Question 1

Etta transfers property with an adjusted basis of $60,000 in exchange for a 50% partnership interest.The property is subject to a $70,000 mortgage which the partnership will assume.The partnership has no other liabilities.Etta will recognize a $10,000 gain on the exchange due to the negative basis limitation.

Accepted Answer

Etta will actually recognize a $20,000 loss on the exchange due to the negative basis limitation (adjusted basis of $60,000 minus the assumed mortgage of $70,000 equals negative $10,000).

Question 2

Because a partnership is a pass-through entity rather than a taxable entity,partnerships need not file tax returns.

Accepted Answer

Partnerships are required to file tax returns because they are pass-through entities, meaning that the profits and losses are passed through to the partners who report them on their individual tax returns.

Question 3

The income of a single member LLC is taxed to its owner under the sole proprietorship rules if no election to be taxed as a corporation is made.

Accepted Answer

This is correct. By default, a single-member LLC is treated as a disregarded entity for tax purposes and the income is reported on the owner's personal tax return under the sole proprietorship rules. However, the owner can choose to be taxed as a corporation if they prefer.

Question 4

All the following are types of pass-through entities except

Accepted Answer

C corporations are not pass-through entities as they are taxed at the corporate level and then again at the individual level when dividends are distributed to shareholders. LLPs, LLCs, and S corporations are all pass-through entities.

Question 5

A contribution of services to a partnership will result in recognition of compensation to the contributing partner equal to the fair market value of the services as well as an increase in partnership basis to the extent of the income recognized.

Accepted Answer

When a partner contributes services to a partnership, the partner is compensated with an amount equal to the fair market value of the services. This compensation is recognized as income by the partner, and it increases the partnership's basis to the extent of the recognized income.

Question 6

Charlie Company is a partnership with two owners,Charlie and Robert.Each owner has a $20,000 original basis in the entity having contributed cash to the partnership at its formation.In the first year of operations,the partnership reported $50,000 of income which is allocated to each partner equally.The partnership has no liabilities.If Charlie sells his partnership interest to Jody for $55,000,what is the amount of gain or loss on the transaction?

Accepted Answer

The answer of Charlie Company is a partnership with two...

Question 7

The partnership's assumption of a liability from a partner is treated as a cash distribution to the partner whose liability is assumed,which decreases his basis in the partnership.

Accepted Answer

When a partnership assumes a liability of a partner, it is treated as a cash distribution to that partner. This distribution decreases the partner's basis in the partnership.

Question 8

All of the following could file partnership tax returns except

Accepted Answer

D)A single member LLC is treated as a sole proprietorship,unless it elects to be treated as a corporation.

Question 9

An LLC that elects to be taxed like a partnership is also classified as a partnership for legal purposes.

Accepted Answer

The answer of An LLC that elects to be taxed...

Question 10

The transfer of property to a partnership in exchange for a partnership interest will generally be a nontaxable event.

Accepted Answer

This is a true statement. The transfer of property to a partnership in exchange for a partnership interest is generally classified as a nontaxable event because the transaction is treated as a contribution to the partnership in exchange for a share of partnership ownership, rather than a sale or exchange. However, there are certain circumstances where the transfer may result in taxable gain or loss, such as when the property being transferred has appreciated in value.

Question 11

Under the "check-the-box" Treasury Regulations,an LLC with more than one member is treated as a partnership unless the LLC affirmatively elects to be classified as a corporation.

Accepted Answer

This is correct according to the check-the-box Treasury Regulations.

Question 12

Limited liability of partners or members is an advantage of all the following with the exception of

Accepted Answer

In a general partnership, partners have unlimited personal liability for the debts and obligations of the partnership, which means they can be held personally responsible for any losses or lawsuits. Limited liability is an advantage shared by LLPs, LLCs, and limited partnerships, as it limits the personal liability of partners/members to their investment in the business.

Question 13

In a limited partnership,the limited partners are liable for partnership debts only to the extent of their investment in the partnership plus any amount they commit to contribute to the partnership if called upon.

Accepted Answer

This statement is true for a limited partnership. Limited partners are not personally liable for partnership debts beyond their investment in the partnership and any additional amount they agree to contribute if called upon. The general partner, however, may be personally liable for the partnership's debts.

Question 14

S corporations are a common form for small businesses because they offer more flexibility than partnerships in terms of ownership structure and allocation of income.

Accepted Answer

The answer of S corporations are a common form for...

Question 15

When capital or Sec.1231 assets are transferred to a partnership in exchange for a partnership interest qualifying under Sec.721,the holding period for the partnership interest includes the holding period of the contributed property.

Accepted Answer

According to Sec. 721, when a taxpayer contributes capital or Sec. 1231 assets to a partnership in exchange for a partnership interest, the holding period of the partnership interest includes the holding period of the contributed property. This means that if the contributed property had been held for more than one year, the partnership interest will also be treated as a long-term capital asset.

Question 16

If a partner contributes inventory to the partnership in exchange for a partnership interest,the holding period for the partnership interest begins on the date the inventory was acquired by the transferor partner.

Accepted Answer

The answer of If a partner contributes inventory to the...

Question 17

Many professional service partnerships have adopted the LLP form primarily because it

Accepted Answer

The LLP form limits legal liability for partners, which is often the primary reason for partnerships to adopt this structure. The other options are benefits of the LLP structure but are not the primary reason for its adoption.

Question 18

The basis of a partnership interest is equal to the sum of money contributed plus the FMV of the property transferred to the partnership.

Accepted Answer

The answer of The basis of a partnership interest is...

Question 19

If a partner contributes property to a partnership,and that property is subject to a liability,the noncontributing partners increase the basis of their partnership interests by their share of the partnership liabilities that were transferred to the partnership.

Accepted Answer

This is known as the "liability allocation rule" and is stipulated in Section 752 of the Internal Revenue Code. The noncontributing partners are allowed to increase their basis in the partnership by their share of the liabilities that were assumed by the partnership as a result of the property transfer, which helps them recognize any losses or deductions that may arise from the partnership's operations.

Question 20

Pass-through entities are taxed at only one level-the ownership level.

Accepted Answer

Pass-through entities such as partnerships, LLCs (limited liability companies), and S-corporations are not taxed at the entity level. Instead, the profits and losses of the business pass through to the individual owners' personal tax returns, and they are taxed at their individual tax rates. Therefore, pass-through entities are taxed at only one level-the ownership level.

Quiz 17: Partnerships and S Corporations