Question 1

Wallace and Pedersen have equal interests in the capital and profits of the partnership of Wallace and Pedersen.They are otherwise unrelated to each other.On August 1, 2018, 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 2009 at a cost of $10,000.What is Wallace's deductible loss for 2018 as a result of the sale of this stock?

Accepted Answer

Since this is a sale of stock, we need to use the tax rules for capital gains and losses. The sale resulted in a loss of $3,000 ($7,000 sale price - $10,000 cost basis). Since the stock was held for more than one year, this is a long-term capital loss. Wallace is allowed to deduct up to $3,000 of capital losses against ordinary income in the current tax year. Therefore, Wallace's deductible loss for 2018 is $3,000 as a result of the sale of this stock.

Question 2

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

Kitty does not recognize any gain or loss on the sale of the building to the partnership because she owns more than 50% of the partnership, making it a related party transaction under IRS rules.

Question 3

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 does indeed aim to prevent tax shelters from generating large losses for their investors while exposing them to little personal risk. This is achieved by limiting the amount of losses that investors can claim on their personal income tax returns to the amount they have invested in the tax shelter, thereby ensuring that they have some personal risk at stake.

Question 4

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

Since Owen owns 60 percent of the partnership, his share of the gain on the sale of the machine is calculated as follows:
Total gain = Sale price - Basis
Total gain = $70,000 - $45,000 = $25,000
Owen's share of the gain = 60% x $25,000 = $15,000
Therefore, Owen's taxable income would be $15,000.
The partnership's basis in the machine would be the purchase price of $70,000.

Question 5

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 thelimitations 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 thenondeductible loss?

Accepted Answer

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

Question 6

If a partner has a more than 50 percent interest in a partnership, a capital gain resulting from the sale of property by the partner 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

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

Question 7

Josh is a 30% partner in the Ghost Partnership.Ghost paid W-2 wages of $100,000 and also made a guaranteed payment to Josh of $20,000.The amount includable as wages in Josh's wage limitation on his QBI deduction is:

Accepted Answer

The answer of Josh is a 30% partner in the...

Question 8

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

Accepted Answer

The "at-risk" rule applies to all taxable activities, with only a few exceptions such as certain farming and real estate activities.

Question 9

Limited liability companies may operate in more than one state.

Accepted Answer

Limited liability companies (LLCs) are authorized to operate in multiple states. An LLC may choose to register as a foreign LLC in a state other than its home state to conduct business there. This allows LLCs to expand their business operations and potentially increase profits. However, the rules and regulations for foreign LLCs may vary from state to state, so it is important for companies to understand and comply with these rules.

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

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 12

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

Accepted Answer

Unlike a partnership, an LLC does not require a general partner. The owners, known as members, can manage the company themselves or hire a manager.

Question 13

A partner's receipt of guaranteed payments is a form of qualified business income.

Accepted Answer

Guaranteed payments to a partner are not considered qualified business income for the purposes of the qualified business income deduction under U.S. tax law. They are treated as payments for services or use of capital and are separate from the pass-through income that might qualify for the deduction.

Question 14

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

Accepted Answer

Losses on transactions between a partnership and its partners may be allowed or disallowed depending on the nature and purpose of the transaction.

Question 15

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 16

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 17

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 18

Which of the following liabilities would be considered nonrecourse?

Accepted Answer

Nonrecourse liabilities are those where the lender can only take the property securing the loan if the borrower defaults on the loan. In this case, the $20,000 real estate loan is an example of a nonrecourse liability. The bank is only able to take the real estate if the taxpayer stops making payments on the loan. The other options, a bank loan and credit card debt, are both examples of recourse liabilities, as the taxpayer is personally liable for the repayment of these debts.

Question 19

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 20

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

Barry's sale of the rental property to the partnership is not a transaction between unrelated parties. Since he owns a 50 percent interest in the partnership, the transaction is treated as a transaction between related parties. Therefore, the sale is not eligible for capital gain treatment, and the entire $40,000 gain on the sale is treated as ordinary income.

Quiz 10: Partnership Taxation