Question 1

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

Provisions relating to ownership structures and allocation of income for S corporations are much more strict than those governing the partnership form.

Question 2

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

Limited partners are not generally engaged in management and want to limit losses in a manner similar to corporate shareholders. State limited partnership statutes provide this protection.

Question 3

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

The increase in a partner's share of liability is treated as a cash contribution.

Question 4

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

Accepted Answer

IRC Sec. 721 generally provides nonrecognition treatment for the exchange of property for a partnership interest.

Question 5

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's basis in her partnership interest will start with the $60,000 adjusted basis of the property transferred in and will be increased by one-half of the $70,000 mortgage now owed by the partnership, resulting in a preliminary basis of $95,000. The $95,000 preliminary basis will be reduced by the $70,000 reduction in Etta's individual liabilities. Her basis in her partnership is $25,000 which is not negative so she will not recognize any gain.

Question 6

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

Transfer of property to a partnership is a mere change in ownership form, but provision of services in exchange for a partnership interest will generally cause income recognition.

Question 7

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

The check-the box-regulations provide default treatment to disregarded status for an LLC with only one member. If that single member is an individual, the entity is treated as a sole proprietorship.

Question 8

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

For partnership interests acquired with solely cash or assets other than capital and Sec. 1231 assets, the holding period begins the day after the interest is acquired. For partnership interests acquired with Sec. 1231 and capital assets, the assets' holding period includes the holding period of the transferred assets.

Question 9

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 10

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 holding period for inventory contributed begins on the date the partnership interest is acquired.

Question 11

All the following are types of pass-through entities except

Accepted Answer

C) A C corporation is a taxable entity.

Question 12

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

Accepted Answer

An LLC is not legally a partnership even if it is taxed as one.

Question 13

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 14

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

Accepted Answer

The entities' income, deductions, gains, losses and credits are allocated to the owners, and the owners include these items on their own tax returns.

Question 15

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 basis is equal to the money contributed plus the adjusted basis of the property transferred to the partnership.

Question 16

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

Accepted Answer

D) In a general partnership, the partners are liable for all partnership debts.

Question 17

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

Accepted Answer

A) The primary reason for adoption of the LLP form is limited liability.

Question 18

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

Any reduction in a partner's share of liability is treated as a cash distribution.

Question 19

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

Accepted Answer

Partnerships must file an annual information return with the IRS.

Question 20

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

The check-the box-regulations provide default treatment to partnership status for an LLC with more than one member.

Quiz 17: Partnerships and S Corporations