Question 1

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 2

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 but valued at $50,000, this establishes a built-in gain of $10,000. When the property is later sold for $70,000, the built-in gain will be realized and allocated to Blaine, resulting in a gain of $15,000 ($10,000 built-in gain + $5,000 appreciation).

Question 3

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 4

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 M-1 or Schedule M-3.

Accepted Answer

This is an accurate description of how partnerships calculate their taxable income.

Question 5

One of the disadvantages of the partnership form is that the partner's share of the partnership's taxable income is taxed to the partner, regardless of whether or not distributed.

Accepted Answer

This is known as "pass-through" taxation, where profits and losses are passed through to the partners and each partner is responsible for paying taxes on their share of the partnership's taxable income, even if they did not receive a distribution of those profits.

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. 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

The answer of Ashley purchased her partnership interest from Lindsey...

Question 7

Which of the following entity owners cannot participate in management of the entity?

Accepted Answer

A limited partner in a limited liability limited partnership cannot participate in management of the entity without losing their limited liability status. The other entity owners listed, including general partners in a general partnership, members of a limited liability company, and partners in a limited liability partnership, can all participate in management.

Question 8

Which one of the following statements regarding partnership taxation is incorrect?

Accepted Answer

A partnership is not a taxable entity for Federal income tax purposes. Instead, the partnership files an information return (Form 1065) that reports each partner's distributive share of the partnership's income, deductions, credits, and other tax items. Each partner is then responsible for reporting their distributive share of the partnership's income on their individual tax return.

Question 9

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 distribution would be $6,000 ($10,000 basis - $8,000 loss + $4,000 distribution = $6,000). Since his distribution of $4,000 exceeded his remaining basis of $6,000, there is no gain to recognize. Therefore, he cannot recognize a gain of $2,000 on the distribution.

Question 10

The sum of the partners' ending basis amounts on all Schedules K-1 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 11

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 12

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

Accepted Answer

According to § 721(a), if a partner contributes property to a partnership in exchange for a partnership interest, neither the partner nor the partnership will recognize any gain or loss on the contribution, and the partnership will take a carryover basis in the contributed property equal to the partner's basis. 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. The other options (A, B, and C) do not result in a carryover basis for the partnership.

Question 13

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 14

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

According to the information given, Maria sold the land to the partnership for $50,000, which is less than her gift basis of $60,000. Therefore, she has a tax loss of $10,000. However, since she sold the land to a partnership in which she owns a 60% interest, the transaction may be considered a related party transaction. In this case, the loss may be disallowed or deferred under the related party rules of the tax code. Therefore, Maria may not be able to recognize her $10,000 loss on the sale.

Question 15

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 can be calculated as follows:
Beginning basis = $60,000
Add: Allocable share of ordinary income = $20,000
Add: Allocable share of tax-exempt interest income = $2,000
Add: Allocable share of long-term capital gain = $6,000
Add: Cash distributed to Emma = $12,000
Total basis = $100,000
Ending basis = Total basis - any distributions during the year = $100,000 - $12,000 = $88,000
Since her ending basis is given as $76,000, it means she must have had a $12,000 distribution during the year. So, the given statement is true.

Question 16

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 17

On January 1 of the current year, Anna and Jason form an equal partnership. Anna contributes $50,000 cash and a parcel of land (adjusted basis of $100,000; fair market value of $150,000) in exchange for her interest in the partnership. Jason contributes property (adjusted basis of $180,000; 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

The answer of On January 1 of the current year,...

Question 18

Tara and Robert formed the TR Partnership four years ago. Because they decided the company needed some expertise in multimedia presentations, they offered Katie a 1/3 interest in partnership capital 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 Katie. How should Katie treat the receipt of the partnership interest in the current year?

Accepted Answer

The answer of Tara and Robert formed the TR Partnership...

Question 19

Tim, Al, and Pat contributed assets to form the equal TAP Partnership. Tim contributed cash of $40,000 and land with a basis of $80,000 (fair market value of $60,000). Al contributed cash of $60,000 and land with a basis of $50,000 (fair market value of $40,000). Pat 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

Al's land has a fair market value of $40,000, which is less than his basis of $50,000. Therefore, he realizes a loss of $10,000. However, he cannot recognize this loss because it is a contribution to a partnership. Instead, his basis in the partnership is reduced to reflect the loss.

Question 20

Items that are not required to be shown on the partners' Schedules K-1 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...

Quiz 14: Partnerships and Limited Liability Entities