe for $18,000? $0 $1,000 $3,000 $5,000

$3,000 The realized gain on the sale of the assets is $3,000 ($18,000 - $15,000 basis in assets). Abe's built in gain on the contribution is $5,000. The amount of gain allocated to Abe is the lower of the realized gain or built-in gain, so $3,000 is the allocation.

The adjusted basis of Jody's partnership interest was $50,000 immediately before Jody received a current distribution of $20,000 cash and property with an adjusted basis to the partnership of $40,000 and a fair market value of $35,000. What is Jody's basis in the distributed property? $0 $30,000 $35,000 $40,000

$30,000 A partner's basis in property received in a nonliquidating distribution is the same as the partnership's basis immediately before the distribution. However, the partner's basis in the property may not exceed his/her basis in the partnership less any cash received in the distribution. Thus, Jody's basis in the distributed property was $30,000, Jody's adjust basis in the partnership interest of $50,000 less the cash received of $20,000.

The basis to a partner of property distributed "in kind" in complete liquidation of the partner's interest is the Adjusted basis of the partner's interest increased by any cash distributed to the partner in the same transaction. Adjusted basis of the partner's interest reduced by any cash distributed to the partner in the same transaction. Adjusted basis of the property to the partnership. Fair market value of the property.

Adjusted basis of the partner's interest reduced by any cash distributed to the partner in the same transaction. The basis to a partner of property distributed "in kind" in complete liquidation of the partner's interest is the adjusted basis of the partner's interest reduced by any cash distributed to the partner in the same transaction.

"Hot assets" of a partnership would include which of the following? Cash Unrealized receivables Section 1231 assets Capital assets

Unrealized receivables "Hot assets" for a partnership include ONLY inventory and unrealized receivables.

The following information pertains to Carr's admission to the Smith & Jones partnership on July 1, 2019: Carr's contribution of capital: 800 shares of Ed Corp. stock bought in 2006 for $30,000; fair market value $150,000 on July 1, 2019. Carr's interest in capital and profits of Smith & Jones: 25%. Fair market value of net assets of Smith & Jones on July 1, 2019, after Carr's admission: $600,000. Carr's gain in 2019 on the exchange of the Ed Corp. stock for Carr's partnership interest was $120,000 ordinary income. $120,000 long-term capital gain. $120,000 Section 1231 gain. $0.

$0. Generally no gain or loss is recognized on the transfer of property to a partnership in exchange for a partnership interest. Since Carr's gain is not recognized, there will be a carryover basis of $30,000 for the stock to the partnership, and Carr will have a $30,000 basis for the 25% partnership interest received.

An individual is a 50% partner who materially participates in Stone Partnership. The individual's adjusted basis at the beginning of the year was $0. Stone had a $70,000 loss from its business. Stone borrowed $30,000 from a bank of which $20,000 remained unpaid at year-end. What amount of loss is the individual allowed in the current year from Stone? $35,000 $15,000 $10,000 $0

$10,000 CORRECT! Beginning basis jn partnership interest $ 0 Share of partnership debt ($20,000 × 50%) 10,000 Basis before loss flow-through $10,000 Portion of $35,000 ($70,000 × 50%) loss allowed (10,000) Ending basis in partnership interest $ 0 Loss allowed to be deducted on Form 1040 is limited to basis in partnership interest.

A partnership had four partners. Each partner contributed $100,000 cash. The partnership reported income for the year of $80,000 and distributed $10,000 to each partner. What was each partner's basis in the partnership at the end of the current year? $170,000 $120,000 $117,500 $110,000

$110,000 Basis is computed as follows: Contribution $100,000 25% of income 20,000 Distribution (10,000) $110,000

December 31, 2018, Alan and Baker were equal partners in a partnership with net assets having a tax basis and fair market value of $100,000. On January 2, 2019, Carr contributed securities with a fair market value of $50,000 (purchased in 2017 at a cost of $35,000) to become an equal partner in the new firm of Alan, Baker, and Carr. The securities were sold on December 15, 2019, for $47,000. How much of the partnership's capital gain from the sale of these securities should be allocated to Carr? $0 $ 3,000 $ 6,000 $12,000

$12,000 Normally, the entire amount of precontribution gain would be allocated to Carr. However, in this case the allocation to Carr is limited to the partnership's recognized gain resulting from the sale, $47,000 selling price − $35,000 basis = $12,000.

White has a one-third interest in the profits and losses of Rapid Partnership. Rapid's ordinary income for the 2019 calendar year is $30,000, after a $3,000 deduction for a guaranteed payment made to White for services rendered. None of the $30,000 ordinary income was distributed to the partners. What is the total amount that White must include from Rapid as taxable income in his 2019 tax return? $3,000 $10,000 $11,000 $13,000

$13,000 Guaranteed payments to partners from their partnership for partnership services or capital are not treated as partnership distributions. Instead, the payments are treated as salary payments to employees or interest payments. Hence, White would have to include the $3,000 guaranteed payment on his 2019 tax return. In addition, since partnerships are pass-through for tax purposes, White must include his share of the partnership's income on his tax return. White share of the partnership's income would be $10,000 (= $30,000 in partnership income multiplied by White's 1/3 share in profits and losses). Therefore, the total amount that White must include from Rapid Partnership as taxable income in his 2019 tax return is $13,000, the sum of the $3,000 in guaranteed payments made to White and White's share of the partnership's income.

Flagg and Miles are each 50% partners in Decor Partnership. Each partner had a $200,000 tax basis in the partnership on January 1, 2019. Decor's 2019 net business income before guaranteed payments was $45,000. During 2019, Decor made a $7,500 guaranteed payment to Miles for deductible services rendered. What is Miles's tax basis in Decor on December 31, 2019? $211,250 $215,000 $218,750 $222,500

$218,750 The basis for a partner's partnership interest is increased by the partner's distributive share of partnership income that is taxed to the partner. Here, Decor's net business income of $45,000 would be reduced by the guaranteed payment of $7,500, resulting in $37,500 of ordinary income that would pass through to be reported on partners' returns and increase the basis of their partnership interests. Here, Miles's beginning tax basis for the partnership interest of $200,000 would be increased by Miles's distributive share of ordinary income ($37,500 × 50% = $18,750), to $218,750.

On December 31, 2018, Edward Baker gave his son, Allan, a gift of a 50% interest in a partnership in which capital is a material income-producing factor. For the year ended December 31, 2019, the partnership's ordinary income was $100,000. Edward and Allan were the only partners in 2019. There were no guaranteed payments to partners. Edward's services performed for the partnership were worth a reasonable compensation of $40,000 for 2019. Allan has never performed any services for the partnership. What is Allan's distributive share of partnership income for 2019? $20,000 $30,000 $40,000 $50,000

$30,000 In a family partnership, services performed by family members must first be reasonably compensated before income is allocated according to the capital interests of the partners. Since Edward's services were worth $40,000, Allan's distributive share of partnership income is ($100,000 − $40,000) × 50% = $30,000.

Evan, a 25% partner in Vista Partnership, received a $20,000 guaranteed payment in 2019 for deductible services rendered to the partnership. Guaranteed payments were not made to any other partner. Vista's 2019 partnership income consisted of: Net business income before guaranteed payments $80,000 Net long-term capital gains 10,000 What amount of income should Evan report from Vista Partnership on her 2019 tax return? $37,500 $27,500 $22,500 $20,000

$37,500 Guaranteed payments from a partnership for the services of a partner are treated as salary payments and, as a result, are made without regard to the partner's share of the partnership's income. Thus, Evan would treat the $20,000 payment from the partnership for services rendered as income on her 2019 tax return. She also must report her share of the partnership's net income. Since the guaranteed payments qualify as a deductible expense, Vista's partnership income may be reduced by the amount of the expense. Hence, the partnership's income would be $70,000; $80,000 in net business income before guaranteed payments plus the $10,000 net long-term capital gain less the $20,000 guaranteed payment. Evan's 25% share of the partnership's income would be $17,500 (25% × $70,000). Thus, Evan would report $37,500 in income from the Vista Partnership on her 2019 tax return − the sum of the guaranteed payment ($20,000) and her share of the partnership's income ($17,500).

In the current year, a partnership reported the following items: Fees earned $500,000 Salary expense 100,000 Utility expense 5,000 Charitable contributions 8,000 Long-term capital gain 2,000 Office supplies 500 What is the partnership's ordinary income? $386,500 $388,500 $394,500 $396,500

$394,500 CORRECT! Ordinary income is the income reported on page 1 of Form 1065 that includes only non-separately stated income. Charitable contributions and long-term capital gain are separately stated. Fees earned $500,000 Salary expense (100,000) Utility expense (5,000) Office supplies (500) Ordinary income $394,500

Alt Partnership, a cash basis calendar year entity, began business on October 1, 2019. Alt incurred and paid the following in 2019: Legal fees to prepare the partnership agreement $12,000 Accounting fees to prepare the representations in offering materials 15,000 Ignoring amortization, what was the maximum amount that Alt could expense on the 2019 partnership return? $0 $5,000 $12,000 $15,000

$5,000 $5,000 of organizational expenses may be deducted, but the $5,000 is reduced by the amount of expenditures incurred that exceed $50,000. Expenses not deducted must be capitalized and amortized over 180 months, beginning with the month that the corporation begins its business operations. Deductions are not allowed to the partnership or any partner for expenses incurred to sell partnership interests. Hence, $5,000 of the legal fees to prepare the partnership agreement may be deducted. However, the accounting fees to prepare the representations in offering materials may not be expensed or amortized because these expenses are related to selling partnership interests.

Dale's distributive share of income from the calendar-year partnership of Dale & Eck was $50,000 in 2019. On December 15, 2019, Dale, who is a cash-basis taxpayer, received a $27,000 distribution of the partnership's 2019 income, with the $23,000 balance paid to Dale in May 2020. In addition, Dale received a $10,000 interest-free loan from the partnership in 2019. This $10,000 is to be offset against Dale's share of 2019 partnership income. What total amount of partnership income is taxable to Dale in 2019? $23,000 $37,000 $50,000 $60,000

$50,000 Partners must report their share of the partnership's income, deductions and other items on the partner's income tax return in the calendar year in which the partnership's tax year ends. Dale's share of Dale and Eck's 2019 income was $50,000. Thus, Dale must report $50,000 of partnership income in 2019.

Gladys Peel owns a 50% interest in the capital and profits of the partnership of Peel and Poe. On July 1, 2019, Peel bought land the partnership had used in its business for its fair market value of $10,000. The partnership had acquired the land five years ago for $16,000. For the year ended December 31, 2019, the partnership's net income was $94,000 after recording the $6,000 loss on the sale of land. Peel's distributive share of ordinary income from the partnership for 2019 was $47,000. $48,500. $49,000. $50,000.

$50,000. Although the $6,000 loss that was deducted in arriving at the partnership's net income would also be deductible for tax purposes, it must be separately passed through to partners because it is a Sec. 1231 loss. Thus, the $6,000 loss must be added back to the $94,000 of partnership net income and results in partnership ordinary income of $100,000. Peel's share is $100,000 × 50% = $50,000.

Hart's adjusted basis of his interest in a partnership was $30,000. He received a nonliquidating distribution of $24,000 cash plus a parcel of land with a fair market value and partnership basis of $9,000. Hart's basis for the land is $9,000 $6,000 $3,000 $0

$6,000 If a partner receives property from the partnership in a nonliquidating distribution, the partner assumes a basis in the property equal to the partnership's basis in the property immediately before the distribution. However, the basis assumed may not exceed the partner's interest in the partnership less any cash received in the distribution. The partnership's basis in the land distributed to Hart was $9,000. However, Hart would not assume this amount as his basis in the land because it exceeds his interest in the partnership less any cash received in the distribution. Thus, Hart's basis would be limited to $6,000, his interest in the partnership of $30,000 less the $24,000 of cash received.

The adjusted basis of Vance's partnership interest in Lex Associates was $180,000 immediately before receiving the following distribution in complete liquidation of Lex: Basis to Lex Fair market value Cash $100,000 $100,000 Real estate 70,000 96,000 What is Vance's basis in the real estate? $96,000 $83,000 $80,000 $70,000

$80,000 A partner's basis in property distributed in a complete liquidation of the partner's partnership interest equals the partner's partnership interest less any cash distributed in the transaction. Thus, Vance's basis in the real estate is $80,000, the adjusted basis of Vance's partnership interest in Lex Associates of $180,000 less cash received of $100,000.

On April 1, 2019, George Hart, Jr. acquired a 25% interest in the Wilson, Hart, and Company partnership by gift from his father. The partnership interest had been acquired by a $50,000 cash investment by Hart, Sr. on July 1, 2013. The tax basis of Hart, Sr.'s partnership interest was $60,000 at the time of the gift. Hart, Jr. sold the 25% partnership interest for $85,000 on December 17, 2019. What type and amount of capital gain should Hart, Jr. report on his 2019 tax return? A long-term capital gain of $25,000. A short-term capital gain of $25,000. A long-term capital gain of $35,000. A short-term capital gain of $35,000.

A long-term capital gain of $25,000. Since the partnership interest was acquired by gift from Hart, Sr., Jr.'s basis would be the same as Sr.'s basis at date of gift, $60,000. Since Jr.'s basis is determined from Sr.'s basis, Jr.'s holding period includes the period the partnership interest was held by Sr. Thus, Hart, Jr. will report a LTCG of $85,000 − $60,000 = $25,000.

In the absence of an election to adopt an annual accounting period, the required tax year for a partnership is A tax year that results in the greatest aggregate deferral of income. A calendar year. A tax year of one or more partners with a more than 50% interest in profits and capital. A tax year of a principal partner having a 10% or greater interest.

A tax year of one or more partners with a more than 50% interest in profits and capital. This answer is correct. A partnership generally is restricted in choosing a tax year in order to prevent the deferral of income to partners that could otherwise occur. Thus, a newly formed partnership is required to adopt the same taxable year as is used by its one or more partners owning a more than 50% interest in profits and capital. This insures that there will be no deferral of reporting of income for more than 50% of the partnership's income.

Which of the following statements regarding a partnership's tax year is correct? A partnership formed on July 1 is required to adopt a tax year ending June 30. A partnership may elect to have a tax year other than the generally required tax year if the deferral period for the tax year elected does not exceed 3 months. A "valid business purpose" can no longer be claimed as a reason for adoption of a tax year other than the generally required tax year. Within 30 days after a partnership has established a tax year, a form must be filed with the IRS as notification of the tax year adopted.

A partnership may elect to have a tax year other than the generally required tax year if the deferral period for the tax year elected does not exceed 3 months. This answer is correct. A partnership must generally determine its taxable year in the following order: (1) it must adopt the taxable year used by its one or more partners owning an aggregate interest of more than 50% in profits and capital; (2) if partners owning a more than 50% interest in profits and capital do not have the same year end, the partnership must adopt the same taxable year as used by all of its principal partners; and (3) if principal partners have different taxable years, the partnership must adopt the taxable year that results in the least aggregate deferral of income to partners. A different taxable year other than the year determined above can be used by a partnership if a valid business purpose can be established and IRS permission is received. Alternatively, a partnership can elect to use a taxable year other than the one required under the general rules in the first paragraph, if the election does not result in a deferral of income for more than 3 months. The deferral period is the number of months between the close of the elected taxable year and the close of the year that would otherwise be required under the general rules. Thus, a partnership that would otherwise be required to adopt a tax year ending December 31 could elect to adopt a fiscal year ending September 30 (3-month deferral), October 31 (2-month deferral), or November 30 (1-month deferral). Note that a partnership that makes this election must make "required payments" which are in the nature of refundable, noninterest-bearing deposits which are intended to compensate the treasury for the revenue lost as a result of the deferral period.

The basis of property (other than money) distributed by a partnership to a partner, in complete liquidation of the partner's interest, shall be an amount equal to the Adjusted basis of such partner's interest in the partnership, increased by any money distributed in the same transaction. Adjusted basis of such partner's interest in the partnership, reduced by any money distributed in the same transaction. Fair market value of the property. Book value of the property.

Adjusted basis of such partner's interest in the partnership, reduced by any money distributed in the same transaction. This answer is correct. In a complete liquidation of a partner's interest in a partnership, the property distributed will have a basis equal to the adjusted basis of the partner's partnership interest reduced by any money received in the same distribution. Generally, in a liquidating distribution, the basis for a partnership interest is (1) first reduced by the amount of money received; (2) then reduced by the partnership's basis for any unrealized receivables and inventory received; (3) with any remaining basis for the partnership interest allocated to other property received in the distribution.

On January 1, 2019, Fred was a 25% equal partner in Reingold General Partnership, which had partnership liabilities of $500,000. On January 2, 2019, a new partner was admitted and Fred's interest was reduced to 20%. On May 9, 2019, Reingold repaid a $150,000 general partnership loan. Ignoring any income, loss, or distributions for 2019, what was the net effect of the two transactions on Fred's tax basis in his Reingold partnership interest? Has no effect. Decrease of $25,000 Increase of $25,000 Decrease of $55,000

Decrease of $55,000 This answer is correct. A partner's basis for a partnership interest consists of the partner's capital account plus the partner's share of partnership liabilities. A decrease in the partner's share of partnership liabilities is considered to be a deemed distribution of money and reduces a partner's basis for the partnership interest. Here, Fred's partnership interest was reduced from 25% to 20% on January 2, resulting in a reduction in Fred's share of partnership liabilities of 5% × $500,000 = $25,000. Subsequently, on May 9, when there was a $150,000 repayment of partnership loans, there was a further reduction in Fred's share of partnership liabilities of 20% × $150,000 = $30,000. Thus, the net effect of the reduction of Fred's partnership interest from 25% to 20%, and the repayment of $150,000 of partnership liabilities would be to reduce Fred's basis for the partnership interest by $25,000 + $30,000 = $55,000.

Partnership Abel, Benz, Clark & Day is in the real estate and insurance business. Abel owns a 40% interest in the capital and profits of the partnership while Benz, Clark, and Day each owns a 20% interest. All use a calendar year. At November 1, 2019, the real estate and insurance business is separated, and two partnerships are formed: Partnership Abel & Benz takes over the real estate business, and Partnership Clark & Day takes over the insurance business. Which one of the following statements is correct for tax purposes? Partnership Abel & Benz is considered to be a continuation of Partnership Abel, Benz, Clark & Day. In forming Partnership Clark & Day, partners Clark and Day are subject to a penalty surtax if they contribute their entire distributions from Partnership Abel, Benz, Clark & Day. Before separating the two businesses into two distinct entities, the partners must obtain approval from the IRS. Before separating the two businesses into two distinct entities, Partnership Abel, Benz, Clark & Day must file a formal dissolution with the IRS on the prescribed form.

Partnership Abel & Benz is considered to be a continuation of Partnership Abel, Benz, Clark & Day. When a partnership divides into two or more partnerships, the original partnership is continued in each of the new partnerships which contain partners that controlled 50% or more of the partnership interest in the original partnership. Since Abel and Benz own 40% and 20% interests, respectively, in the capital and profits of Partnership Abel, Benz, Clark and Day, the new Partnership Abel and Benz is considered a continuation of Partnership Abel, Benz, Clark and Day. However, Clark and Day only own a combined 40% interest in the capital and profits of Partnership Abel, Benz, Clark and Day. Hence, the Partnership Clark and Day is not considered a continuation of Partnership Abel, Benz, Clark and Day.

Under the Internal Revenue Code sections pertaining to partnerships, guaranteed payments are payments to partners for Payments of principal on secured notes honored at maturity. Timely payments of periodic interest on bona fide loans that are not treated as partners' capital. Services or the use of capital without regard to partnership income. Sales of partners' assets to the partnership at guaranteed amounts regardless of market values.

Services or the use of capital without regard to partnership income. Under the Internal Revenue Code sections pertaining to partnerships, guaranteed payments are payments to partners for services or the use of capital without regard to partnership income. Thus, guaranteed payments are treated similarly to salary payments to the partner, not as partnership distributions.

Reid, Welsh, and May are equal partners in the RWM partnership Reid's basis in the partnership interest is $60,000. Reid receives a liquidating distribution of $61,000 cash and land with a fair market value of $14,000 and an adjusted basis of $12,000. What gain must Reid recognize upon the liquidation of his partnership interest? $0 $ 1,000 $13,000 $15,000

$ 1,000 This answer is correct. If both cash and noncash property are received in a liquidating distribution, the basis for the partner's partnership interest is first reduced by the cash, before being reduced by noncash property. This is important because a distributee partner must recognize gain to the extent that the cash received exceeds the basis for his partnership interest. Here, Reid recognizes a gain of $61,000 cash - $60,000 basis = $1,000. The basis for the land that Reid received will be zero.

Basic Partnership, a cash-basis calendar-year entity, began business on February 1, 2019. Basic incurred and paid the following during 2019: Filing fees incident to the creation of the partnership $ 3,600 Accounting fees to prepare the representations in offering materials 12,000 If Basic wishes to deduct organizational costs, what is the maximum amount that Basic can deduct on the 2019 partnership return? $15,600 $ 3,600 $ 660 $ 220

$ 3,600 The filing fees incident to the creation of the partnership are organizational expenditures. A partnership may deduct up to $5,000 of organizational expenditures for the tax year in which the partnership begins business, with any remaining expenditures deducted ratably over the 180-month period beginning with the month in which the partnership begins business. Here, since the organizational expenditures total only $3,600, they can be fully deducted for 2019. The accounting fees to prepare the representations in offering materials are considered syndication fees. Syndication fees include the costs connected with the issuing and marketing of partnership interests such as commissions, professional fees, and printing costs. These costs must be capitalized and can neither be amortized nor depreciated.

Mike Reed, a partner in Post Co., received the following distribution from Post: Post's basis Fair market value Cash $11,000 11,000 Inventory 5,000 12,500 Before this distribution, Reed's basis in Post was $25,000. If this distribution were nonliquidating, Reed's basis for the inventory would be $14,000 $12,500 $ 5,000 $ 1,500

$ 5,000 The $25,000 basis of Reed's partnership interest would first be reduced by the $11,000 of cash received, and then reduced by the $5,000 basis of the inventory to $9,000. Reed's basis for the inventory received is $5,000.

Tucker received a partnership distribution of $20,000 cash and a building with an adjusted basis of $30,000 and a fair market value of $10,000. Tucker's basis in the partnership immediately prior to the distribution was $10,000. What is Tucker's basis in the building? $0 $10,000 $30,000 $40,000

$0 Correct! Tucker must first reduce his basis in the partnership interest of $10,000 by the cash distribution of $20,000 (but not below zero). Tucker recognizes a gain of $10,000 due to the cash distribution and his basis in the partnership interest is reduced to zero. Tucker's basis in the building is the lower of (1) the partnership's basis in the building ($30,000), or (2) Tucker's basis in the partnership interest after the cash distribution ($0). Thus, Tucker's basis in the building is zero.

In the current year, when Hoben's tax basis in Lynz Partnership interest was $10,000, Hoben received a liquidating distribution as follows: Adjusted tax basis Fair market value Marketable securities $ 5,000 $ 5,000 Land 25,000 27,000 Lynz had no appreciated inventory, unrealized receivables, or properties that had been contributed by its partners. What was Hoben's recognized gain on the distribution? $0 $15,000 $22,000 $23,000

$0 Gain is recognized on a partnership distribution ONLY if the cash distributed exceeds the basis in the partnership interest. In this case there was no cash distributed, so no gain is recognized.

The following information pertains to property contributed by Gray on July 1, 2019, for a 40% interest in the capital and profits of Kag & Gray, a partnership: As of June 30, 2019 Adjusted basis $24,000 Fair market value $30,000 After Gray's contribution, Kag & Gray's capital totaled $150,000. What amount of gain was reportable in Gray's 2019 return on the contribution of property to the partnership? $0 $ 6,000 $30,000 $36,000

$0 Generally, no gain or loss is recognized on the contribution of property in exchange for a partnership interest. Note that this nonrecognition rule applies even though the value of the partnership capital interest received (40% × $150,000 = $60,000) exceeds the fair market value of the property contributed ($30,000).

Baker is a partner in BDT with a partnership basis of $60,000. BDT made a liquidating distribution of land with an adjusted basis of $75,000 and a fair market value of $40,000 to Baker. What amount of gain or loss should Baker report? $35,000 loss $20,000 loss $0 $15,000 gain

$0 This answer is correct. Generally no gain or loss is recognized upon the complete liquidation of a partner's partnership interest, although a loss can be recognized if the liquidating distribution consists of only cash, receivables, and inventory. Since Baker received land in complete liquidation of the partnership interest, Baker's loss cannot be recognized and his unrecovered partnership basis of $60,000 becomes the basis for the land to Baker.

Able, an individual, is a partner in CD Partnership with an adjusted basis of $30,000 for Able's partnership interest. Able received a nonliquidating distribution of $25,000 cash and property with an adjusted basis of $7,000, and a fair market value of $10,000. What amount of gain should Able recognize? $0 $2,000 $5,000 $12,000

$0 This answer is correct. Generally, gain is recognized on a distribution only if the amount of cash received exceeds the basis for the partner's partnership interest. If both cash and noncash property are received, the basis for the partner's partnership interest is first reduced by the cash, before the noncash property. Here, since the $25,000 of cash received does not exceed the $30,000 basis for Able's partnership interest, no gain is recognized.

Doris and Lydia are sisters and also are equal partners in the capital and profits of Agee & Nolan. The following information pertains to 300 shares of Mast Corp. stock sold by Lydia to Agee & Nolan. Year of purchase 2009 Year of sale 2018 Basis (cost) $9,000 Sales price (equal to fair market value) $4,000 The amount of long-term capital loss that Lydia recognized in 2019 on the sale of this stock was $5,000. $3,000. $2,000. $0.

$0. A loss is disallowed if incurred in a transaction between a partnership and a person owning (directly or constructively) more than a 50% capital or profits interest. Although Lydia directly owns only a 50% partnership interest, she constructively owns her sister's 50% partnership interest. Since Lydia directly and constructively has a 100% partnership interest, her $5,000 loss is disallowed.

Stone's basis in Ace Partnership was $70,000 at the time he received a nonliquidating distribution of partnership capital assets. These capital assets had an adjusted basis of $65,000 to Ace, and a fair market value of $83,000. Ace had no unrealized receivables, appreciated inventory, or properties which had been contributed by its partners. What was Stone's recognized gain or loss on the distribution? $18,000 ordinary income. $13,000 capital gain. $5,000 capital loss. $0.

$0. A partner receiving a distribution from a partnership usually does not recognize a gain or loss. Gains are recognized only to the extent the partner receives an amount of cash exceeding his/her adjusted basis in the partnership interest. Gains from property distributions other than cash are not recognized until the partner sells or disposes of the property. Therefore, Stone does not recognize any gain or loss from the distribution.

Mike Reed, a partner in Post Co., received the following distribution from Post: Post's basis Fair market value Cash $11,000 $11,000 Land 5,000 12,500 Before this distribution, Reed's basis in Post was $25,000. If this distribution were nonliquidating, Reed's recognized gain or loss on the distribution would be $11,000 gain. $ 9,000 loss. $ 1,500 loss. $0.

$0. This answer is correct. A loss can never be recognized as a result of a pro rata nonliquidating partnership distribution, and a gain will only be recognized if the amount of cash received exceeds the basis of the partner's partnership interest. If both cash and noncash property are received in a single distribution, the cash reduces the basis of the partner's interest before the distribution of noncash property. Here, no gain is recognized because the cash distribution ($11,000) does not exceed the basis of Reed's partnership interest before the distribution ($25,000).

Stone's basis in Ace Partnership was $70,000 at the time he received a nonliquidating distribution of partnership capital assets. These capital assets had an adjusted basis of $65,000 to Ace, and a fair market value of $83,000. Ace had no unrealized receivables, appreciated inventory, or properties which had been contributed by its partners. What was Stone's recognized gain or loss on the distribution? $18,000 ordinary income. $13,000 capital gain. $ 5,000 capital loss. $0.

$0. This answer is correct. Gain will be recognized by a distributee partner in a nonliquidating distribution if the amount of money received exceeds the partner's basis for the partnership interest. Additionally, gain or loss may be recognized by a distributee partner if a nonliquidating distribution is disproportionate with respect to the partner's interest in partnership property. A distribution is disproportionate if the partner receives more than the partner's share of unrealized receivables and substantially appreciated inventory, and in return relinquishes a share in other assets, or receives more than the partner's share in capital and Sec. 1231 assets, and in return, relinquishes an interest in the partnership's unrealized receivables and substantially appreciated inventory. In this case, the Ace Partnership has no unrealized receivables, appreciated inventory, or properties which had been contributed by its partners, so the distribution received by Stone cannot be disproportionate. Since gain will never be recognized in a proportionate noncash distribution of property, Stone recognizes no gain on the distribution and will have a transferred basis of $65,000 in the capital assets received and a basis of $5,000 for his continuing partnership interest.

Belson and Forman decided to terminate North partnership. On the date of termination, North's balance sheet was as follows: Adjusted Basis Cash $2,000 Equipment (fair market value $4,000) 6,000 Capital-Belson 4,000 Capital-Forman 4,000 Forman's outside basis is $2,000. The partnership assets were distributed equally between the partners. What is Forman's tax basis in the property received? $1,000 $4,000 $6,000 $10,000

$1,000 This answer is correct. Generally, no gain or loss is recognized on the liquidation of a partner's partnership interest. If both cash and noncash property are received, the basis for the partner's partnership interest is first reduced by the cash, before the noncash property. Here, Foreman's basis of $2,000 for the partnership interest would first be reduced by the $1,000 of cash. The remaining $1,000 of basis would become Forman's basis for the equipment that was received.

The CSU partnership distributed to each partner cash of $4,000, inventory with a basis of $4,000 and a fair market value (FMV) of $6,000, and land with an adjusted basis of $5,000 and an FMV of $3,000 in a liquidating distribution. Partner Chang had an outside basis in Chang's partnership interest of $12,000. In the second year after receiving the liquidating distribution, Chang sold the inventory for $5,000 and the land for $3,000. What income must Chang report upon the sale of these assets? $0 gain or loss. $0 ordinary gain and $1,000 capital loss. $1,000 ordinary gain and $1000 capital loss. $1,000 ordinary gain and $0 capital loss.

$1,000 ordinary gain and $1000 capital loss. This answer is correct. No gain or loss would be recognized by Chang upon the receipt of the cash, inventory, and land in complete liquidation of his partnership interest. The $12,000 basis for Chang's partnership interest would first be reduced by the $4,000 of cash received, then reduced by the $4,000 basis of the inventory received, with the remaining $4,000 of partnership basis becoming the basis of the land to Chang. The subsequent sale of the inventory with a basis of $4,000 for a selling price of $5,000 results in $1,000 of ordinary income. Chang must recognize the gain from the sale of inventory as ordinary income because the inventory was sold within 5 years of its receipt. Finally, assuming that Chang held the land as a capital asset, the sale of the land with a basis of $4,000 for a selling price of $3,000 results in a $1,000 capital loss.

White has a one-third interest in the profits and losses of Rapid Partnership. Rapid's ordinary income for the 2019 calendar year is $30,000, after a $3,000 deduction for a guaranteed payment made to White for services rendered. None of the $30,000 ordinary income was distributed to the partners. What is the total amount that White must include from Rapid as gross income in his 2019 tax return? $ 3,000 $10,000 $11,000 $13,000

$13,000 This answer is correct. A partnership is a pass-through entity and income and deduction items pass through to be reported on partners' returns even though not distributed. Here, White must include his one-third distributive share of the partnership's income on his return, $30,000 × 1/3 = $10,000. Additionally, White must report the $3,000 guaranteed payment that was deducted in arriving at partnership ordinary income.

The personal service partnership of Allen, Baker & Carr had the following cash basis balance sheet at December 31, 2018: Assets Adjusted basis per book Market value Cash $102,000 $102,000 Unrealized accounts receivable -- 420,000 _______ _______ Totals $102,000 $522,000 Liability and Capital Note payable $ 60,000 $ 60,000 Capital accounts: Allen 14,000 154,000 Baker 14,000 154,000 Carr 14,000 154,000 _______ _______ $102,000 $522,000 Carr, an equal partner, sold his partnership interest to Dole, an outsider, for $154,000 cash on January 1, 2019. In addition, Dole assumed Carr's share of the partnerships liability. What amount of ordinary income should Carr report in his 2019 income tax return on the sale of his partnership interest? $0 $20,000 $34,000 $140,000

$140,000 If a partner sells or exchanges his/her partnership interest and the partnership has either unrealized receivables or substantially appreciated inventory, the partner recognizes an ordinary gain to the extent that the amount realized by the partner due to the unrealized receivables or substantially appreciated inventory is greater than the partner's basis in the items. When Carr sold his partnership interest in Allen, Baker and Carr, the partnership had unrealized receivables. The amount realized by Carr due to the unrealized receivables was $140,000, the partnership's total unrealized receivables of $420,000 multiplied by Carr's one-third ownership interest. Carr does not have any basis in the unrealized receivables (indicating that none of the receivables have been collected). Hence, Carr must report an ordinary gain of $140,000, the $140,000 realized by Carr due to the unrealized receivables less Carr's basis in the receivables, which is zero.

The partnership of Felix and Oscar had the following items of income during the current taxable year Income from operations $156,000 Tax-exempt interest income 8,000 Dividends from foreign corporations 6,000 Net rental income 12,000 What is the total ordinary income of the partnership the current taxable year? $156,000 $174,000 $176,000 $182,000

$156,000 This answer is correct. Income from operations is considered ordinary income and as such would be included in the calculation. Tax-exempt interest, dividends, and net rental income must be separately stated and allocated to the partners and are thus excluded from the computation of ordinary income. Therefore, total ordinary income for the partnership is $156,000.

The personal service partnership of Allen, Baker & Carr had the following cash-basis balance sheet at December 31, 2018: Assets Adjusted basis per book Market value Cash $102,000 $102,000 Unrealized accounts receivable -- 420,000 _______ _______ Totals $102,000 $522,000 Liability and Capital Note payable $ 60,000 $ 60,000 Capital accounts: Allen 14,000 154,000 Baker 14,000 154,000 Carr 14,000 154,000 _______ _______ $102,000 $522,000 Carr, an equal partner, sold his partnership interest to Dole, an outsider, for $154,000 cash on January 1, 2019. In addition, Dole assumed Carr's share of the partnerships liability. What was the total amount realized by Carr on the sale of his partnership interest? $174,000 $154,000 $140,000 $134,000

$174,000 In computing the amount realized from the sale of a partner's interest in the partnership, the partner must consider their share of the partnership's liabilities along with the cash or value of property received. Thus, Carr's share of the partnership's liabilities, $20,000 (= $60,000 in total liabilities multiplied by Carr's one-third interest in the partnership), must be included in determining the amount realized by Carr. Therefore, the total amount realized by Carr on the sale of his partnership interest is $174,000, the sum of the $154,000 in cash received and Carr's $20,000 share of the partnership's liabilities.

Dale was a 50% partner in D&P Partnership. Dale contributed $10,000 in cash upon the formation of the partnership. D&P borrowed $10,000 to purchase equipment. During the first year of operations, D&P had $15,000 net taxable income, $2,000 tax-exempt interest income, a $3,000 distribution to each partner, and a $4,000 reduction of debt. At the end of the first year of operation, what amount would be Dale's basis? $16,500 $17,500 $18,500 $21,500

$18,500 Dale's basis is computed as follows: Cash contributed $10,000 Equipment debt (50%) 5,000 Taxable income (50%) 7,500 Tax-exempt income (50%) 1,000 Debt reduction (50%) (2,000) Distribution (3,000) Ending basis $18,500

Morse is a 50% partner in Ecco Partnership. Morse's tax basis in Ecco on January 2 was $4,000. Ecco did not have unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. On December 31, Ecco made an $11,000 nonliquidating cash distribution to Morse. For the year, Ecco reported $10,000 of ordinary business income. What is the amount of the net capital gain realized by Morse from the cash distribution? $0 $2,000 $7,000 $11,000

$2,000 Correct! Gain is recognized from a partnership distribution if the cash distributed to the partner exceeds her basis in her partnership interest. Morse's basis of $4,000 is increased by her share of the partnership's ordinary income, or $5,000 ($10,000 × 50%), increasing her basis to $9,000. The cash distribution of $11,000 exceeds her basis of $9,000 by $2,000. So Morse has a $2,000 capital gain.

Partner A's basis in partnership ABC is $5,000 at the beginning of the year. During the year, Partner A received a nonliquidating distribution of $3,000 cash and property with an adjusted basis of $4,000 and fair market value of $5,000. What was Partner A's basis in the property received? $2,000 $3,000 $4,000 $5,000

$2,000 Correct. Basis in partnership interest $5,000 Less: Cash received (3,000) $2,000 Lower of $4,000 basis in property, or remaining basis in partnership interest ($2,000) (2,000) $ 0 The basis in the property is $2,000.

In 2015, Lisa Bara acquired a one-third interest in Dee Associates, a partnership. In 2019, when Lisa's entire interest in the partnership was liquidated, Dee's assets consisted of the following: cash, $20,000 and tangible property with a basis of $46,000 and a fair market value of $40,000. Dee has no liabilities. Lisa's adjusted basis for her one-third interest was $22,000. Lisa received cash of $20,000 in liquidation of her entire interest. What was Lisa's recognized loss in 2019 on the liquidation of her interest in Dee? $0 $2,000 short-term capital loss $2,000 long-term capital loss $2,000 ordinary loss

$2,000 long-term capital loss A distributee partner can recognize loss only upon the complete liquidation of the partner's interest through receipt of only money, unrealized receivables, or inventory. Since Lisa only received cash, the amount of recognized loss is the $2,000 difference between the $22,000 adjusted basis of her partnership interest and the $20,000 of cash received. Since a partnership interest is a capital asset and Lisa acquired her one-third interest in 2015, Lisa has a $2,000 long-term capital loss.

Ted King's adjusted basis for his partnership interest in Troy Company was $24,000. In complete liquidation of his interest in Troy, King received cash of $4,000 and realty having a fair market value of $40,000. Troy's adjusted basis for this realty was $15,000. King's basis for the realty is $ 9,000 $15,000 $16,000 $20,000

$20,000 This answer is correct. In a liquidating distribution, a partner's basis for a partnership interest is first reduced by the amount of cash received and by the partnership's basis for any unrealized receivables and inventory received. Any remaining basis is then allocated to other property received. Here, King's partnership basis of $24,000 is first reduced by the $4,000 cash to $20,000. This $20,000 becomes the basis of the distributed realty. Note that even though the FMV of the realty is $40,000, King recognizes no gain, since gain is recognized on a distribution only if the cash received exceeds the basis of the partnership interest.

Jones and Curry formed Major Partnership as equal partners by contributing the assets below. Asset Adjusted basis Fair market value Jones Cash $45,000 $45,000 Curry Land 30,000 57,000 The land was held by Curry as a capital asset, subject to a $12,000 mortgage, that was assumed by Major. What was Curry's initial basis in the partnership interest? $45,000 $30,000 $24,000 $18,000

$24,000 Generally, no gain or loss is recognized on the contribution of property in exchange for a partnership interest. As a result, Curry's initial basis for the partnership interest received consists of the $30,000 adjusted basis of the land contributed to the partnership, less the net reduction in Curry's individual liability resulting from the partnership's assumption of the $12,000 mortgage. Since Curry received a 50% partnership interest, the net reduction in Curry's individual liability is $12,000 × 50% = $6,000. As a result, Curry's basis for the partnership interest is $30,000 − $6,000 = $24,000.

At December 31, 2018, Lincoln and Ebert were equal partners in a partnership with net assets having a tax basis and fair market value of $150,000. On January 2, 2019, Gregory contributed securities with a fair market value of $75,000 (purchased in 2014 at a cost of $51,000) to become an equal partner in the new firm of Lincoln, Ebert, and Gregory. The securities were sold on July 1, 2019, for $78,000. How much of the partnership's capital gain from the sale of these securities should be allocated to Gregory? $0 $ 9,000 $24,000 $25,000

$25,000 This answer is correct. Since the securities were sold for more than their fair market value on the date of contribution, the entire pre-contribution gain of $24,000 ($75,000 − $51,000) would be allocated to Gregory. In addition, Gregory would be allocated 1/3 of the post-contribution gain from the securities, which is $1,000 [($78,000 − $75,000) × 1/3]. Gregory should therefore be allocated $25,000 ($24,000 + $1,000) of the partnership's capital gain.

Fern received $30,000 in cash and an automobile with an adjusted basis and market value of $20,000 in a proportionate liquidating distribution from EF Partnership. Fern's basis in the partnership interest was $60,000 before the distribution. What is Fern's basis in the automobile received in the liquidation? $0 $10,000 $20,000 $30,000

$30,000 This answer is correct. Although no gain or loss is generally recognized upon the receipt of property in a proportionate liquidating distribution, a loss can be recognized if the distributee partner receives only cash, receivables, and inventory. In this case, since cash and an automobile were received, Fern is not allowed to recognize a loss, and the cash and automobile must absorb all of Fern's $60,000 partnership basis. Here, Fern's $60,000 partnership basis is first reduced by the $30,000 of cash received, with the remaining $30,000 becoming the basis of the automobile to Fern.

Stone and Frazier decided to terminate the Woodwest Partnership as of December 31. On that date, Woodwest's balance sheet was as follows: Cash $2,000 Equipment (adjusted basis) 2,000 Capital—Stone 3,000 Capital—Frazier 1,000 The fair market value of the equipment was $3,000. Frazier's outside basis in the partnership was $1,200. Upon liquidation, Frazier received $1,500 in cash. What gain should Frazier recognize? $0 $250 $300 $500

$300 Fraizer received cash of $1,500 less his basis in the partnership of $1,200 = gain of $300.

Gilroy, a calendar-year taxpayer, is a partner in the firm of Adams and Company which has a fiscal year ending June 30. The partnership agreement provides for Gilroy to receive 25% of the ordinary income of the partnership. Gilroy also receives a guaranteed payment of $1,000 monthly which is deductible by the partnership. The partnership reported ordinary income of $88,000 for the year ended June 30, 2019, and $132,000 for the year ended June 30, 2020. How much should Gilroy report on his 2019 return as total income from the partnership? $25,000 $30,500 $34,000 $39,000

$34,000 Gilroy's income will consist of his share of the partnership's ordinary income for the fiscal year ending June 30, 2019 (the partnership year that ends within his year), plus the twelve monthly guaranteed payments that he received for that period of time. 25% × $88,000 = $22,000 12 × $ 1,000 = 12,000 Total income = $ 34,000

Clark and Lewis are partners who share profits and losses 60% and 40%, respectively. The tax basis of each partner's interest in the partnership as of December 31, 2018, was as follows: Clark $24,000 Lewis $18,000 During 2019, the partnership had ordinary income of $50,000 and a long-term capital loss of $10,000 from the sale of securities. There were no distributions to the partners during 2019. What is the amount of Lewis's tax basis as of December 31, 2019? $33,000 $34,000 $38,000 $42,000

$34,000 This answer is correct. Since Lewis's share of profits and losses is 40%, Lewis's December 31, 2018 basis of $18,000 is increased by $20,000 (40% of $50,000) and decreased by $4,000 (40% of $10,000) resulting in a basis of $34,000 at December 31, 2019.

PDK, LLC had three members with equal ownership percentages. PDK elected to be treated as a partnership. For the tax year ending December 31, year 1, PDK had the following income and expense items: Revenues $120,000 Interest income 6,000 Gain on sale of securities 8,000 Salaries 36,000 Guaranteed payments 10,000 Rent expense 21,000 Depreciation expense 18,000 Charitable contributions 3,000 What would PDK report as nonseparately stated income for year 1 tax purposes? $30,000 $35,000 $43,000 $51,000

$35,000 Non-separately stated income is the ordinary business income of the LLC, computed as follows: Revenues $120,000 Salaries (36,000) Guaranteed payments (10,000) Rent expense (21,000) Depreciation expense (18,000) Ordinary income $35,000

During the current year, James Elton received a 25% capital interest in Bredbo Associates, a partnership, in return for services rendered plus a contribution of assets with a basis to Elton of $25,000 and a fair market value of $40,000. The fair market value of Elton's 25% interest was $50,000. How much is Elton's basis for his interest in Bredbo? $25,000 $35,000 $40,000 $50,000

$35,000 Since Elton received a capital interest with a FMV of $50,000 in exchange for property worth $40,000 and services, Elton must recognize compensation income of $10,000 ($50,000 − $40,000) on the transfer of services for a capital interest. Thus, Elton's basis for his partnership interest consists of the $25,000 basis of assets transferred plus the $10,000 of income recognized on the transfer of services, a total of $35,000.

As a general partner in Greenland Associates, an individual's share of partnership income for the current tax year is $25,000 ordinary business income and a $10,000 guaranteed payment. The individual also received $5,000 in cash distributions from the partnership. What income should the individual report from the interest in Greenland? $5,000 $25,000 $35,000 $40,000

$35,000 The partner must report $25,000 of ordinary income and the $10,000 guaranteed payment. The distribution does not generate additional income since the partner has sufficient basis to absorb it.

Garner is a 25 percent partner in Classic General Partnership. On February 3, Garner's tax basis in Classic was $10,000 when she received a nonliquidating distribution of $5,000 cash. Classic had no unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. Classic reported the following for the same year: U.S. Treasury interest $ 30,000 Ordinary business income 120,000 What amount of income from Classic should Garner include in her gross income for that year? $ 7,500 $30,000 $37,500 $42,500

$37,500 Correct! $7,500 of the interest ($30,000 × 25%) and $30,000 of the business income ($120,000 × 25%) is taxed on Garner's tax return. The $5,000 distribution reduces Garner's basis in Classic but does not produce any income since the cash distribution does not exceed the basis.

Hart's adjusted basis in Best Partnership was $9,000 at the time he received the following nonliquidating distributions of partnership property: Cash $ 5,000 Land Adjusted basis 7,000 Fair market value 10,000 What was the amount of Hart's basis in the land? $0 $4,000 $7,000 $10,000

$4,000 A partner's basis in property received in a nonliquidating distribution is the same as the partnership's basis immediately before the distribution. However, the partner's basis in the property may not exceed his/her basis in the partnership less any cash received in the distribution. Hart received property with a basis of $12,000 ($5,000 in cash plus the partnership's basis in the land of $7,000). However, his basis in the partnership interest is $9,000, so the basis in the property distributed must be limited to this amount. Since the distribution included $5,000 in cash, Hart's basis in the land is $4,000 ($9,000 - 5,000).

Kay Shea owns a 55% interest in the capital and profits of Dexter Communications, a partnership. In 2019, Kay sold an oriental lamp to Dexter for $5,000. Kay bought this lamp in 2013 for her personal use at a cost of $1,000 and had used the lamp continuously in her home until the lamp was sold to Dexter. Dexter purchased the lamp as an investment. What is Kay's reportable gain in 2019 on the sale of the lamp to Dexter? $4,000 ordinary income $4,000 long-term capital gain $2,200 ordinary income $1,800 long-term capital gain

$4,000 long-term capital gain A gain that is recognized on a sale of property between a partnership and a person owning a more than 50% partnership interest will be treated as ordinary income if the property is not a capital asset in the hands of the transferee. Although Kay has a 55% partnership interest, the partnership purchased the lamp as an investment (i.e., a capital asset), and Kay's gain will solely depend on how she held the lamp. Since she used the lamp for personal use, Kay has a $5,000 − $1,000 = $4,000 long-term capital gain.

The partnership of Bond and Felton has a fiscal year ending September 30. John Bond files his tax return on a calendar-year basis. The partnership paid Bond a guaranteed salary of $1,000 per month during the calendar year 2018 and $1,500 a month during the calendar year 2019. After deducting this salary the partnership realized ordinary income of $80,000 for the year ended September 30, 2019, and $90,000 for the year ended September 30, 2020. Bond's share of the profits is the salary paid him plus 40% of the ordinary income after deducting this salary. For 2019, Bond should report taxable income from the partnership of $36,500. $44,000. $48,500. $50,000.

$48,500. This answer is correct. Both distributable shares of income and guaranteed payments are reported by partners for the year in which the end of the partnership fiscal year occurs. Thus, Bond would calculate his income as follows: Guaranteed payments (10/1/18 to 9/30/19): $1,000 × 3 months $ 3,000 $1,500 × 9 months 13,500 Share of ordinary income $80,000 × 40% 32,000 $48,500

Don Wolf became a general partner in Gata Associates on January 1, 2019, with a 5% interest in Gata's profits, losses, and capital. Gata is a distributor of auto parts. Wolf does not materially participate in the partnership business. For the year ended December 31, 2019, Gata had an operating loss of $100,000. In addition, Gata earned interest of $20,000 on a temporary investment. Gata has kept the principal temporarily invested while awaiting delivery of equipment that is presently on order. The principal will be used to pay for this equipment. Wolf's passive loss for 2019 is $0. $4,000. $5,000. $6,000.

$5,000. Passive activity losses are the amount that total losses from passive activities exceed total gains from passive activities. The characterization of a partner's share of the partnership's income as passive or nonpassive depends on the partner's participation in the partnership's income earning activities. Since Wolf did not materially participate in the partnership business, his share of the partnership's operating loss, $5,000, is considered a loss from a passive activity. Passive income does not include portfolio income. As a result, Wolf's share of the $20,000 in interest income would not be passive. Therefore, since Wolf had no gains from passive activities to offset the loss from his share of the partnership's operating loss, Wolf would have a passive loss of $5,000, equal to his share of the partnership's operating loss.

Doris and Lydia are equal partners in the capital and profits of Agee & Nolan, but are otherwise unrelated. The following information pertains to 300 shares of Mast Corp. stock sold by Lydia to Agee & Nolan: Year of purchase 2016 Year of sale 2019 Basis (cost) $9,000 Sales price (equal to fair market value) $4,000 The amount of long-term capital loss that Lydia recognized in 2019 on the sale of this stock was $5,000. $3,000. $2,500. $0.

$5,000. This answer is correct. Although gains and losses incurred in sales transactions between a partnership and its partners are generally recognized, a loss is disallowed if incurred in a transaction between a partnership and a partner owning (directly or constructively) more than a 50% capital or profits interest. Since Lydia's partnership interest does not exceed 50%, she realizes and recognizes a long-term capital loss of $9,000 − $4,000 = $5,000 from the sale of stock.

Dale's distributive share of income from the calendar-year partnership of Dale & Eck was $50,000 in 2019. On December 15, 2019, Dale, who is a cash-basis taxpayer, received a $27,000 distribution of the partnership's 2019 income, with the $23,000 balance paid to Dale in February 2020. In addition, Dale received a $10,000 interest-free loan from the partnership in 2019. This $10,000 is to be offset against Dale's share of 2020 partnership income. What total amount of partnership income is taxable to Dale in 2019? $27,000 $37,000 $50,000 $60,000

$50,000 A partnership functions as a pass-through entity and its items of income and deduction are passed through to partners on the last day of the partnership's taxable year. Income and deduction items pass through to be reported by partners even though not actually distributed during the year. Here, Dale is taxed on his $50,000 distributive share of partnership income for 2019, even though $23,000 was not received until 2020. The $10,000 interest-free loan does not effect the pass-through of income for 2019, and the $10,000 offset against Dale's distributive share of partnership income for 2020 will not effect the pass-through of that income in 2020.

In March 2019, Lou Cole bought 100 shares of a listed stock for $10,000. In May 2019, Cole sold this stock for its fair market value of $16,000 to the partnership of Rook, Cole & Clive. Cole owned a one-third interest in this partnership. In Cole's 2019 tax return, what amount should be reported as short-term capital gain as a result of this transaction? $6,000 $4,000 $2,000 $0

$6,000 If a person engages in a transaction with a partnership other than as a partner of such partnership, any resulting gain is generally recognized just as if the transaction had occurred with a nonpartner. Here, Cole's gain of $16,000 − $10,000 = $6,000 is fully recognized. Since the stock was not held for more than 12 months, Cole's $6,000 gain is treated as a short-term capital gain.

During the current year, Wayne sold the interest he had held for 5 years in the Alco Partnership for $15,000 cash. The buyer also assumed Wayne's $2,000 share of the partnership liabilities. Wayne's tax basis in the partnership was $11,000. The Alco Partnership had no unrealized receivables nor appreciated inventories. What is Wayne's gain on the sale of his partnership interest in Alco? $2,000 ordinary gain $2,000 long-term capital gain $4,000 long-term capital gain $6,000 long-term capital gain

$6,000 long-term capital gain This answer is correct. Wayne's gain would be calculated as follows: Cash received $ 15,000 Liabilities assumed + 2,000 Total amount realized $ 17,000 Basis − 11,000 Long-term capital gain $ 6,000 Wayne's share of partnership liabilities is already included in the tax basis given in the item.

Hart's adjusted basis for his interest in a partnership was $30,000. He received a nonliquidating distribution of $24,000 cash plus a parcel of land with a fair market value and partnership basis of $9,000. Hart's basis for the land is $9,000. $6,000. $3,000. $0.

$6,000. This answer is correct. If both cash and noncash property are received in a single distribution, the basis for the partner's partnership interest is first reduced by the cash, before the noncash property. Although a partner's basis for distributed property is generally the same as the partnership's former basis for the property (a transferred basis), the distributed property's basis will be limited to the partner's basis for the partnership interest reduced by any money received in the same distribution. Here, the basis of Hart's partnership interest of $30,000 is first reduced by the $24,000 of cash received, with the remaining basis of $6,000 allocated as the basis for the parcel of land received.

Olson, Wayne, and Hogan are equal partners in the OWH partnership. Olson's basis in the partnership interest is $70,000. Olson receives a liquidating distribution of $10,000 cash and land with a fair market value of $63,000, and a basis of $58,000. What is Olson's basis in the land? $58,000 $60,000 $63,000 $70,000

$60,000 This answer is correct. A distributee partner can recognize loss only upon the complete liquidation of the partner's interest and then only if what is received consists of solely money, unrealized receivables, or inventory. Since Olson received land in the liquidating distribution, no loss can be recognized and the land must absorb all of Olson's remaining partnership basis after it is first reduced by the cash received. Here, Olson's partnership basis of $70,000 is first reduced by the $10,000 of cash to $60,000, which then becomes the basis for the land to Olson.

Jane, a 25% partner in Excel Partnership, received a $30,000 guaranteed payment in 2019 for services rendered to the partnership. Guaranteed payments to other partners for services rendered totaled $50,000. Excel's 2019 partnership income consisted of Net business income before guaranteed payments $160,000 Net long-term capital gains 50,000 What amount of income from Excel should Jane report from Excel Partnership on her 2019 tax return? $30,000 $52,500 $62,500 $75,000

$62,500 This answer is correct. A partnership is a pass-through entity and its items of income and deduction pass through to be reported on partners' returns even though not distributed. The amount to be reported by Jane consists of her guaranteed payment, plus her 25% share of the partnership's business income and capital gains. Since Jane's $30,000 guaranteed payment and the $50,000 of guaranteed payments to other partners are for deductible services rendered to the partnership, they must be subtracted from the partnership's net business income before guaranteed payments of $160,000 to determine the amount of net business income to be allocated among partners. Jane's reportable income from the partnership includes Guaranteed payment $30,000 Business income [($160,000 − $80,000) × 25%] 20,000 Net long-term capital gain ($50,000 × 25%) 12,500 $62,500

In January 2019, Martin and Louis formed a partnership with each contributing $75,000 cash. The partnership agreement provided that Martin would receive a guaranteed payment of $20,000 and that partnership profits and losses (computed after deducting Martin's guaranteed payment) would be shared equally. For the year ended December 31, 2019, the partnership's operations resulted in a loss of $18,000 after deducting the $20,000 guaranteed payment made to Martin. The partnership had no outstanding liabilities as of December 31, 2019. What is the amount of Martin's basis for his partnership interest as of December 31, 2019? $46,000 $66,000 $76,000 $86,000

$66,000 This answer is correct. Generally, a partner's original basis in the partnership consists of his capital contribution. It is increased by the partner's distributive share of income, and decreased by distributions from the partnership and the partner's distributive share of any partnership losses. In this case, Martin's basis in the partnership is his original contribution of $75,000 less his one-half share of the $18,000 loss. Therefore, his basis is $66,000. The guaranteed payment of $20,000 is already reflected as a deduction in the computation of the partnership's loss of $18,000, and the receipt of the guaranteed payment must be reported as ordinary income by Martin.

Owen's tax basis in Regal Partnership was $18,000 at the time Owen received a nonliquidating distribution of $3,000 cash and land with an adjusted basis of $7,000 to Regal and a fair market value of $9,000. Regal did not have unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. Disregarding any income, loss, or any other partnership distribution for the year, what was Owen's tax basis in Regal after the distribution? $9,000 $8,000 $7,000 $6,000

$8,000 This answer is correct. Owen's beginning partnership basis of $18,000 would be reduced by the $3,000 of cash distributed, and the $7,000 adjusted basis of the land, resulting in a basis of $8,000 for Owen's partnership interest after the distribution.

The adjusted basis of Smith's interest in EVA partnership was $230,000 immediately before receiving the following distribution in complete liquidation of EVA: Basis to EVA Fair market value Cash $150,000 $150,000 Real estate 120,000 146,000 What is Smith's basis in real estate? $146,000 $133,000 $120,000 $80,000

$80,000 This answer is correct. Generally, neither a partnership nor a distribute partner will recognize gain or loss on proportionate distributions in complete liquidation of a partnership. As a result, a partner's basis for distributed property is generally the same as the partnership's former basis for the property. However, since a distribution cannot reduce the basis for a partner's partnership interest below zero, the distributed property's basis to the partner is limited to the partner's basis for the partnership interest before the distribution. Here, Smith's partnership basis of $230,000 is first reduced by the $150,000 of cash received, to $80,000, which then becomes the basis of the real estate to Smith.

Gladys Peel owns an 80% interest in the capital and profits of the partnership of Peel & Poe. On July 1, 2019, Peel bought surplus land from the partnership at the land's fair market value of $10,000. The partnership's basis in the land was $16,000. For the year ended December 31, 2019, the partnership's net income was $94,000 after recording the $6,000 loss on the sale of land. Peel's distributive share of ordinary income from the partnership for 2019 was $70,400. $75,200. $78,200. $80,000.

$80,000. This answer is correct. Recognition of loss is disallowed on a sale or exchange between a partnership and a person who owns (directly or constructively) more than a 50% partnership interest. Therefore, the $6,000 realized loss on the sale of land to Peel must be added back to the partnership's net income of $94,000. Thus, Peel's distributive share of ordinary income is $80,000 [80% × ($94,000 + $6,000)].

Johnson, an individual, has a 50% interest in DEF Partnership. Johnson's adjusted basis at the beginning of the year was $14,000. The partnership's ordinary income for the current year was $6,000. Johnson received a nonliquidating distribution of $8,000 cash, and property with an adjusted basis of $12,000 and a fair market value of $15,000. What is the basis of the distributed property, other than cash, to Johnson? $6,000 $9,000 $12,000 $15,000

$9,000 This answer is correct. A partner's basis for a partnership interest is increased by the flow-through of income for the year before being reduced by distributions. If both cash and noncash property are received, the partner's basis for the partnership interest is then reduced by the cash, before being reduced by the noncash property. Here, Johnson's beginning basis of $14,000 would first be increased by income of (50%)($6,000) = $3,000. Johnson's resulting basis of $17,000 would then be reduced by the $8,000 of cash to $9,000. Although distributed property normally has a transferred basis, its basis cannot exceed the partner's remaining basis for the partnership interest which in this case is $9,000.

Mike Reed, a partner in Post Co., received the following distribution from Post: Post's basis Fair market value Cash $11,000 $11,000 Inventory 5,000 12,500 Before this distribution, Reed's basis in Post was $25,000. If this distribution were in complete liquidation of Reed's interest in Post, Reed's recognized gain or loss resulting from the distribution would be $7,500 gain. $9,000 loss. $1,500 loss. $0.

$9,000 loss. A distributee partner can recognize loss only upon the complete liquidation of the partner's interest through the receipt of only money, unrealized receivables, or inventory. Since Reed received only money and inventory, the amount of recognized loss is the $9,000 difference between the $25,000 basis of his partnership interest and the $11,000 of cash and $5,000 basis for the inventory received.

The partnership of Spencer and Rey realized an ordinary loss of $42,000 in 2019. Both the partnership and the two partners are on a calendar-year basis. The partners materially participate in the partnership's activities and share profits and losses equally. At December 31, 2019, Rey had an adjusted basis of $18,000 for his partnership interest before taking the 2019 loss into consideration. On his individual income tax return for 2019, Rey should deduct An ordinary loss of $18,000. An ordinary loss of $21,000. An ordinary loss of $18,000 and a capital loss of $3,000. A capital loss of $21,000.

An ordinary loss of $18,000. This answer is correct. The amount of partnership loss which may be deducted by a partner is limited to the partner's basis in the partnership (at the end of the taxable year of the partnership). Rey's share of the loss is $21,000 (1/2 × $42,000), however, the loss deduction is limited to his basis of $18,000. The remaining $3,000 may be carried forward and taken as a deduction in a subsequent year in which he has basis to absorb the loss.

What is the tax treatment of net losses in excess of the at-risk amount for an activity? Any loss in excess of the at-risk amount is suspended and is deductible in the year in which the activity is disposed of in full. Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity. Any losses in excess of the at-risk amount are deducted currently against income from other activities; the remaining loss, if any, is carried forward without expiration. Any losses in excess of the at-risk amount are carried back two years against activities with income and then carried forward for 20 years.

Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity. This is a true statement.

Irving Aster, Dennis Brill, and Robert Clark were partners who shared profits and losses equally. On February 28, 2019, Aster sold his interest to Phil Dexter. On March 31, 2019, Brill died, and his estate held his interest for the remainder of the year. The partnership continued to operate and for the fiscal year ending June 30, 2019, it had a profit of $45,000. Assuming that partnership income was earned on a pro rata monthly basis and that all partners were calendar-year taxpayers, the distributive shares to be included in 2019 gross income should be Aster $10,000, Brill $0, Estate of Brill $15,000, Clark $15,000, and Dexter $5,000. Aster $10,000, Brill $11,250, Estate of Brill $3,750, Clark $15,000, and Dexter $5,000. Aster $0, Brill $11,250, Estate of Brill $3,750, Clark $15,000, and Dexter $15,000. Aster $0, Brill $0, Estate of Brill $15,000, Clark $15,000, and Dexter $15,000.

Aster $10,000, Brill $11,250, Estate of Brill $3,750, Clark $15,000, and Dexter $5,000. This answer is correct. Clark was a partner for the entire year and is taxed on his distributive 1/3 share ($45,000 × 1/3 = $15,000). Since Aster sold his entire partnership interest to Dexter, the partnership tax year closes with respect to Aster on February 28. As a result, Aster's distributive share is $45,000 × 1/3 × 8/12 = $10,000. Dexter's distributive share is $45,000 × 1/3 × 4/12 = $5,000. Additionally, the partnership tax year closes with respect to a deceased partner as of date of death. Since Brill died on March 31, the distributive share to be included in Brill's 2019 Form 1040 would be $45,000 × 1/3 × 9/12 = $11,250. Since Brill's estate held his partnership interest for the remainder of the year, the estate's distributive share of income is $45,000 × 1/3 × 3/12 = $3,750.

A distribution from a C corporation to a shareholder cannot be treated by the shareholder as which of the following classifications? Dividend income Nontaxable return of capital Capital gain Capital loss

Capital loss CORRECT! A distribution to a C corporation is: Taxable as dividend income to extent of the shareholder's pro rata share of earnings and profits. Excess is tax-free to extent of shareholder's basis in stock (and reduces the basis). Remaining distribution amount is taxed as a capital gain. Capital losses are not included as an option.

Curry's sale of her partnership interest causes a partnership termination. The partnership's business and financial operations are continued by the other members. What is (are) the effect(s) of the termination? I. There is a deemed distribution of assets to the remaining partners and the purchaser. II. There is a hypothetical recontribution of assets to a new partnership. I only. II only. Both I and II. Neither I nor II.

Both I and II. For tax purposes, a partnership terminates when it stops doing business as a partnership. When the partnership's business and financial operations are continued by other members, there is a deemed distribution of assets to the remaining partners and the purchaser and a hypothetical recontribution of assets to a new partnership.

Guaranteed payments made by a partnership to partners for services rendered to the partnership, that are deductible business expenses under the Internal Revenue Code, are I. Deductible expenses on the U.S. Partnership Return of Income, Form 1065, in order to arrive at partnership income (loss). II. Included on schedules K-1 to be taxed as ordinary income to the partners. I only. II only. Both I and II. Neither I nor II.

Both I and II. Guaranteed payments from a partnership for the services of a partner are treated as salary payments and, as a result, receive similar treatment under the Internal Revenue Code. Therefore, in contrast to provisions applying to other withdrawals of assets from partnerships by partners, guaranteed payments are deductible by the partnership. The deduction for guaranteed payments may create an ordinary loss for the partnership. Guaranteed payments are required to be reported separately from the partner's share of the partnership's income on the partner's K-1. Thus, guaranteed payments made by a partnership to partners for services rendered to the partnership, that are deductible business expenses under the Internal Revenue Code, are deductible expenses on the U.S. Partnership Return of Income, Form 1065, in order to arrive at partnership income (loss) and included on schedules K-1 to be taxed as ordinary income to the partners.

Partnership Adams, Baxter, Carter, and Dudley has the following partners' interests: Partner Partnership Interest Adams 45% Baxter 30% Carter 15% Dudley 10% The partners agree to separate and form the partnerships of Baxter & Carter and Adams & Dudley. What is (are) the effect(s) of the separation? I. Partnership Baxter & Carter is considered a new partnership and must adopt a taxable year, as well as make other tax accounting elections. II. Partnership Adams & Dudley is treated as a continuation of the former partnership. I only. II only. Both I and II. Neither I nor II.

Both I and II. This answer is correct. Partnership Adams and Dudley is a continuation of the former partnership, as Adams and Dudley owned 55% (45% + 10%) of the former partnership. Since Baxter and Carter owned only 45% (30% + 15%) of the prior partnership, partnership Baxter & Carter is a new partnership. As a new partnership, partnership Baxter & Carter must adopt a taxable year, as well as make other tax accounting elections.

On December 31, 2019, after receipt of his share of partnership income, Clark sold his interest in a limited partnership for $30,000 cash and relief of all liabilities. On that date, the adjusted basis of Clark's partnership interest was $40,000, consisting of his capital account of $15,000 and his share of the partnership liabilities of $25,000. The partnership has no unrealized receivables or substantially appreciated inventory. What is Clark's gain or loss on the sale of his partnership interest? Ordinary loss of $10,000 Ordinary gain of $15,000 Capital loss of $10,000 Capital gain of $15,000

Capital gain of $15,000 If a partner sells his/her interest in the partnership, the partner recognizes a capital gain equal to the amount that the payment exceeds the partner's adjusted basis in the partnership. Clark's adjusted basis in the partnership is $40,000 immediately before the sale. His amount realized is $55,000 ($30,000 cash received + $25,000 debt relief). Hence, Clark must recognize a capital gain of $15,000 ($55,000 − $40,000).

On December 31, after receipt of his share of partnership income, Clark sold his interest in a limited partnership for $30,000 cash and relief of all liabilities. On that date, the adjusted basis of Clark's partnership interest was $40,000, consisting of his capital account of $15,000 and his share of the partnership liabilities of $25,000. The partnership has no unrealized receivables or substantially appreciated inventory. What is Clark's gain or loss on the sale of his partnership interest? Ordinary loss of $10,000 Ordinary gain of $15,000 Capital loss of $10,000 Capital gain of $15,000

Capital gain of $15,000 This answer is correct. A partnership interest is a capital asset and a sale generally results in capital gain or loss, except that ordinary income must be reported to the extent of the selling partner's share of unrealized receivables and appreciated inventory. Here, Clark realized $55,000 from the sale of his partnership interest ($30,000 cash + relief from his $25,000 share of partnership liabilities). Since the partnership had no unrealized receivables nor appreciated inventory and the basis of Clark's interest was $40,000, Clark realized a capital gain of $55,000 − $40,000 = $15,000 from the sale.

Brown, a 50% partner in Brown & White, received a distribution of $12,500 in the current year. The partnership's income for the year was $25,000. What is the character of the payment that Brown received? Partial liquidation Liquidating distribution Disproportionate distribution Current distribution

Current distribution This answer is correct. Partnership distributions are categorized as either liquidating distributions or current (nonliquidating) distributions. A liquidating distribution completely terminates a partner's entire interest. All other distributions are current (nonliquidating) distributions. When a partnership makes a current distribution, the distribution is generally nontaxable to the partners because it generally represents the distribution of earnings that have already been taxed to partners and have already increased the basis for the partners' partnership interests.

In computing the ordinary income of a partnership, a deduction is allowed for Contributions to recognized charities. The first $100 of dividends received from qualifying domestic corporations. Short-term capital losses. Guaranteed payments to partners.

Guaranteed payments to partners. Certain items are separately stated on a partnership's income tax return and, as a result, are not included in the ordinary income of a partnership. These items are directly passed through to the partners and included on the partners' income tax return. The separately stated items are composed of: charitable contributions; dividends; short-term capital gains and losses; long-term capital gains and losses; Code Section 1231 gains and losses; income, gains, losses, deductions and credits specially allocated under the partnership agreement; nonbusiness production of income expenses; income, gains and losses from the sale of unrealized receivables and appreciated inventory; bad debt, prior taxes and delinquency amounts recovered; taxes of foreign nations and U.S. possessions eligible for the foreign tax credit; intangible drilling and development expenses; mining exploration expenses; and soil and water conservation expenses. Guaranteed payments to partners are treated as salary payments. Thus, the payments are deductible from the partnership's ordinary income.

In computing the ordinary income of a partnership, a deduction is allowed for The net operating loss deduction. Contributions to recognized charities. Partner's personal exemptions. Guaranteed payments to partners.

Guaranteed payments to partners. This answer is correct. Guaranteed payments to partners are deductible in computing partnership ordinary income. There would be no NOL deduction, since prior losses would have already been passed through to partners. Since charitable contributions are subject to percentage limitations, they must be separately passed through to partners and cannot be included in computing ordinary income. A deduction for a partner's personal exemptions would be allowed on the partner's tax return, not on the partnership return.

A guaranteed payment by a partnership to a partner for services rendered, may include an agreement to pay I. A salary of $5,000 monthly without regard to partnership income. II. A 25% interest in partnership profits. I only. II only. Both I and II. Neither I nor II.

I only. Guaranteed payments from a partnership for the services of a partner are treated as salary payments and, as a result, are made without regard to the partner's share of the partnership's income. Thus, a guaranteed payment by a partnership to a partner for services rendered may include an agreement to pay a salary of $5,000 monthly without regard to partnership income and may not include an agreement to pay 25% interest in partnership profits.

The at-risk limitation provisions of the Internal Revenue Code may limit I. A partner's deduction for his or her distributive share of partnership losses. II. A partnership's net operating loss carryover. I only. II only. Both I and II. Neither I nor II.

I only. This answer is correct. A partner's share of partnership losses is generally deductible by the partner to the extent of the partner's at-risk basis for the partnership interest at the end of the partnership year. Note that these at-risk rules apply at the partner level, rather than at the partnership level. Also note that a partnership will never have a net operating loss carryover, since the partnership's expenses and losses pass through to partners each year.

A guaranteed payment by a partnership to a partner for services rendered may include an agreement to pay I. A salary of $10,000 monthly without regard to partnership income. II. A 10% interest in partnership profits. I only. II only. Both I and II. Neither I nor II.

I only. This answer is correct. Guaranteed payments are payments made to a partner for services or for the use of capital if the payments are determined without regard to the amount of partnership income. Guaranteed payments are deductible by a partnership in computing its ordinary income or loss from trade or business activities and must be reported as self-employment income by the partner receiving payment. A payment that represents a 10% interest in partnership profits could not be classified as a guaranteed payment because the payment is conditioned on the partnership having profits.

Under which of the following circumstances is a partnership that is not an electing large partnership considered terminated for income tax purposes? I. Fifty-five percent of the total interest in partnership capital and profits is sold within a twelve-month period. II. The partnership's business and financial operations are discontinued. I only. II only. Both I and II. Neither I nor II.

II only. Correct! A partnership will be terminated when (1) there are no longer at least two partners or (2) no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership. Before 2018, a technical termination occurred if within a 12-month period there was a sale or exchange of 50% or more of the total interest in partnership capital and profits. The technical termination rules no longer apply.

Peters has a one-third interest in the Spano Partnership. During 2019, Peters received a $16,000 guaranteed payment, which was deductible by the partnership, for services rendered to Spano. Spano reported a 2019 operating loss of $70,000 before the guaranteed payment. What is(are) the net effect(s) of the guaranteed payment? I. The guaranteed payment increases Peters's tax basis in Spano by $16,000. II. The guaranteed payment increases Peters's ordinary income by $16,000. I only. II only. Both I and II. Neither I nor II.

II only. Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. This treatment is for purposes of determining gross income and deductible business expenses only.

The holding period of property acquired by a partnership as a contribution to the contributing partner's capital account Begins with the date of contribution to the partnership. Includes the period during which the property was held by the contributing partner. Is equal to the contributing partner's holding period prior to contribution to the partnership. Depends on the character of the property transferred.

Includes the period during which the property was held by the contributing partner. Generally no gain or loss is recognized on the contribution of property to a partnership in exchange for a capital interest. Since the partnership's basis for the contributed property is determined by reference to the contributing partner's former basis for the property (i.e., a transferred basis), the partnership's holding period includes the period during which the property was held by the contributing partner.

For tax purposes, a retiring partner who receives retirement payments ceases to be regarded as a partner On the last day of the taxable year in which the partner retires. On the last day of the particular month in which the partner retires. The day on which the partner retires. Only after the partner's entire interest in the partnership is liquidated.

Only after the partner's entire interest in the partnership is liquidated. A retiring partner continues to be a partner for income tax purposes until the partner's entire interest has been completely liquidated through distributions or payments.

John Albin is a retired partner of Brill & Crum, a personal service partnership. Albin has not rendered any services to Brill & Crum since his retirement in 2017. Under the provisions of Albin's retirement agreement, Brill & Crum is obligated to pay Albin 10% of the partnership's net income each year. In compliance with this agreement, Brill & Crum paid Albin $25,000 in 2019. How should Albin treat this $25,000? Not taxable Ordinary income Short-term capital gain Long-term capital gain

Ordinary income Payments made by a personal service partnership to a retired partner that are determined by partnership income are distributive shares of partnership income, regardless of the period over which they are paid. Thus, they are taxable to Albin as ordinary income.

When the AQR partnership was formed, partner Acre contributed land with a fair market value of $100,000 and a tax basis of $60,000 in exchange for a one-third interest in the partnership. The AQR partnership agreement specifies that each partner will share equally in the partnership's profits and losses. During its first year of operation, AQR sold the land to an unrelated third party for $160,000. What is the proper tax treatment of the sale? Each partner reports a capital gain of $33,333. The entire gain of $100,000 must be specifically allocated to Acre. The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by the other two partners. The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership.

The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership. This is a true statement.

On November 1, 2019, Kerry and Payne, each of whom was a 20% partner in the calendar-year partnership of Roe Co., sold their partnership interests to Reed, who was a 60% partner. For tax purposes, the Roe Co. partnership Was terminated as of November 1, 2019. Was terminated as of December 31, 2019. Continues in effect until a formal partnership dissolution notice is filed with the IRS. Continues in effect until a formal partnership dissolution resolution is filed in the office of the county clerk where Roe Co. had been doing business.

Was terminated as of November 1, 2019. This answer is correct. The partnership was terminated on November 1, 2019, the date on which Kerry and Payne sold their interests to Reed. On that date, the business ceased to operate as a partnership because the operation of a partnership requires two or more partners.

Which of the following limitations will apply in determining a partner's deduction for that partner's share of partnership losses? At risk Passive Income Yes No No Yes Yes Yes No No

Yes Yes At-risk rules limit the amount of loss deductions from investment activities to the amount the taxpayer had at-risk. The amount that a taxpayer had at risk is the amount of cash and basis of property contributed to an activity. Borrowed amounts are considered to be at risk to the extent that the taxpayer is personally liable for repayment. At-risk rules do not apply to partnerships, but the rules do apply to the individual partners. Passive activity rules prevent the offsetting of nonpassive income with passive losses and credits from passive activities. Passive activity rules do not apply to partnerships, but the rules do apply to the individual partners. This response correctly indicates that at-risk and passive activity rules apply in determining a partner's deduction for that partner's share of partnership losses.

Which of the following limitations may apply in determining the allowable deduction for a partner's distributive share of partnership losses? At risk Passive loss Yes No No Yes Yes Yes No No

Yes Yes This answer is correct. A partner's distributive share of partnership losses is generally deductible by the partner to the extent of the partner's basis in the partnership at the end of the taxable year. Additionally, the deductibility of partnership losses is limited to the amount of the partner's at-risk basis, and will also be subject to the passive activity loss limitations if they are applicable. Note that the at-risk and passive activity loss limitations apply at the partner level, rather than at the partnership level.