Question 1

Kitty is a 60 percent partner of Tabby Associates. Kitty sells a building to the partnership for $75,000. If the building had an adjusted basis to Kitty of $95,000, how much gain or loss does Kitty recognize on this transaction?

Accepted Answer

The answer of Kitty is a 60 percent partner of...

Question 2

Losses are disallowed for transactions between a partnership and a partner who has a 50 percent interest in the partnership.

Accepted Answer

Losses can be recognized for transactions between a partnership and a partner who has a 50 percent interest in the partnership. However, special rules apply if the transaction involves property contributed to the partnership by the partner.

Question 3

The "at-risk" rule does not apply to activities involving real estate.

Accepted Answer

The "at-risk" rule does apply to activities involving real estate, limiting the amount of loss a taxpayer can deduct to the amount for which they are considered "at risk" in the activity.

Question 4

At the beginning of the year, Joe's basis in his partnership interest was $5,000. During the year, Joe contributed $10,000 in cash to the partnership and signed a bank loan to be personally liable for the partnership's debt of $25,000. For the current year, the partnership allocated a loss of $60,000 to Joe. In the following year, Joe's portion of the partnership income is $30,000. Which of the following is accurate?

Accepted Answer

The answer of At the beginning of the year, Joe's...

Question 5

The "at-risk" rule applies, with limited exceptions, to all taxable activities.

Accepted Answer

The "at-risk" rule applies to all taxable activities, except for certain real estate activities and certain passive activities.

Question 6

Wallace and Pedersen have equal interests in the capital and profits of the partnership of Wallace and Pedersen, but are otherwise unrelated. On August 1, 2015, Wallace sold 100 shares of Kalmia Mining Corporation to the partnership for its fair market value of $7,000. Wallace had bought the stock in 2000 at a cost of $10,000. What is Wallace's deductible loss for 2015 as a result of the sale of this stock?

Accepted Answer

Wallace sold the shares for $7,000, which is less than what he paid for them ($10,000), resulting in a loss. This is a long-term capital loss since he held the shares for more than one year. However, because he sold the shares to a partnership in which he has an equal interest, this is considered a related-party transaction and the loss is disallowed for tax purposes. Therefore, Wallace's deductible loss for 2015 is $0.

Question 7

Which of the following is true about an LLC (Limited Liability Company)?

Accepted Answer

An LLC's limited liability is similar to a corporation's. Although an LLC can choose to be taxed as a partnership or a corporation, by default it is taxed like a partnership. An LLC can have only one member or multiple members.

Question 8

Limited liability companies may operate in more than one state.

Accepted Answer

Limited liability companies (LLCs) are allowed to operate in more than one state by filing for Foreign Qualification in each additional state they seek to operate in.

Question 9

Mario and Luigi are brothers and they are equal partners in Pipes of Your Dreams Plumbing. Mario sells his fancy sports car to the business for $40,000. Mario's basis in the car is $45,000.
a.What is the amount of Mario's recognized gain or loss on this transaction, and what is the nature of the gain or loss?
b.If the partnership later sells the sports car for $55,000, how much of the gain is recognized?

Accepted Answer

The answer of Mario and Luigi are brothers and they...

Question 10

Rochelle owns 40 percent of a partnership and her brother owns the remaining 60 percent interest. During the current tax year, Rochelle sold a building to the partnership for $180,000, to be used for the partnership's office. She had held the building for 3 years at the time of the sale.
a.Assuming Rochelle's basis in the building was $200,000, what is the amount and nature of her gain or loss?
b.Assuming Rochelle's basis in the building was $150,000, what is the amount and nature of her gain or loss?

Accepted Answer

The answer of Rochelle owns 40 percent of a partnership...

Question 11

The "at-risk" rule acts to prevent tax shelters from generating large losses for their investors while exposing them to little personal risk.

Accepted Answer

The "at-risk" rule is designed to limit the amount of loss an investor can claim in a tax shelter to the amount they have personally invested or are considered to be at risk. This helps prevent tax shelters from generating large losses for investors while exposing them to little personal risk.

Question 12

Which of the following liabilities would be considered nonrecourse?

Accepted Answer

Nonrecourse liabilities are debts where the creditor can only look to the collateral securing the debt to satisfy the obligation. Option C describes a nonrecourse liability, as the bank can only take the real estate and cannot seek further repayment from the taxpayer. Options A and B both describe recourse liabilities, as the creditor can pursue the taxpayer's personal assets or income to satisfy the obligation.

Question 13

Which of the following is a disadvantage of an LLC?

Accepted Answer

The states are not consistent in their treatment of LLCs, which can be a disadvantage for businesses operating in multiple states or looking to expand.

Question 14

During the current year, Jay is a partner in an automobile dealership. Jay's amount at risk at the beginning of the year is $90,000, and during the current year Jay's share of the dealership's ordinary loss is $120,000.
a.What is the amount of the loss from the automobile dealership that Jay may deduct in the current year?
b.If the dealership has a profit of $63,000 in the subsequent year, how much of the subsequent year income is taxable to Jay?

Accepted Answer

The answer of During the current year, Jay is a...

Question 15

Barry owns a 50 percent interest in B&B Interests, a partnership. His brother, Benny, owns a 35 percent interest in that same partnership, and the remaining 15 percent is owned by an unrelated individual. During the current year, Barry sells a rental property with a basis of $60,000 to B&B Interests for $100,000. The partnership intends to hold the rental as inventory for resale. What is the amount and nature of Barry's gain or loss on this transaction?

Accepted Answer

Since the partnership intends to hold the rental as inventory for resale, the sale is treated as though Barry sold the property directly to the ultimate buyer, making it a sale in the ordinary course of business. Thus, Barry realizes a $40,000 gain on the sale ($100,000 selling price - $60,000 basis), which is treated as ordinary income.

Question 16

If a partner has a more than 50 percent interest in a partnership, a capital gain resulting from the sale of property to the partnership will be taxed as ordinary income to the partner, provided the property is not a capital asset to the partnership.

Accepted Answer

If a partner has a more than 50 percent interest in a partnership, a capital gain resulting from the sale of property to the partnership will be taxed as ordinary income to the partner, provided the property is not a capital asset to the partnership.

Question 17

There is no general partner required in a limited liability company (LLC).

Accepted Answer

In an LLC, there is no requirement for a general partner, unlike in a limited partnership where at least one general partner is required.

Question 18

Owen owns 60 percent of the Big Time partnership. He sells to the partnership a machine for $70,000 that has a $45,000 basis. What would the taxable income be for Owen and what is the partnership's basis in the machine?

Accepted Answer

Owen's taxable income will be the difference between the sales price and his basis, so $70,000 - $45,000 = $25,000. 
The partnership's basis in the machine will be the purchase price, so $70,000.

Question 19

Losses on transactions between a partnership and its partners are always disallowed.

Accepted Answer

Losses on transactions between a partnership and its partners are not always disallowed. It depends on the specific circumstances of the transaction and the tax laws in force.

Question 20

Michael invests in Buxus Interests, a partnership. Michael's capital contribution to the partnership consists of $10,000 cash and equipment with an adjusted basis of $120,000 (fair market value of $150,000) subject to a nonrecourse liability of $60,000.
a.Calculate the amount that Michael is at-risk in the activity after making the above contribution?
b.If Michael's share of the partnership loss in the year after he makes the contribution is $150,000, how much of the loss may be deducted in that year (before considering the limitations on passive losses)? Assume the partnership had no other transactions.
c.If Michael has any nondeductible loss in part b, what may Michael do with the nondeductible loss?

Accepted Answer

The answer of Michael invests in Buxus Interests, a partnership....

Quiz 10: Partnership Taxation

Kitty is a 60 percent partner of Tabby Associates. Kitty sells a building to the partnership for $75,000. If the building had an adjusted basis to Kitty of $95,000, how much gain or loss does Kitty recognize on this transaction?

Losses are disallowed for transactions between a partnership and a partner who has a 50 percent interest in the partnership.

The "at-risk" rule does not apply to activities involving real estate.

The "at-risk" rule applies, with limited exceptions, to all taxable activities.

Which of the following is true about an LLC (Limited Liability Company) ?

Limited liability companies may operate in more than one state.

The "at-risk" rule acts to prevent tax shelters from generating large losses for their investors while exposing them to little personal risk.

Which of the following liabilities would be considered nonrecourse?

Which of the following is a disadvantage of an LLC?

If a partner has a more than 50 percent interest in a partnership, a capital gain resulting from the sale of property to the partnership will be taxed as ordinary income to the partner, provided the property is not a capital asset to the partnership.

There is no general partner required in a limited liability company (LLC).

Owen owns 60 percent of the Big Time partnership. He sells to the partnership a machine for $70,000 that has a $45,000 basis. What would the taxable income be for Owen and what is the partnership's basis in the machine?

Losses on transactions between a partnership and its partners are always disallowed.