Question 1

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

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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

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Question 3

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

The substantial economic effect requirement does not require equal allocation of cash distributions between partners. The distribution must be allocated based on the partners' capital account balances, which in this case would result in Tom receiving a larger share of the distribution than William.

Question 4

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

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Question 5

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 determined by the total value of her contribution, which is the adjusted basis of the property she contributed plus any liabilities assumed by the partnership. Therefore, Kate's initial basis should be calculated as follows:

Adjusted basis of property contributed: $90,000
Nonrecourse liability assumed by partnership: $100,000
Total value of contribution: $190,000
Kate's percentage share: 50%
Kate's initial basis: $95,000

Since the question states that Kate's basis is only $40,000, it must be false.

Question 6

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

Nicholas's distributive share of partnership income is $6,666.67 (1/3 of $20,000). His guaranteed payment of $50,000 is treated as ordinary income. Therefore, his total income from the partnership is $56,666.67. Since his basis in the partnership is $80,000, he has an ordinary loss of $23,333.33 ($80,000 - $56,666.67).

Question 7

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 remaining basis after the $8,000 loss would be $2,000 ($10,000 - $8,000). Since his distribution of $4,000 exceeds his remaining basis, he would need to recognize a loss rather than a gain. Therefore, Harry would deduct the $8,000 loss and also recognize a $2,000 loss on the distribution.

Question 8

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 9

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, a partnership must adopt the tax year of the majority partners who own more than 50% of the capital and profits. In this case, since two out of the three corporations have a June 30 fiscal year-end, they are considered the majority partners, and therefore ABC, LLC will have a June 30 year-end.

Question 10

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

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Question 11

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

To calculate Ashley's basis in her partnership interest we start with her initial purchase price which is $40,000. We then add her share of partnership income which is $15,000 and subtract any cash distributions she received from the partnership, which is $10,000. This gives us a total of $45,000.

We then add her share of partnership liabilities which is $20,000. This brings her outside basis to $65,000 at the end of the year. Therefore, the statement is true.

Question 12

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 is true according to IRS regulations. Partners must have access to information necessary to calculate their individual deductions, which may not be permitted at the partnership level.

Question 13

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 income and loss from operating activities are combined with separately stated income and expenses to determine the partnership's net income (loss). This is then reconciled to book income on Schedule M-1 or Schedule M-3.

Question 14

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

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Question 15

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 partner's ending basis on Schedule K-1 and the ending capital account on Schedule L are calculated differently and may not necessarily equal each other. The basis includes liabilities and other adjustments, while the capital account reflects the partner's equity in the partnership.

Question 16

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 commonly used in limited liability companies to allocate debt among members. However, if a member has personally guaranteed the debt, they may be liable for the debt beyond the scope of the nonrecourse debt allocation rules.

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

Since Blaine contributed property with a basis of $40,000 and it was later sold for $70,000, there is a gain of $30,000 that will be allocated to the partners based on their percentage of ownership. Since Blaine owns a 25% interest in the partnership, $7,500 (25% of $30,000) of the gain will be allocated to him. This is less than the $15,000 gain stated in the question, but it is still consistent with the allocation of partnership income and gains based on ownership percentages.

Question 18

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

Emma's ending basis is calculated as: $60,000 (beginning basis) + $20,000 (ordinary income) + $2,000 (tax-exempt interest) + $6,000 (long-term capital gain) - $12,000 (cash distribution) = $76,000.

Question 19

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 least aggregate deferral method is the only method that can be used to align their income and expense recognition. This method involves deferring income and expenses from the later fiscal year-ends so that all partners have the same year-end. Therefore, the statement is true.

Question 20

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...

Quiz 21: Partnerships