Tax Exam 4 (CH. 10+11)
T or F: An example of the "aggregate concept" underlying partnership taxation is the fact that the partners (rather than the partnership) pay tax on partnership income.
True The aggregate concept treats the partnership as a channel through which income, credits, deductions, and other items flow to the partners. The partnership is regarded as a collection of taxpayers joined in an agency relationship.
Which of the following statements regarding the advantages of the partnership entity form over the subchapter C corporate form is false? a.A partnership typically has easier administrative and filing requirements than does a C corporation. b.Partnership income is subject to a single level of taxation; corporate income is double taxed. c.Individual partners may be able to deduct up to 20% of qualified business income passed through from a partnership. d.Partnerships may specially allocate income and expenses among the partners, provided the substantial economic effect requirements are met; corporate dividends must be proportionate to shareholdings. e.The partners are not liable for entity debt.
E
T or F: A partner who owns a majority of the partnership should sell property at a loss to the partnership.
False A partner who owns a majority of the partnership should not sell property at a loss to the partnership because the loss deduction is disallowed.
T or F: A partner's basis is reported on the Schedule K-1.
False A partner's basis is not reflected anywhere on the Schedule K-1. Instead, each partner should maintain a personal record of the basis in the partnership interest.
T or F: A partnership's allocations of income and deductions to the partners are required to be proportionate to the partners' percentage ownership of partnership profits in order to meet the substantial economic effect tests.
False A partnership may allocate items of partnership income, gain, loss, deduction, or credit in any manner agreed upon by the partners, provided the allocation meets the three substantial economic effect tests or certain alternate tests for economic performance.
T or F: A proportionate current distribution of cash is never taxable to the partner.
False A proportionate current distribution of cash is taxable to the partner to the extent the distributed cash exceeds the partner's outside basis.
T or F: A partnership can deduct the first $8,000 of organizational costs.
False For organizational and startup costs, the first $5,000 may be deducted, provided total expenses in that category do not exceed $50,000. If costs in the category exceed the base amount, the deduction is phased out, dollar for dollar. When costs exceed the phaseout amount in that category, no portion of the current deduction is permitted. Any amount that may not be deducted is amortized over 180 months.
T or F: If a partner contributes a capital asset to the partnership, the partner's holding period in the partnership interest begins on the date of the transfer.
False If a partner contributes a capital asset, the partner's holding period in the partnership interest is the same as that partner's holding period for the capital asset.
T or F: A partner cannot file his or her return until the K-1 is received.
False If a partner needs to file a return before the partnership prepares the partner's Schedule K-1, the partner can estimate income from the partnership and then file an amended return when the K-1 is received.
T or F: Individual partners are not allowed the qualified business income (QBI) deduction on income passed through from the partnership.
False Individual partners can deduct up to 20% of QBI passed through from a partnership; the maximum effective rate on this income is 29.6%.
T or F: Nonrecourse debt is allocated based on each partner's economic risk of loss.
False Nonrecourse debt is debt for which no partner is personally liable. Nonrecourse debt (including qualified nonrecourse financing) is allocated among all the partners in accordance with their profit sharing ratios.
T or F: Items that are not required to be passed through separately from a partnership to the partners include charitable contributions and taxes paid to foreign countries.
False Partnership income and loss items must be separately stated if they could differently affect the tax liabilities of two or more partners. This is true also for other partnership items and information (not necessarily income or loss amounts), such as charitable contributions and the information a partner might need for calculating the foreign tax credit.
T or F: After a partner is admitted to a partnership, the partner's proportionate share of any increase in partnership liabilities results in a decrease in the partner's adjusted basis in the partnership.
False Partnership liability is positively, not negatively, correlated to the partner's adjusted basis in the partnership.
T or F: Section 721 provides that, in general, gain but not loss is recognized by the partnership or the partner on contribution of appreciated or depreciated property to a partnership in exchange for an interest in the partnership.
False Section 721 provides for nonrecognition of either gain or loss on a contribution of property to the partnership. The realized gain or loss is deferred, rather than forgiven.
T or F: Syndication costs are deducted on the partnership's first tax return.
False Syndication costs arise when partnership interests are being marketed to investors. Under § 709, these costs are neither amortizable nor deductible.
T or F: Distributee partners can recognize a loss on a liquidating distribution if (1) the partner receives only cash, unrealized receivables, or inventory or (2) the partner's outside basis exceeds the partnership's inside basis for the hot assets.
False The distributee partner recognizes a loss on a liquidating distribution only if both these conditions are met.
T or F: A partner's adjusted basis in a newly formed partnership usually equals the fair market value of any property the partner contributed to the partnership.
False The partner's initial outside basis generally equals the partner's basis in contributed assets. This could be a cost basis (plus any amount recognized as income on contribution of services) or a basis determined under the gift or inheritance rules. After the partner is admitted to the partnership, the partner's basis is adjusted for numerous items.
T or F: The primary purpose of the partnership agreement is to document the various tax elections made by the partnership regarding depreciation methods, treatment of research and experimental costs, calculation of the § 199 deduction, and the § 754 election.
False The partnership agreement documents the arrangement among the partners regarding formation, operation, and liquidation of the partnership; allocations of profits, losses, and distributions; and other matters. The elections described are not typically covered in the partnership agreement.
T or F: Even if the partnership properly makes an election for treatment of a specific tax item, the partner may elect out of that treatment.
False The partnership makes elections regarding everything from the partnership's taxable year to the depreciation method for partnership assets. Each partner is bound by the decisions made by the partnership relative to these partnership level elections.
T or F: A proportionate distribution occurs when the distribution increases or decreases the distributee partner's interest in certain ordinary income-producing assets.
False This is a disproportionate distribution
T or F: A newly formed partnership must adopt the accrual method of accounting.
False may adopt cash, accrual, or hybrid
T or F: A partnership measures and reports two kinds of income: ordinary (operating) income and investment income.
False ordinary and separately stated items
Isabel is a 40% partner in the ICE Partnership. During the current year, ICE reported gross receipts of $160,000 and a charitable contribution of $10,000. The partnership paid expenses of $120,000. In addition, ICE distributed $10,000 each to partners Isabel and Edith. Isabel reports which of the following income from ICE during the current tax year? a.$4,000 ordinary income b.$16,000 ordinary income; $4,000 charitable contribution c.$12,000 ordinary income d.$8,000 ordinary income; $4,000 charitable contribution e.$24,000 ordinary income; $6,000 charitable contribution
B ICE's net ordinary income is $40,000 ($160,000 ordinary income - $120,000 of expenses). The cash distributions to Isabel and Edith are not deductible. Isabel's share of this income is $16,000 ($40,000 × 40%). In addition, Isabel reports her $4,000 share ($10,000 × 40%) of the partnership's charitable contribution.
Jane's basis for her partnership interest at the beginning of the year was $60,000. For the year, her proportionate share of partnership items was as follows: partnership income of $10,000; partnership charitable contributions of $3,000; and a reduction of partnership liabilities of $5,000. Jane's adjusted basis (outside basis) for her partnership interest at year-end is: a.$72,000. b.$62,000. c.$70,000. d.$60,000. e.$42,000.
B Jane's ending basis is $62,000 ($60,000 + $10,000 - $3,000 - $5,000). The net income increases her basis, while the charitable contributions and decrease in partnership liabilities decrease her basis.
Miguel and Ann formed a partnership. Miguel received a 40% interest in partnership capital and profits in exchange for land with a basis of $100,000 and a fair market value of $140,000. Ann received a 60% interest in partnership capital and profits in exchange for $210,000 of cash. Three years after the contribution date, the land contributed by Miguel is sold by the partnership to a third party for $160,000. How much taxable gain will Miguel recognize from the sale? a.$68,000 b.$110,000 c.$0 d.$35,000 e.$48,000
E
Regarding partnership reporting: a. Form 1120 must be filed with the IRS. b. For a calendar year partnership, each partner must be given their K-1 by January 31. c. The partners make most of the elections regarding the treatment of partnership items. d. An automatic two-month extension can be requested. e. For a calendar year partnership, the due date is March 15.
E
T or F: "Average annual gross receipts" is the average of gross receipts for the three tax years ending with the tax period prior to the tax year in question.
True
T or F: A partner's capital interest is measured by a partner's capital sharing ratio.
True
T or F: A partner's profits (loss) interest must be the same as their capital sharing ratio.
True
T or F: A partnership can have partners who are individuals, corporations, trusts, associations, or even other partnerships.
True
T or F: An example of the "entity concept" underlying partnership taxation is the fact that the partnership must file an information tax return.
True
T or F: An increase in a partner's share of partnership debt is treated as a cash contribution by the partner to the partnership.
True
T or F: Dividends allocated from a partnership are treated as net investment income (NII).
True
T or F: For both general and limited partners, any guaranteed payments for services are subject to the self-employment tax.
True
T or F: Recognition of a loss for a distributee partner is precluded if it involves any type of property other than cash, unrealized receivables, or inventory.
True
T or F: Syndication costs include brokerage fees, legal fees, and registration fees incurred in connection with marketing interests in partnerships.
True
T or F: The LLP is currently the organizational form of choice for professional service entities, such as accounting firms.
True
T or F: The partnership makes the election as to what cost recovery methods and assumptions are used.
True
T or F: The sum of the partner's ending basis on Schedule K-1 does not equal the total of the partner's ending capital account on Schedule L.
True
T or F: Any disallowed business interest expense is passed through to the partners.
True Any disallowed business interest expense is passed through to the partners (reducing their basis in the partnership interest) and can be used to offset the partnership's "excess taxable income" in future years.
T or F: A disproportionate distribution occurs when the distribution increases or decreases the distributee partner's interest in certain ordinary income-producing assets.
True Each distribution is classified based on whether it is proportionate or disproportionate. In a proportionate distribution, a partner receives the appropriate share of certain ordinary income-producing assets of the partnership. A disproportionate distribution occurs when the distribution increases or decreases the distributee partner's interest in these assets.
T or F: If a partner contributes depreciable property to the partnership, the partnership continues to use the depreciation schedule and calculations the partner used.
True If a partner contributes depreciable property to the partnership, the partnership generally "steps into the shoes" of the contributing partner and continues to use the depreciation schedule and calculations the partner used.
T or F: Distributions don't typically cause the partner to recognize income
True Instead, the partner's outside basis is reduced by the amount of cash received. The partnership's inside basis in assets is also reduced.
T or F: Julia purchased her partnership interest from Christina on the first day of the current year for $40,000 cash. She received a $10,000 cash distribution from the partnership during the year, and her share of partnership income is $15,000. If her share of partnership liabilities on the last day of the partnership year is $20,000, her outside basis for her partnership interest at the end of the year is $65,000.
True Julia's adjusted basis at the end of the year is $65,000, determined as follows: $40,000 cash (paid to acquire interest) + $15,000 (share of income) + $20,000 (share of partnership liabilities) - $10,000 (cash distribution).
T or F: In a sale between a partnership and a partner who owns more than 50% of partnership capital or profits, if the transferee later sells the property at a gain, the disallowed loss reduces the gain the transferee would otherwise recognize.
True No loss is recognized on a sale of property between a person and a partnership when the person owns, directly or indirectly, more than 50% of partnership capital or profits. The disallowed loss might not vanish entirely, however. If the transferee eventually sells the property at a gain, the disallowed loss reduces the gain the transferee would otherwise recognize.
T or F: Each partner's share of the partnership items are reported on that partner's Schedule K-1.
True Schedule K-1 summarizes the tax-related items for each partner after considering the allocation conventions outlined in the partnership agreement or required under the Code and Regulations. For each partnership item, the sum of the amounts allocated to all of the partners on Schedules K-1 should equal the partnership's total amount per Schedule K.
T or F: If a partnership makes a payment on behalf of a partner for medical expenses, the partnership can deduct the payment as a medical expense.
False If a partnership makes a payment on behalf of a partner, such as for alimony, medical expenses, or other items that constitute deductions to individuals, the partnership treats the payment as a distribution or guaranteed payment to the partner, and the partner determines whether to claim the deduction.
Mark's outside basis in the River Works Partnership, an LLC, is $260,000. The LLC distributes $60,000 cash to Mark. Based on these facts: a.Mark's outside basis will be $200,000. b.Mark's inside basis will be $260,000 and his outside basis will be $320,000. c.Mark recognizes a $75,000 long-term capital gain. d.Mark's inside basis will be $260,000. e.Mark recognizes a $75,000 ordinary gain.
A
George sells one parcel of land (basis of $100,000) for its fair market value of $160,000 to a partnership in which he owns a 60% capital interest. George held the land for investment purposes. The partnership is in the real estate development business and will build residential housing (for sale to customers) on the land. George will recognize: a.$60,000 ordinary income. b.$0 gain or loss. c.$60,000 capital gain. d.$36,000 ordinary income. e.$36,000 capital gain.
A If a partner owns more than a 50% interest in a partnership, any property sold to the partnership at a gain results in ordinary income to the selling partner, unless the property was a capital asset both to the partner and the partnership. In this case, the land was a capital asset to George, but it was inventory to the partnership, so the gain is treated as ordinary income
Tempe LLC incurred the following costs during its first year: Legal fees for drafting the operating agreement $18,000 Syndication costs 19,000 Preopening advertising expenses 20,000 Accounting fees for tax advice of an organizational nature 15,000 Training costs for new employees before opening the business 12,000 The amount of Tempe's startup costs is: a. $32,000. b. $69,000. c. $84,000. d. $39,000. e. $37,000.
A Legal and accounting fees are organizational costs
At the beginning of the year, Mark's "tax basis" capital account balance in the MAP Partnership was $80,000. During the tax year, Mark contributed property with a basis of $20,000 and a fair market value of $50,000. His share of the partnership's ordinary income and separately stated income and deduction items was $41,000. At the end of the year, the partnership distributed $10,000 of cash to Mark. Also, the partnership allocated $10,000 of recourse debt to Mark. What is Mark's ending capital account balance determined using the "tax basis" method? a.$131,000 b.$69,000 c.$151,000 d.$80,000 e.$90,000
A Mark's beginning capital account balance of $80,000 is "rolled forward" by adding the basis of the property he contributed ($20,000) and his share of partnership income ($41,000), and subtracting the distribution to him ($10,000) ($80,000 + $20,000 + $41,000 - $10,000). Liabilities are not included in the partner's capital account.
Manuel contributed property to the newly formed HOME Partnership. The property had a $100,000 adjusted basis to Manuel and a $160,000 fair market value on the contribution date. The property was also encumbered by a $120,000 nonrecourse debt, which was transferred to the partnership on that date. Another partner, Olivia, shares 30% of the partnership income, gain, loss, deduction, and credit. Under IRS Regulations, Olivia's share of the nonrecourse debt for basis purposes is: a.$30,000. b.$36,000. c.$120,000. d.$100,000. e.$20,000.
A The § 704(c) portion of the debt must first be allocated to the contributing partner, Manuel. The § 704(c) portion of the nonrecourse debt that is allocated to Manuel under this rule is $20,000 ($120,000 - $100,000 basis). The rest of the nonrecourse debt is allocated in the manner that the partners share in the deductions that relate to the debt. Therefore, Olivia shares in $30,000 ($100,000 × 30%) of the remaining nonrecourse debt.
T or F: Partnership debt includes accounts payable of a cash basis partnership.
False
T or F: Proportionate liquidating distributions must consist of a series of distributions.
False
Kit and Min form the KM Partnership, with each receiving a 50% interest in the capital and profits of the partnership. Kit contributes land with a basis of $30,000 (fair market value of $50,000) and cash of $20,000 for a 50% interest in the partnership. Min contributes services worth $70,000 to the partnership. Which of the following reflects the results of these transactions? a.The partnership's holding period for the land begins on the date of the transfer. b.Kit has a basis of $50,000 in his partnership interest. c.Min's basis in the partnership interest is zero. d.Min has a capital gain equal to $70,000. e.Kit recognizes a gain of $20,000.
B Kit has a basis of $50,000 in his partnership interest ($30,000 adjusted basis of land + $20,000 of cash contributed). Services are not considered property that can be transferred to a partnership on a tax-free basis.
In the current year, the GHI Partnership received revenues of $200,000 and paid the following amounts: $50,000 in rent and utilities and $20,000 as a distribution to partner Igor. In addition, the partnership earned $6,000 of long-term capital gains during the year. Partner Igor owns a 50% interest in the partnership. How much income must Igor report for the tax year? a. $68,000 ordinary income b. $75,000 ordinary income; $3,000 of long-term capital gains c. $150,000 ordinary income; $6,000 of long-term capital gains d. $65,000 ordinary income; $3,000 of long-term capital gains e. $78,000 ordinary income
B Ordinary income = 150,000. The distribution to Igor is not deductible. Igor's share of GHI's ordinary income is $75,000. The $6,000 of long-term capital gains is a separately stated item, of which Igor's share is $3,000.
Tyler and Josie formed a partnership. Tyler received a 25% interest in partnership capital and profits in exchange for land with a basis of $40,000 and a fair market value of $60,000. Josie received a 75% interest in partnership capital and profits in exchange for $180,000 of cash. Three years after the contribution date, the land contributed by Tyler is sold by the partnership to a third party for $76,000. How much taxable gain will Tyler recognize from the sale? a. $0 b. $24,000 c. $36,000 d. $9,000 e. $5,000
B Section 704(c)(1)(A) requires that any precontribution gain must be allocated entirely to Tyler. The gain on the sale by the partnership is $36,000 ($76,000 selling price - $40,000 basis). Therefore, Tyler is allocated the $20,000 precontribution ("built-in") gain and 25% ($4,000) of the $16,000 ($36,000 - $20,000) postcontribution gain.
On January 1 of the current year, Annabelle and Paul form an equal partnership. Annabelle makes a cash contribution of $80,000 and a property contribution (adjusted basis of $120,000; fair market value of $160,000) in exchange for her interest in the partnership. Paul contributes property (adjusted basis of $190,000; fair market value of $240,000) in exchange for his partnership interest. Which of the following statements concerning the income tax results of this partnership formation is true? a.Paul recognizes a $50,000 gain on his property transfer. b.Annabelle has a $200,000 tax basis for her partnership interest. c.The partnership has a $200,000 adjusted basis in the property contributed by Annabelle. d.The partnership has a $160,000 adjusted basis in the property contributed by Annabelle. e.Paul has a $240,000 tax basis for his partnership interest.
B The contributions are tax-free, and the carryover and substituted basis rules of §§ 722 and 723 apply. Paul's basis for his partnership interest will be the same as his $190,000 basis for the property contributed. Annabelle will have a $200,000 tax basis for her partnership interest ($80,000 cash contributed + $120,000 adjusted basis of the property contributed); the partnership will have a $120,000 adjusted basis for the property contributed by Annabelle; and neither Paul nor Annabelle will recognize a gain or loss on the property contribution.
T or F: The partner's basis is shown on Schedule K-1.
False
Evangelina's basis in her partnership interest was $120,000, including her $40,000 share of partnership liabilities. The partnership decides to liquidate, and after repaying all liabilities, distributes all remaining assets proportionately to the partners. Evangelina receives $30,000 cash and accounts receivable with a $20,000 basis and a $22,000 fair market value to the partnership. What gain or loss does Evangelina recognize, and what is her basis in the accounts receivable? a.$0 gain or loss; $90,000 basis b.$30,000 loss; $22,000 basis c.$30,000 loss; $20,000 basis d.$70,000 loss; $20,000 basis e.$0 gain or loss; $20,000 basis
C
ABC Partners was formed during the current tax year. It incurred $10,000 of organizational expenses, $80,000 of startup expenses, and $5,000 of transfer taxes to retitle property contributed by a partner. The property had been held as MACRS property for 10 years by the contributing partner and had an adjusted basis to the partner of $300,000 and fair market value of $400,000. Which of the following statements regarding these items is true? a.ABC cannot depreciate the contributed property. b.The partner continues to depreciate the property even after it is contributed to the partnership. c.ABC must capitalize the transfer tax and treat the contributed property as a new asset placed in service on the date the property is contributed. d.ABC must amortize the $10,000 of organizational expenses over 180 months. e.ABC's startup expenses are amortized over 60 months.
C Legal fees and transfer taxes incurred in transferring assets to a partnership must be capitalized. Cost recovery for these amounts commences when the underlying property is placed in service. "ABC cannot depreciate the contributed property" and "The partner continues to depreciate the property even after it is contributed to the partnership" are incorrect because the partnership "steps into the partner's shoes" with respect to depreciation of contributed property. "ABC must amortize the $10,000 of organizational expenses over 180 months" is incorrect because the first $5,000 of organizational costs may be deducted if total organizational costs are less than $50,000. "ABC's startup expenses are amortized over 60 months" is incorrect because the portion of startup costs that cannot be currently deducted must be amortized over 180 months.
At the beginning of the year, Penny's "tax basis" capital account balance in the PAL Partnership was $60,000. During the tax year, Penny contributed property with a basis of $10,000 and a fair market value of $30,000. Her share of the partnership's ordinary income and separately stated income and deduction items was $26,000. At the end of the year, the partnership distributed $10,000 of cash to Penny. Also, the partnership allocated $15,000 of recourse debt and $25,000 of nonrecourse debt to Penny. What is Penny's ending capital account balance determined using the "tax basis" method? a.$101,000 b.$96,000 c.$86,000 d.$126,000 e.$136,000
C Penny's beginning capital account balance of $60,000 is "rolled forward" by adding the basis of the property she contributed ($10,000) and her share of partnership income ($26,000), and subtracting the distribution to her ($10,000). Liabilities are not included in the partner's capital account ($60,000 + $10,000 + $26,000 - $10,000).
Tempe LLC was organized on June 1 and began business on August 1 of 2019. Tempe has adopted a calendar year and incurred the following costs during 2019:Legal fees for drafting the operating agreement$18,000Syndication costs19,000Preopening advertising expenses20,000Accounting fees for tax advice of an organizational nature15,000Training costs for new employees before opening the business12,000The maximum amount Tempe can deduct as startup costs on its tax return for 2018 is: a.$6,400. b.$6,800. c.$5,750. d.$5,000. e.$2,133.
C Startup costs include the preopening advertising expenses and the training costs for new employees before opening the business ($20,000 + $12,000 = $32,000). The partnership may deduct up to $5,000 of startup costs in the year in which it begins business. This amount must be reduced, however, by startup costs that exceed $50,000. Excess expenditures are amortizable over 180 months, beginning with the month in which the partnership begins business. Permitted deduction$5,000Amortization ($32,000 - $5,000)/180 months × 5 months750Total deduction$5,750
Tonesha has an outside basis of $60,000 in the TREE Partnership as of December 31 of the current year. On that date, the partnership liquidates and distributes to Tonesha a proportionate distribution of $20,000 cash and inventory with an inside basis to the partnership of $18,000 and a fair market value of $22,000. In addition, Tonesha receives a desk (not inventory) that has an inside basis and fair market value of $200 and $350, respectively. None of the distribution is for partnership goodwill. How much gain or loss will Tonesha recognize on the distribution, and what basis will she take in the desk? a.$21,650 loss; $350 basis b.$0 loss; $200 basis c.$0 loss; $22,000 basis d.$0 loss; $0 basis e.$21,800 loss; $200 basis
C The cash and inventory are distributed first and take bases of $20,000 and $18,000, respectively. The partner cannot recognize a loss on the distribution because the desk is a § 1231 asset (depreciable property used in a trade or business). Only cash, inventory, and receivables can be distributed if the partner is to recognize a loss. The partner's basis before the distribution of the desk is $22,000 ($60,000 - $20,000 cash - $18,000 inventory). Therefore, the desk must take a substituted basis of $22,000 to the partner, which is the amount of the partner's remaining outside basis when the desk is distributed.
Zion Corporation was formed on July 1, 2019, and started business on November 1. Zion adopts a calendar year. During 2019, Zion incurred $40,000 in legal fees for drafting the LLC's operating agreement and $12,000 in accounting fees for tax advice of an organizational nature. If Zion wants to take the largest deduction for organizational expenses, how much can it deduct for 2019? a.$2,167 b.$4,633 c.$3,544 d.$5,522 e.$5,000
C The partnership may deduct up to $5,000 of organizational expenditures in the year in which it begins business. This amount must be reduced, however, by organizational expenditures that exceed $50,000. Excess expenditures are amortizable over 180 months, beginning with the month in which the partnership begins business. Total organizational expenses $52,000 Less (50,000) Excess $2,000 Maximum amount deductible $5,000 Less (2,000) Permitted deduction $3,000 Amortization ($52,000 - $3,000)/180 months × 2 months 544 Total deduction$3,544
Under § 721: a.Intangibles received by the partnership are not amortized. b.The partnership's basis in the assets received is the fair market value on the date of formation. c.The partner's holding period in the partnership interest depends on the type of contributed assets. d.Losses are recognized. e.The partnership must recognize gain on the contributed property.
C Under § 721, neither gains nor losses are recognized by the partner or the partnership when property is contributed. The partnership takes a carryover basis in the assets it receives. If an intangible asset is contributed, the partnership will generally "step into the shoes" of the partner in determining future amortization deductions. The partner's holding period in the partnership interest depends on the type of contributed assets. To the extent a partner contributes capital and § 1231 assets, the partner's holding period in the partnership interest is the same as that partner's holding period for these assets. To the extent the partner contributes cash or noncapital/§ 1231 assets, the holding period in the partnership interest begins on the date the partnership interest is acquired.
Artie, Willy, and Thomas contributed assets to form the equal AWT Partnership. Artie contributed cash of $40,000 and land with a basis of $80,000 (fair market value of $60,000). Willy contributed cash of $60,000 and land with a basis of $50,000 (fair market value of $40,000). Thomas contributed cash of $60,000 and a fully depreciated property ($0 basis) valued at $40,000. Which of the following tax treatments is correct? a. Artie's basis in his partnership interest is $80,000. b. AWT has a basis of $60,000 in the land contributed by Artie. c. Willy has a basis in his partnership interest of $110,000. d. Thomas realizes and recognizes a gain of $40,000. e. Willy realizes and recognizes a loss of $10,000.
C Willy's basis in the partnership interest is $110,000 ($60,000 cash + $50,000 basis in the property contributed). He cannot recognize his $10,000 realized loss. Artie's basis is $120,000 ($40,000 cash + $80,000 basis in the land). Thomas's basis is $60,000 ($60,000 cash contribution + $0 basis in the property); he does not recognize his $60,000 realized gain. The partnership takes a carryover basis in the three contributed properties.
Which of the following statements regarding the advantages of the partnership entity form over the subchapter C corporate form is false? a.Partnership income is subject to a single level of taxation; corporate income is double taxed. b.Individual partners may be able to deduct up to 20% of qualified business income passed through from a partnership. c.Partnerships may specially allocate income and expenses among the partners, provided the substantial economic effect requirements are met; corporate dividends must be proportionate to shareholdings. d.The partners are not liable for entity debt. e.A partnership typically has easier administrative and filing requirements than does a C corporation.
D
Juliana receives a proportionate nonliquidating distribution from the JAM Partnership. The distribution consists of $75,000 cash and property with an adjusted basis to the partnership of $20,000 and a fair market value of $25,000. Immediately before the distribution, Juliana's adjusted basis for her partnership interest is $90,000. Juliana's basis in the noncash property received is: a.$0. b.$20,000. c.$50,000. d.$15,000. e.$25,000.
D Juliana's basis in the partnership interest is first reduced to $15,000 by the $75,000 cash distribution $90,000 (partnership interest) - $75,000 (cash distribution) = $15,000 (remaining basis in partnership interest). Because this is a nonliquidating distribution, the basis in the noncash property is the lesser of $15,000 (remaining basis in the partnership interest) or the partnership's $20,000 basis in the property. The basis in the property, therefore, is $15,000, and Juliana's basis in the partnership interest is reduced to $0.
Julio's basis for his partnership interest at the beginning of the year was $68,000. For the year, his proportionate share of partnership items was as follows: partnership loss of $20,000; partnership tax- exempt interest $3,000; and an increase in partnership liabilities of $8,000. Julio's adjusted basis (outside basis) for his partnership interest at year-end is: a. $37,000. b. $68,000. c. $85,000. d. $59,000. e. $43,000.
D Julio's ending basis is $59,000 ($68,000 - $20,000 + $3,000 + $8,000). The net loss decreases his basis, while the tax-exempt interest and the increase in partnership liabilities increase his basis.
At the beginning of the year, Aretha's basis in the A&B Partnership interest is $60,000. She receives a proportionate nonliquidating distribution from the partnership consisting of $10,000 of cash, unrealized accounts receivable (basis of $0; fair market value of $30,000), and inventory (basis of $10,000; fair market value of $20,000). After the distribution, Aretha's bases in the accounts receivable, inventory, and partnership interest are: a.$0; $20,000; and $30,000. b.$10,000; $0; and $40,000. c.$30,000; $20,000; and $0. d.$30,000; $10,000; and $10,000. e.$0; $10,000; and $40,000.
E $60,000 (Aretha's basis) - $10,000 (cash distribution) = $50,000. The accounts receivable and inventory are distributed next and take carryover bases of $0 and $10,000, respectively. This reduces the basis in the partnership interest to $40,000 ($50,000 - $10,000)
Jane contributed property with a basis of $40,000 and a value of $50,000 to the JO Partnership in exchange for a 20% interest in partnership capital and profits. During the first year of partnership operations, JO had net taxable income of $30,000 and tax-exempt interest income of $10,000. The partnership distributed $10,000 cash to Jane. On January 1 of year 2, Jane sells her partnership interest for $49,000. What is Jane's gain or loss on the sale? a.$9,000 gain b.$9,000 loss c.$0 d.$11,000 loss e.$11,000 gain
E Jane is a 20% partner and shares in 20% of the partnership's taxable and tax-exempt income, or $8,000. Her basis is reduced by the cash distribution during the year. Jane's ending basis is calculated as follows: $40,000 beginning basis + $8,000 [20% × ($30,000 + $10,000)] - $10,000 distribution. Selling price of $49,000 - basis of $38,000 = $11,000 gain.
Jerome is the managing general partner of JAR, in which he owns a 30% interest. For the year, JAR reported income of $260,000 (after deducting all guaranteed payments). Jerome received a guaranteed payment of $40,000 for capital that he had loaned the partnership, and he received a guaranteed payment of $120,000 for services he performed for JAR. How much income from self-employment did Jerome earn from JAR? a.$160,000 b.$238,000 c.$120,000 d.$380,000 e.$198,000
E Jerome's income from self-employment includes his distributive share of partnership income of $78,000 ($260,000 × 30%). In addition, his SE income includes the guaranteed payment he received for services ($120,000), for total SE income of $198,000. The guaranteed payment for the use of Jerome's capital is not subject to SE tax.
Marina and Nolan formed the MN Partnership. Marina contributed $20,000 of cash in exchange for her 50% interest in the partnership capital and profits. During the first year of partnership operations, the following events occurred: the partnership had a net taxable income of $10,000; Marina received a distribution of $8,000 cash from the partnership; and Marina had a 50% share in the partnership's $16,000 of recourse liabilities on the last day of the partnership year. Marina's adjusted basis for her partnership interest at year-end is: a.$33,000. b.$17,000. c.$38,000. d.$20,000. e.$25,000.
E Marina's adjusted basis at year-end is $25,000 ($20,000 cash contribution, + her $5,000 share of partnership income - $8,000 cash distribution, + her $8,000 share of partnership liabilities).
At the beginning of the tax year, Zack's basis for his partnership interest and his amount at risk in the partnership was $30,000. His share of partnership items for the year consisted of tax-exempt interest income of $2,000 and an ordinary loss of $44,000. He also received a distribution from the partnership of $20,000 cash during the year. For the tax year, Zack will report: a.An ordinary loss of $44,000 and a nontaxable distribution of $20,000. b.A nontaxable distribution of $20,000, an ordinary loss of $10,000, and a suspended loss carryforward of $34,000. c.A nontaxable distribution of $12,000, an ordinary loss of $32,000, and a suspended loss of $20,000. d.An ordinary loss of $32,000, a suspended loss carryforward of $12,000, and a taxable distribution of $20,000. e.A nontaxable distribution of $20,000, an ordinary loss of $12,000, and a suspended loss carryforward of $32,000.
E The $20,000 distribution and the $2,000 share of partnership tax-exempt income combine to reduce Zack's basis for his partnership interest to $12,000 ($30,000 + $2,000 - $20,000). Zack will then be allocated the $44,000 partnership loss; $12,000 of which is deductible and $32,000 of which is suspended.
PQR Partners reported the following items: Sales revenue $720,000 Interest income 5,000 Long-term capital gain 8,000 Cost of goods sold 200,000 Wages paid to employees 100,000 Cash distributions to partners 20,000 Other operating expenses 30,000 How much will PQR report as ordinary business income? a. $383,000 b. $720,000 c. $733,000 d. $403,000 e. $390,000
E The partnership's ordinary business income is $390,000 ($720,000 sales revenue - $200,000 cost of goods sold - $100,000 wages paid to employees - $30,000 other operating expenses).
Mary and Juan formed a partnership. Mary received a 70% interest in partnership capital and profits in exchange for land with a basis of $250,000 and a fair market value of $260,000. Juan received a 30% interest in partnership capital and profits in exchange for $110,000 of cash. Three years after the contribution date, the land contributed by Mary is sold by the partnership to a third party for $300,000. How much taxable gain will Juan recognize from the sale? a.$15,000 b.$0 c.$18,000 d.$5,000 e.$12,000
E The total gain is $50,000 ($300,000 selling price - $250,000 basis). Mary's precontribution gain is $10,000 ($260,000 fair market value - $250,000 basis). The $10,000 precontribution ("built-in") gain is allocated all to Mary.
Manuel contributed property to the newly formed HOME Partnership. The property had a $100,000 adjusted basis to Manuel and a $160,000 fair market value on the contribution date. The property was also encumbered by a $120,000 nonrecourse debt, which was transferred to the partnership on that date. Another partner, Olivia, shares 30% of the partnership income, gain, loss, deduction, and credit. Under IRS Regulations, Olivia's share of the nonrecourse debt for basis purposes is: a. $20,000. b. $100,000. c. $120,000. d. $36,000. e. $30,000.
E The § 704(c) portion of the debt must first be allocated to the contributing partner, Manuel. The § 704(c) portion of the nonrecourse debt that is allocated to Manuel under this rule is $20,000 ($120,000 - $100,000 basis). The rest of the nonrecourse debt is allocated in the manner that the partners share in the deductions that relate to the debt. Therefore, Olivia shares in $30,000 ($100,000 × 30%) of the remaining nonrecourse debt.
At the beginning of the year, Victoria's "tax basis" capital account balance in the VIP Partnership was $90,000. During the tax year, Victoria contributed property with a basis of $30,000 and a fair market value of $70,000. Her share of the partnership's loss was $12,000. At the end of the year, the partnership distributed $15,000 of cash to Victoria. Also, the partnership allocated $20,000 of recourse debt and $35,000 of nonrecourse debt to Victoria. What is Victoria's ending capital account balance determined using the "tax basis" method? a. $90,000 b. $120,000 c. $147,000 d. $117,000 e. $93,000
E Victoria's ending capital account is $93,000. Victoria's beginning capital account balance of $90,000 is "rolled forward" by adding the basis of the property she contributed ($30,000). The basis is then reduced by her share partnership loss ($12,000) and her distribution of ($15,000) ($90,000 + $30,000 - $12,000 - $15,000). Liabilities are not included in the partner's capital account.
Swift, Inc., Heron, Inc., and Canary formed a general partnership. Swift owns a 50% interest, and Heron and Canary each own 25% interests. Swift, Inc., files its tax return on a July 1-June 30 fiscal year; Heron, Inc., files on a September 1-August 31 fiscal year; and Canary is a calendar year taxpayer. Which of the following statements regarding the taxable year the partnership can choose is true? a.The partnership cannot use the "least aggregate deferral" method to determine its taxable year. b.The partnership must choose the calendar year because it has no principal partners. c.The partnership must choose either a November or January year-end. d.The partnership must choose a June 30 year-end because Swift, Inc., is a majority partner. e.The partnership can request permission from the IRS to use a January 31 fiscal year if it can establish that is a natural business year.
E no majority partners, and principal partners all have different tax years
T or F: Distributions of cash from the partnership to the partner after the partnership is formed increase the partner's adjusted basis.
False
T or F: Guaranteed payments are taxable as short-term capital gains.
False
T or F: In a proportionate liquidating distribution, unrealized receivables and inventory are distributed first.
False
T or F: Partners usually recognize gains/losses in a proportionate distribution
False
