Question 1

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 $76,000.

Accepted Answer

Emma's basis in her LLC interest is increased by her share of LLC items ($20,000 ordinary income + $2,000 tax-exempt interest income + $6,000 capital gain = $28,000) and decreased by any cash distributions ($12,000). Therefore, her ending basis is $60,000 + $28,000 - $12,000 = $76,000, as stated in the question.

Question 2

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 3

Items that are not required to be shown on the partners' Schedules K­1 include AMT adjustments and preferences and taxes paid to foreign countries, as AMT and the foreign tax credit are calculated by the partnership.

Accepted Answer

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

Question 4

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 5

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. Her share of partnership liabilities on the last day of the partnership year is $20,000. Ashley's outside basis for her partnership interest at the end of the year is $45,000.

Accepted Answer

Ashley's outside basis for her partnership interest at the end of the year should be calculated as follows:

Beginning basis: $40,000 
Add: Share of partnership income: $15,000 
Less: Cash distribution received: ($10,000) 
Ending basis before liabilities: $45,000

However, Ashley's share of partnership liabilities must also be taken into account. Since her share of partnership liabilities is $20,000, her outside basis would actually be:

Beginning basis: $40,000 
Add: Share of partnership income: $15,000 
Less: Cash distribution received: ($10,000) 
Add: Share of partnership liabilities: $20,000 
Ending basis after liabilities: $65,000

Therefore, the statement "Ashley's outside basis for her partnership interest at the end of the year is $45,000" is false.

Question 6

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

Harry's basis at the end of the year is $6,000 ($10,000 beginning basis - $8,000 loss + $4,000 distribution). Since he received a distribution in excess of his remaining basis ($4,000 > $6,000), he must reduce his basis to zero and recognize a gain on the excess distribution. Thus, Harry recognizes a $2,000 gain, but he cannot deduct the full $8,000 loss due to the basis limitation.

Question 7

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 the least aggregate deferral method to determine its taxable year-end.

Accepted Answer

The answer of ABC, LLC is equally-owned by three corporations....

Question 8

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 $50,000. The partnership immediately started using the land as a parking lot for its employees. Maria may recognize her $10,000 loss on the sale.

Accepted Answer

Since Maria sold the land to the partnership in which she owns a significant interest, this transaction would not qualify as a loss recognized for tax purposes. The partnership could not deduct the loss either. Therefore, Maria cannot recognize her $10,000 loss on the sale.

Question 9

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 are typically used to allocate debt among LLC members, meaning each member's share of the debt is based on their share of ownership in the company. However, if a member has personally guaranteed the debt, their share of the debt may be allocated differently.

Question 10

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 is calculated as follows: 
- Adjusted basis of property contributed ($90,000) 
+ Share of nonrecourse liability ($50,000) 
= Basis in partnership interest before adjustment ($140,000) 
Since this is less than Kate's contribution of $160,000, she must have recognized $20,000 of gain on the contribution. Therefore, her basis in the partnership interest is increased by the recognized gain of $20,000, resulting in a total basis of $60,000 ($40,000 initial basis + $20,000 recognized gain).

Question 11

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

Accepted Answer

The answer of Partners' capital accounts should be determined using...

Question 12

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 13

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 14

The amount of a partnership's income and loss from operating activities is combined with separately stated income and expenses to determine the partnership's equivalent of "taxable income." This amount is reconciled to book income on the partnership's Schedule M­1 or Schedule M­3.

Accepted Answer

This statement is true. The partnership's taxable income is determined by combining operating activities, separately stated items, and reconciling to book income on the Schedule M-1 or Schedule M-3.

Question 15

The sum of the partners' ending basis amounts on all Schedules K­1 equals the partners' ending capital account balance shown on the partnership's Schedule L.

Accepted Answer

The answer of The sum of the partners' ending basis...

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

Accepted Answer

Nicholas's guaranteed payment is reported as ordinary income, while his share of the partnership income results in an ordinary loss. This is consistent with the treatment of guaranteed payments and partnership income for tax purposes.

Question 17

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

Blaine's share of the gain would be 25% of $30,000, which is $7,500. However, since Blaine's basis in the property was only $40,000, he would also have to recognize a portion of the gain equal to the excess of the allocation over his basis, which is $15,000 ($7,500 allocated gain + $7,500 recognized gain).

Question 18

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 partnership must use the least aggregate deferral method, they must choose a year-end that is closest to each partner's individual year-end. January 31 is the closest to November 30 and December 31, so the partnership must use January 31 as its year-end.

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 in proportion to those ending capital account balances.

Accepted Answer

According to the substantial economic effect requirements, liquidating cash distributions must be allocated to partners according to their ending capital account balances. Since Tom and William are equal partners in the TW Partnership, the liquidating cash distribution must be allocated in proportion to their ending capital account balances of $50,000 and $30,000, respectively. Therefore, the statement is true.

Question 20

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

According to the Internal Revenue Code section 705(a)(1)(B), a partnership is required to provide any necessary information to its partners for the purpose of calculating any deductions that are not permitted at the partnership level. This includes deductions such as oil and gas depletion and the corporate dividends received deduction.

Quiz 10: Partnerships: Formation, Operation, and Basis

Items that are not required to be shown on the partners' Schedules K1 include AMT adjustments and preferences and taxes paid to foreign countries, as AMT and the foreign tax credit are calculated by the partnership.

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.

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 the least aggregate deferral method to determine its taxable year-end.

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.

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

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.

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.

The amount of a partnership's income and loss from operating activities is combined with separately stated income and expenses to determine the partnership's equivalent of "taxable income." This amount is reconciled to book income on the partnership's Schedule M1 or Schedule M3.

The sum of the partners' ending basis amounts on all Schedules K1 equals the partners' ending capital account balance shown on the partnership's Schedule L.

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.

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.

Quiz 10: Partnerships: Formation, Operation, and Basis

Items that are not required to be shown on the partners' Schedules K­1 include AMT adjustments and preferences and taxes paid to foreign countries, as AMT and the foreign tax credit are calculated by the partnership.

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.

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 the least aggregate deferral method to determine its taxable year-end.

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.

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

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.

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.

The amount of a partnership's income and loss from operating activities is combined with separately stated income and expenses to determine the partnership's equivalent of "taxable income." This amount is reconciled to book income on the partnership's Schedule M­1 or Schedule M­3.

The sum of the partners' ending basis amounts on all Schedules K­1 equals the partners' ending capital account balance shown on the partnership's Schedule L.

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.

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.

Items that are not required to be shown on the partners' Schedules K1 include AMT adjustments and preferences and taxes paid to foreign countries, as AMT and the foreign tax credit are calculated by the partnership.

The amount of a partnership's income and loss from operating activities is combined with separately stated income and expenses to determine the partnership's equivalent of "taxable income." This amount is reconciled to book income on the partnership's Schedule M1 or Schedule M3.

The sum of the partners' ending basis amounts on all Schedules K1 equals the partners' ending capital account balance shown on the partnership's Schedule L.