Question 1

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 from a partner, it is treated as a cash distribution to the partner whose liability is assumed. This results in a decrease in the partner's basis in the partnership.

Question 2

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 "nonrecourse liabilities" and is allowed under the tax law for purposes of determining each partner's basis in the partnership.

Question 3

When property is contributed to a partnership,the partnership's basis in the property is the same as that of the transferor partner even if gain is recognized on the transfer.

Accepted Answer

According to the tax laws, when a partner contributes property to a partnership, the partnership's basis in the property is the same as that of the transferor partner. This rule applies even if the transferor partner recognizes gain on the transfer.

Question 4

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 fair market value of the services is recognized as compensation to the partner. This compensation is taxed as ordinary income to the partner. In addition, the partnership basis is increased to the extent of the income recognized, which can result in tax benefits for the partnership.

Question 5

If a partner contributes depreciable property to a partnership in exchange for a partnership interest,the depreciation recapture potential of the contributed assets does not carry over to the partnership.

Accepted Answer

The depreciation recapture potential of the contributed assets does carry over to the partnership. When the partnership sells the property, any depreciation recapture will be subject to ordinary income tax rates and allocated to the contributing partner based on their share of the partnership.

Question 6

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, but the partnership itself is not subject to income tax. Instead, the profits and losses flow through to the partners, who report the partnership income on their individual tax returns.

Question 7

The primary purpose of a partnership tax return is to determine the income,deduction,loss and credit items of the partnership and thus the amounts that should be reported by the individual partners.

Accepted Answer

The statement is true. The main purpose of a partnership tax return is to determine the income, deduction, loss and credit items of the partnership and allocate them to the individual partners so that they can report their share of partnership income (or losses) on their personal tax returns.

Question 8

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 statement is correct, as per the "check-the-box" Treasury Regulations issued by the IRS.

Question 9

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

Accepted Answer

Pass-through entities such as partnerships, S corporations, and limited liability companies (LLCs) are not taxed at the entity level. Instead, their income flows through to the owners who report it on their individual tax returns and pay taxes at their individual tax rates. Therefore, they are taxed at only one level - the ownership level.

Question 10

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 11

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 12

A partnership sells equipment and recognizes depreciation recapture under Sec.1245.In reporting its results for the year,the partnership will separately state the Sec.1245 depreciation recapture.

Accepted Answer

The answer of A partnership sells equipment and recognizes depreciation...

Question 13

The transfer of property to a partnership in exchange for a partnership interest will generally not be a taxable event.

Accepted Answer

The transfer of property to a partnership in exchange for a partnership interest is typically considered a tax-free contribution of capital. This means that no immediate tax liability is incurred as a result of the transfer. However, the partner may be subject to tax on their share of the partnership's income in future years.

Question 14

All costs of organizing a partnership can be deducted in the year in which the partnership begins business.

Accepted Answer

While some costs may be immediately deductible, others may need to be capitalized and amortized over time. It depends on the nature and timing of the expenses.

Question 15

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 as per the default tax treatment for a single-member LLC. The IRS considers the LLC to be a "disregarded entity" for tax purposes and thus the profits and losses of the LLC are passed through to the owner's personal tax return under sole proprietorship rules. However, the owner can choose to file an election with the IRS to be taxed as a corporation if they prefer.

Question 16

The basis of a partner's interest in a partnership is adjusted to reflect each partner's share of income and deduction items only if a distribution is made to the partners.

Accepted Answer

The basis of a partner's interest in a partnership is adjusted to reflect each partner's share of income and deduction items regardless of whether a distribution is made to the partners. This adjustment is made annually and is necessary for the partner to accurately calculate their share of partnership income, gain, loss, deduction, and credit.

Question 17

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 is the basic definition of limited partnership. Limited partners have limited liability, meaning they are not personally responsible for the partnership's debts and other obligations beyond the amount of their investment and any promises they made to contribute additional funds to the partnership.

Question 18

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 19

Although a partner's distributive share of income,deductions,losses,and credits is generally determined by partnership agreement,special allocation provisions restrict the partners' freedom to shift some tax benefits among partners.

Accepted Answer

This statement is true. Special allocation provisions are designed to prevent partners from unfairly shifting tax benefits among themselves, and are subject to certain rules and restrictions set forth in the tax code.

Question 20

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

The holding period of the contributed property is tacked on to the holding period of the partnership interest received in exchange under Sec.721.

Quiz 17: Partnerships and S Corporations