Question 1

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

Nonrecourse debt allocation rules dictate that each LLC member is allocated a portion of the company's overall debt based on their share of ownership in the company. However, if a member has personally guaranteed a specific portion of the debt, that portion will be allocated to them personally rather than through the nonrecourse rules.

Question 2

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 3

Items that are not required to be passed through separately from a partnership to the partners include AMT adjustments and preferences and taxes paid to foreign countries.

Accepted Answer

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

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

This statement is true. Partnerships are required to provide the necessary information to their partners to calculate deductions that are not permitted at the partnership level, such as oil and gas depletion or the corporate dividends received deduction. This is because these deductions are claimed at the individual partner's level, not at the partnership level.

Question 5

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 $88,000.

Accepted Answer

The answer of Emma's basis in her BBDE LLC interest...

Question 6

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.If her share of partnership liabilities on the last day of the partnership year is $20,000, her outside basis for her partnership interest at the end of the year is $65,000.

Accepted Answer

The outside basis formula is:
Beginning Basis + Share of Income/Loss + Share of Liabilities - Distributions = Ending Basis
So Ashley's beginning basis is $40,000, her share of income is $15,000, her share of liabilities is $20,000, and her distributions are $10,000.
$40,000 + $15,000 + $20,000 - $10,000 = $65,000. Therefore, her outside basis at the end of the year is $65,000.

Question 7

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

Since the partners have different fiscal year-ends, the partnership has to use a method to adjust for the difference. The least aggregate deferral method is the most commonly used method for such situations, which means the partnership has to choose the fiscal year-end that results in the least amount of deferral of income or expenses. In this case, since PaulCo has a January 31 year-end, it makes the most sense for the partnership to use that year-end to minimize the amount of deferral. Therefore, the statement is true.

Question 8

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

When a partner contributes property to a partnership, their basis in the partnership is equal to the adjusted basis of the property contributed. In this case, Blaine's basis in his 25% interest in the partnership would be $10,000 (25% of the $40,000 adjusted basis of the property). When the property is sold for $70,000, there is a gain of $30,000 ($70,000 - $40,000), which is allocated to the partners based on their percentage interests. Blaine's 25% share of the gain would be $7,500 ($30,000 x 25%), which is less than his $10,000 basis in the partnership, resulting in a gain of $2,500 ($7,500 - $5,000).

Question 9

The sum of the partner's ending basis on Schedule K-1 equals the total of the partner's ending capital account on Schedule L.

Accepted Answer

The answer of The sum of the partner's ending basis...

Question 10

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 11

The amount of a partnership's income and loss from operating activities is combined with separately stated income and expenses in determining the partnership's net income (loss).This amount is reconciled to book income on the partnership's Schedule M-1 or Schedule M-3.

Accepted Answer

This statement is true. The partnership's net income (loss) is determined by combining operating activities with separately stated income and expenses, and this is reconciled to book income on the partnership's Schedule M-1 or Schedule M-3.

Question 12

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

Accepted Answer

The answer of On Form 1065, partners' capital accounts should...

Question 13

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 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 a June 30 year end under the majority partners' tax year rule because more than 50% of the partnership's capital and profits is owned by partners with the same taxable year.

Accepted Answer

According to the majority partners' tax year rule, if partners owning more than 50% of the capital and profits of the partnership have the same taxable year, the partnership will use that taxable year. In this scenario, since two of the three partners have a June 30 fiscal year end, which is the majority, ABC, LLC will use a June 30 year end.

Question 15

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 16

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 must report a $10,000 ordinary loss from partnership operations, and the $50,000 guaranteed payment as ordinary income.

Accepted Answer

The answer of Nicholas, a 1/3 partner with a basis...

Question 17

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 calculated as follows:
Adjusted basis of property contributed: $90,000
+ Portion of nonrecourse liability assumed: ($100,000 / 2) = $50,000
= Total basis in partnership interest: $140,000
Therefore, the statement that Kate has a basis of only $40,000 in her partnership interest is false.

Question 18

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

The distribution of $4,000 reduces Harry's basis to $6,000 ($10,000 - $4,000 = $6,000). Since his share of loss is greater than his remaining basis, he cannot deduct the full $8,000 loss. Harry can only deduct up to his remaining basis, which is $6,000. Therefore, he cannot recognize a gain on the distribution.

Question 19

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 equally between the partners.

Accepted Answer

If any liquidating cash distribution is allocated equally between the partners, it would not reflect the actual balance in their capital accounts. To meet the substantial economic effect requirements, liquidating distributions must be allocated based on the partners' capital account balances. In this case, Tom would receive 5/8 (50,000/80,000) of the liquidating distribution and William would receive 3/8 (30,000/80,000) of the distribution.

Question 20

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 $75,000.The partnership immediately started using the land as a parking lot for its employees.Maria's recognized gain of $15,000 on the sale is capital-not ordinary.

Accepted Answer

The answer of Maria owns a 60% interest in the...

Quiz 21: Partnerships