Question 1

If a partnership allocates losses to the partners, the partners must first apply the passive loss limitations, then the basis limitation, and finally the at-risk limitations. If all three hurdles are met, the partner may deduct the loss.

Accepted Answer

The answer of If a partnership allocates losses to the...

Question 2

Tom and William are equal partners in the TW Partnership. Just before TW liquidated, Tom's capital account balance was $50,000 and William's capital account balance was $30,000. To meet the substantial economic effect requirements, any liquidating cash distribution must be allocated in proportion to those ending capital account balances.

Accepted Answer

The substantial economic effect requirements require that any liquidating cash distribution be allocated in proportion to the ending capital account balances of the partners. In this case, Tom's capital account balance was $50,000 and William's capital account balance was $30,000, so any distribution must be allocated in a 5:3 ratio, which reflects their ownership percentages as equal partners.

Question 3

Emma's basis in her BBDE LLC interest is $60,000 at the beginning of the tax year. Her allocable share of LLC items are as follows: $20,000 of ordinary income, $2,000 tax-exempt interest income, and a $6,000 long-term capital gain. In addition, the LLC distributed $12,000 of cash to Emma during the year. Assuming the LLC had no liabilities at the beginning or the end of the year, Emma's ending basis in her LLC interest is $76,000.

Accepted Answer

Emma's ending basis in her LLC interest is calculated as follows: 
Beginning basis + allocable share of income (ordinary income + tax-exempt interest income + long-term capital gain) - allocable share of losses - cash distribution = Ending basis 
$60,000 + ($20,000 + $2,000 + $6,000) - 0 - $12,000 = $76,000 
Therefore, the statement is true.

Question 4

A partnership must provide any information to the partners that the partners would need to calculate deductions not permitted at the partnership level, such as for oil and gas depletion or the corporate dividends received deduction.

Accepted Answer

According to the IRS, partnerships must provide any necessary information to their partners in order for them to calculate any deductions that are not permitted at the partnership level, such as those related to oil and gas depletion or the corporate dividends received deduction. This is stated in IRS Publication 541: Partnerships, under the section on "Allocations to partners".

Question 5

Julie and Kate form an equal partnership during the current year. Julie contributes cash of $160,000, and Kate contributes property (adjusted basis of $90,000, fair market value of $260,000) subject to a nonrecourse liability of $100,000. As a result of these transactions, Kate has a basis in her partnership interest of $40,000.

Accepted Answer

Kate's basis in her partnership interest is determined by the total value of her contribution, which is the adjusted basis of the property she contributed plus any liabilities assumed by the partnership. Therefore, Kate's initial basis should be calculated as follows:

Adjusted basis of property contributed: $90,000
Nonrecourse liability assumed by partnership: $100,000
Total value of contribution: $190,000
Kate's percentage share: 50%
Kate's initial basis: $95,000

Since the question states that Kate's basis is only $40,000, it must be false.

Question 6

Harry's basis in his partnership interest was $10,000 at the beginning of the tax year. For the year, his share of the partnership's loss was $8,000, and he also received a distribution of $4,000. Harry can deduct an $8,000 loss, and he recognizes a gain of $2,000 on the distribution of cash in excess of his remaining basis.

Accepted Answer

Harry's basis at the end of the year was only $6,000 ($10,000 - $8,000 loss + $4,000 distribution). Since his distribution of $4,000 exceeds his remaining basis of $6,000, he does not recognize any gain on the distribution. He can still deduct the full $8,000 loss.

Question 7

Maria owns a 60% interest in the KLM Partnership. Four years ago her father gave her a parcel of land. The gift basis of the land to Maria is $60,000. In the current year, Maria had still not figured out how to use the land for her own personal or business use; consequently, she sold the land to the partnership for $50,000. The partnership immediately started using the land as a parking lot for its employees. Maria may recognize her $10,000 loss on the sale.

Accepted Answer

Since Maria sold the land to a partnership in which she has a majority interest, this is considered a related party transaction. When selling property to a related party, the transaction is subject to the related party rules of IRC section 267. Under these rules, any loss on the sale of property to a related party is disallowed. Therefore, Maria cannot recognize her $10,000 loss on the sale.

Question 8

Partners' capital accounts should be determined using the same method on Form 1065 Schedule L, Form 1065
Schedule M-2, and the Schedules K-1 prepared for the partners.

Accepted Answer

The answer of Partners' capital accounts should be determined using...

Question 9

Blaine contributes property valued at $50,000 (basis of $40,000) in exchange for a 25% interest in the BIKE Partnership. If the property is later sold for $70,000, gain of $15,000 will be allocated to Blaine.

Accepted Answer

Since Blaine contributed property with a basis of $40,000 and the property was later sold for $70,000, there is a gain of $30,000. Since Blaine has a 25% interest in the partnership, $7,500 of the gain ($30,000 x 25%) will be allocated to him. However, since the gain exceeds the basis of the contributed property ($30,000 gain > $10,000 basis), $7,500 of the gain will be treated as recaptured depreciation and the remaining $7,500 will be treated as long-term capital gain. Therefore, $7,500 will be allocated to Blaine as gain.

Question 10

The sum of the partners' ending basis amounts on all Schedules K­1 equals the partners' ending capital account balance shown on the partnership's Schedule L.

Accepted Answer

The answer of The sum of the partners' ending basis...

Question 11

The JPM Partnership is a US-based manufacturing company. JPM calculates the domestic production activities
deduction (§ 199) and deducts that amount on its Form 1065.

Accepted Answer

The answer of The JPM Partnership is a US-based manufacturing...

Question 12

Debt of a limited liability company is allocated among LLC members using the nonrecourse debt allocation rules unless an LLC member has personally guaranteed the debt.

Accepted Answer

This is because nonrecourse debt allocation rules allocate the debt among LLC members based on their ownership percentage in the company, and does not hold any member personally liable for the debt. However, if a member has personally guaranteed the debt, then they may be responsible for the repayment of that portion of the debt.

Question 13

The amount of a partnership's income and loss from operating activities is combined with separately stated income and expenses to determine the partnership's equivalent of "taxable income." This amount is reconciled to book income on the partnership's Schedule M­1 or Schedule M­3.

Accepted Answer

This statement is true. The partnership's taxable income is a combination of operational income and loss, as well as separately stated income and expenses. It is then reconciled with book income on Schedule M-1 or Schedule M-3.

Question 14

ABC, LLC is equally-owned by three corporations. Two corporations have June 30 fiscal year ends, the third is a calendar-year taxpayer. ABC will use the least aggregate deferral method to determine its taxable year-end.

Accepted Answer

The answer of ABC, LLC is equally-owned by three corporations....

Question 15

William is a general partner in the WST partnership. During the current year, he receives a guaranteed payment of
$10,000 for services he provides to the partnership, and his distributive share of partnership income is $30,000. William is required to pay self-employment tax on the $10,000 guaranteed payment, but not on his distributive share of partnership income.

Accepted Answer

Both the $10,000 guaranteed payment for services and his $30,000 distributive share of partnership income are subject to self-employment tax, as both are considered earnings from self-employment for a general partner.

Question 16

A partnership's allocations of income and deductions to the partners are required to be proportionate to the partners' percentage ownership of partnership capital in order to meet the substantial economic effect tests.

Accepted Answer

The answer of A partnership's allocations of income and deductions...

Question 17

Ashley purchased her partnership interest from Lindsey 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. Her share of partnership liabilities on the last day of the partnership year is $20,000. Ashley's outside basis for her partnership interest at the end of the year is $45,000.

Accepted Answer

The answer of Ashley purchased her partnership interest from Lindsey...

Question 18

Items that are not required to be shown on the partners' Schedules K­1 include AMT adjustments and preferences
and taxes paid to foreign countries, as AMT and the foreign tax credit are calculated by the partnership.

Accepted Answer

The answer of Items that are not required to be...

Question 19

PaulCo, DavidCo, and Sean form a partnership with cash contributions of $80,000, $50,000 and $30,000, respectively, and agree to share profits and losses in the ratio of their original cash contributions. PaulCo uses a January 31 fiscal year-end, while DavidCo and Sean use a November 30 and December 31 year-end, respectively. The partnership must use the least aggregate deferral method to determine its year end.

Accepted Answer

The least aggregate deferral method involves selecting a year-end that forces the least amount of deferral for all partners. Since each partner has a different year-end, the partnership must select a year-end that results in the least amount of deferral for all partners. This is typically the year-end of the partner with the latest year-end, which is Sean in this case. Therefore, the partnership must use a December 31 year-end.

Question 20

Nicholas, a 1/3 partner with a basis in the interest of $80,000 at the beginning of the year, received a guaranteed payment in the current year of $50,000. Partnership income before consideration of the guaranteed payment was $20,000. Nicholas reports a $10,000 ordinary loss from partnership operations, and the $50,000 guaranteed payment as ordinary income.

Accepted Answer

Nicholas is considered a partner in the partnership and is therefore subject to the partnership's profits and losses. His basis in the partnership interest is $80,000, which means he has invested $80,000 in the partnership. The partnership's income before the guaranteed payment was $20,000, which means that the total income was divided among the partners. Since Nicholas is a 1/3 partner, his share of the income would be $6,666.67. However, since he received a guaranteed payment of $50,000, his total income from the partnership would be $50,000 + $6,666.67 = $56,666.67.

Since his share of the partnership income was less than the guaranteed payment, he would report a $10,000 ordinary loss from partnership operations, and the $50,000 guaranteed payment as ordinary income on his tax return.

Quiz 21: Partnerships

If a partnership allocates losses to the partners, the partners must first apply the passive loss limitations, then the basis limitation, and finally the at-risk limitations. If all three hurdles are met, the partner may deduct the loss.

A partnership must provide any information to the partners that the partners would need to calculate deductions not permitted at the partnership level, such as for oil and gas depletion or the corporate dividends received deduction.

Partners' capital accounts should be determined using the same method on Form 1065 Schedule L, Form 1065 Schedule M-2, and the Schedules K-1 prepared for the partners.

Blaine contributes property valued at $50,000 (basis of $40,000) in exchange for a 25% interest in the BIKE Partnership. If the property is later sold for $70,000, gain of $15,000 will be allocated to Blaine.

The sum of the partners' ending basis amounts on all Schedules K1 equals the partners' ending capital account balance shown on the partnership's Schedule L.

The JPM Partnership is a US-based manufacturing company. JPM calculates the domestic production activities deduction (§ 199) and deducts that amount on its Form 1065.

Debt of a limited liability company is allocated among LLC members using the nonrecourse debt allocation rules unless an LLC member has personally guaranteed the debt.

The amount of a partnership's income and loss from operating activities is combined with separately stated income and expenses to determine the partnership's equivalent of "taxable income." This amount is reconciled to book income on the partnership's Schedule M1 or Schedule M3.

ABC, LLC is equally-owned by three corporations. Two corporations have June 30 fiscal year ends, the third is a calendar-year taxpayer. ABC will use the least aggregate deferral method to determine its taxable year-end.

A partnership's allocations of income and deductions to the partners are required to be proportionate to the partners' percentage ownership of partnership capital in order to meet the substantial economic effect tests.

Items that are not required to be shown on the partners' Schedules K1 include AMT adjustments and preferences and taxes paid to foreign countries, as AMT and the foreign tax credit are calculated by the partnership.

Quiz 21: Partnerships

If a partnership allocates losses to the partners, the partners must first apply the passive loss limitations, then the basis limitation, and finally the at-risk limitations. If all three hurdles are met, the partner may deduct the loss.

A partnership must provide any information to the partners that the partners would need to calculate deductions not permitted at the partnership level, such as for oil and gas depletion or the corporate dividends received deduction.

Partners' capital accounts should be determined using the same method on Form 1065 Schedule L, Form 1065 Schedule M-2, and the Schedules K-1 prepared for the partners.

Blaine contributes property valued at $50,000 (basis of $40,000) in exchange for a 25% interest in the BIKE Partnership. If the property is later sold for $70,000, gain of $15,000 will be allocated to Blaine.

The sum of the partners' ending basis amounts on all Schedules K­1 equals the partners' ending capital account balance shown on the partnership's Schedule L.

The JPM Partnership is a US-based manufacturing company. JPM calculates the domestic production activities deduction (§ 199) and deducts that amount on its Form 1065.

Debt of a limited liability company is allocated among LLC members using the nonrecourse debt allocation rules unless an LLC member has personally guaranteed the debt.

The amount of a partnership's income and loss from operating activities is combined with separately stated income and expenses to determine the partnership's equivalent of "taxable income." This amount is reconciled to book income on the partnership's Schedule M­1 or Schedule M­3.

ABC, LLC is equally-owned by three corporations. Two corporations have June 30 fiscal year ends, the third is a calendar-year taxpayer. ABC will use the least aggregate deferral method to determine its taxable year-end.

A partnership's allocations of income and deductions to the partners are required to be proportionate to the partners' percentage ownership of partnership capital in order to meet the substantial economic effect tests.

Items that are not required to be shown on the partners' Schedules K­1 include AMT adjustments and preferences and taxes paid to foreign countries, as AMT and the foreign tax credit are calculated by the partnership.

The sum of the partners' ending basis amounts on all Schedules K1 equals the partners' ending capital account balance shown on the partnership's Schedule L.

The amount of a partnership's income and loss from operating activities is combined with separately stated income and expenses to determine the partnership's equivalent of "taxable income." This amount is reconciled to book income on the partnership's Schedule M1 or Schedule M3.

Items that are not required to be shown on the partners' Schedules K1 include AMT adjustments and preferences and taxes paid to foreign countries, as AMT and the foreign tax credit are calculated by the partnership.