Question 1

On a partnership's Form 1065,which of the following statements is always true?

Accepted Answer

The answer of On a partnership's Form 1065,which of the...

Question 2

Kevin,Chuck,and Greg contributed assets to form the equal KCG Partnership.Kevin contributed cash of $50,000 and land with a basis of $80,000 (fair market value of $50,000).Chuck contributed cash of $30,000 and land with a basis of $40,000 (fair market value of $70,000).Greg contributed cash of $60,000 and a fully depreciated property ($0 basis)valued at $40,000.Which of the following tax treatments is not correct?

Accepted Answer

Chuck's basis in his partnership interest should be $110,000 (($40,000 FMV of land + $30,000 cash contributed) - ($40,000 basis of land)). Therefore, option B is not correct. 
Option A is correct, as Kevin's basis in his partnership interest is $130,000 (($50,000 cash contributed) + ($50,000 FMV of land) + ($80,000 basis of land)). 
Option C is correct, as Greg's basis in his partnership interest is $100,000 (($60,000 cash contributed) + ($40,000 FMV of property)). 
Option D is correct, as the partnership's basis is equal to the basis of the assets contributed.

Question 3

Cheryl and Nina formed a partnership.Cheryl received a 40% interest in partnership capital and profits in exchange for land with a basis of $60,000 and a fair market value of $80,000.Nina received a 60% interest in partnership capital and profits in exchange for $120,000 of cash.Three years after the contribution date,the land contributed by Cheryl is sold by the partnership to a third party for $90,000.How much taxable gain will Cheryl recognize from the sale?

Accepted Answer

Cheryl's initial basis in the partnership is $60,000 (the basis of the land she contributed). The partnership sells the land for $90,000, resulting in a gain of $30,000 ($90,000 - $60,000). Cheryl's share of the gain is 40% of $30,000, which is $12,000. However, Cheryl's taxable gain is the entire $30,000 because she contributed the land, and under the partnership rules, the gain is allocated to the contributing partner to the extent of the pre-contribution gain.

Question 4

Tina and Randy formed the TR Partnership four years ago.Because they decided the company needed some expertise in multimedia presentations,they offered Susan a 1/3 interest in partnership capital and profits if she would come to work for the partnership.On July 1 of the current year,the unrestricted partnership interest (fair market value of $25,000)was transferred to Susan.How should Susan treat the receipt of the partnership interest in the current year?

Accepted Answer

Susan should treat the receipt of the partnership interest as $25,000 ordinary income because it is compensation for her services to the partnership.

Question 5

A partnership has accounts receivable with a basis of $0 and a fair market value of $10,000 and depreciation recapture potential of $15,000.All other assets of the partnership are either cash,capital assets,or § 1231 assets.If a purchaser acquires a 30% interest in the partnership from another partner,the selling partner will be required to recognize ordinary income of $7,500.

Accepted Answer

According to the information given, the accounts receivable have a fair market value of $10,000 and depreciation recapture potential of $15,000, which means that the selling partner will have to recognize ordinary income of $7,500 when a 30% interest is sold. Therefore, the statement is true.

Question 6

Surina sells her 25% partnership interest to Katie for $50,000 on July 1 of the current tax year.Surina's basis in her partnership interest at the beginning of the year was $40,000,including a $15,000 share of partnership liabilities.The partnership's income for the entire year was $100,000,and Surina's share of partnership debt was $10,000 as of the date she sold the partnership interest.Assume the partnership has no hot assets and that its income is earned evenly throughout the year.Surina recognizes a gain of $2,500 on the sale.

Accepted Answer

To calculate Surina's gain or loss on the sale of her partnership interest, we need to determine the amount realized and the adjusted basis.

Amount realized = $50,000
Adjusted basis = $40,000 + ($15,000 - $10,000) = $45,000

Therefore, Surina's gain is $50,000 - $45,000 = $5,000. Since Surina recognizes a gain of $2,500 on the sale, the answer is A: True.

Question 7

In which of the following independent situations would the transaction most likely be characterized as a disguised sale?

Accepted Answer

The answer of In which of the following independent situations...

Question 8

George's basis in his partnership interest is $100,000,including his share of partnership debt.Sarah buys George's partnership interest for $60,000 cash and she assumes George's $60,000 share of the partnership's debt.If the partnership owns no hot assets,George will recognize a capital loss of $40,000.

Accepted Answer

The answer of George's basis in his partnership interest is...

Question 9

Which of the following is a correct definition of a concept related to partnership taxation?

Accepted Answer

The answer of Which of the following is a correct...

Question 10

When property is contributed to a partnership for a capital and profits interest,the holding period of the contributing partner's interest:

Accepted Answer

The holding period of the contributing partner's interest may include the holding period of the contributed property. This is in accordance with the tax rules that allow partners to carry over the holding period of contributed property to their partnership interest. As a result, the partner can qualify for long-term capital gains treatment on their share of the partnership's income.

Question 11

A limited liability company generally provides limited liability for those owners that are not active in the management of the LLC but requires owner-managers of the LLC to have unlimited personal liability for LLC debts.

Accepted Answer

This statement is false. Owners of an LLC, whether active in management or not, generally have limited liability for LLC debts. This is one of the primary benefits of forming an LLC as a business entity.

Question 12

Which of the following partnership owners is personally liable for the entity's debts to general creditors?

Accepted Answer

In a general partnership, all general partners have unlimited personal liability for the partnership's debts to general creditors.

B) Incorrect: A limited partner in a limited partnership only has limited personal liability, meaning they are not personally liable for the partnership's debts beyond their investment.

C) Incorrect: A member of a limited liability company (LLC) has limited personal liability, meaning they are not personally liable for the LLC's debts beyond their investment.

D) Incorrect: A partner in a limited liability limited partnership (LLLP) has limited personal liability, meaning they are not personally liable for the LLLP's debts beyond their investment.

E) Incorrect: Some partnership owners, such as general partners, can be personally liable for entity debts to general creditors.

Question 13

Which of the following is an election or calculation made by the partner rather than the partnership?

Accepted Answer

The § 199 deduction is a deduction taken by individual partners on their individual tax returns, not by the partnership itself. Therefore, the election of the amount of the deduction is made by the partner rather than the partnership.

Question 14

MEM Partners was formed during the current tax year.It incurred $20,000 of organizational expenses,$100,000 of startup expenses,and $200,000 of syndication costs.Which of the following statements is correct regarding these payments?

Accepted Answer

The answer of MEM Partners was formed during the current...

Question 15

Partner Tom transferred property (basis of $20,000;fair market value of $50,000)to the TUV Partnership in exchange for a partnership interest.At a later date,when Tom's outside basis for his partnership interest was $70,000,Tom received a $50,000 cash distribution from the partnership.Which one of the following statements is not true?

Accepted Answer

If the transaction is treated as a disguised sale, Tom's basis in the partnership interest will be the same as his basis in the property transferred, which is $20,000. Therefore, statement B is true. Statement A is also true because a cash distribution shortly after a property contribution could trigger a presumption that the transaction was a disguised sale. Statement C is true because if Tom would have made the property contribution regardless of any anticipated distributions, the IRS is less likely to challenge the transaction as a disguised sale. Statement D is false because if the transaction is treated as a disguised sale, the partnership's basis in the property would remain at $20,000, which is Tom's basis in the partnership interest.

Question 16

A partnership will take a carryover basis in an asset it acquires when:

Accepted Answer

According to § 721(a), when a partner contributes property to a partnership in exchange for a partnership interest, the partnership takes a carryover basis in the contributed property. Therefore, when the partnership acquires the asset from a partner as a contribution to partnership capital under § 721(a), it will take a carryover basis in the asset. This is different from the other choices as they do not involve a contribution of property to the partnership.

Question 17

Nick sells his 25% interest in the LMNO Partnership to new partner Nancy for $50,000.The partnership's assets consist of cash ($100,000),land (basis of $60,000;fair market value of $40,000),and inventory (basis of $50,000;fair market value of $60,000).Nick's basis in his partnership interest was $52,500.On the sale,Nick will recognize ordinary income of $2,500 and a capital loss of $5,000.

Accepted Answer

Nick's basis in his partnership interest was $52,500, but he only received $50,000 from the sale. Therefore, he will recognize a capital loss of $2,500. Additionally, he will recognize ordinary income of $2,500, which is the difference between his basis and the amount he received for the sale. The sale of a partnership interest is generally treated as a sale of a capital asset, so the capital loss of $5,000 is also correct.

Question 18

Which one of the following statements regarding partnership taxation is always correct?

Accepted Answer

Partnership taxation is based on the idea that each partner includes their share of the partnership's income or loss on their individual tax return. The partnership itself does not pay tax. The partnership's taxable income or loss is divided among the partners according to their profit-sharing ratio, which may differ from the capital-sharing ratio. The IRS requires that partnerships file an annual tax return on Form 1065 to report its income, deductions, gains, and losses. Partnerships must also provide each partner with a Schedule K-1, which reports each partner's share of the partnership's income, deductions, and credits. The income items that may be separately stated on a Schedule K-1 include items like interest income, dividend income, capital gains or losses, and charitable contributions.

Question 19

In a proportionate liquidating distribution in which the partnership is also liquidated,Ralph received cash of $30,000,accounts receivable (basis of $0 and fair market value of $20,000),and a desk (basis of $0 and fair market value of $1,000).Immediately before the distribution,Ralph's basis in the partnership interest was $40,000.Ralph realizes and recognizes a loss of $10,000,and his basis is $0 in both the accounts receivable and the desk.

Accepted Answer

The answer of In a proportionate liquidating distribution in which...

Question 20

On January 1 of the current year,Sarah and Bart form an equal partnership.Sarah makes a cash contribution of $60,000 and a property contribution (adjusted basis of $160,000;fair market value of $140,000)in exchange for her interest in the partnership.Bart contributes property (adjusted basis of $120,000;fair market value of $200,000)in exchange for his partnership interest.Which of the following statements is true concerning the income tax results of this partnership formation?

Accepted Answer

Sarah's tax basis in her partnership interest will be the sum of the cash and property contribution, or $60,000 + $160,000 = $220,000. The partnership's adjusted basis in the property contributed by Sarah will be her adjusted basis, or $160,000. Bart's tax basis in his partnership interest will be the fair market value of the property he contributed, or $200,000. He will not recognize any gain or loss on the transfer because it was made in exchange for a partnership interest. Therefore, statement D is true, while statements A, B, C, and E are false.

Quiz 21: Partnerships