Deck 11: Partnerships and Limited Liability Entities

Question 1

JLK Partnership incurred $6,000 of organizational costs and $50,000 of startup costs in 2013.JKL may deduct $5,000 each of organizational and startup costs,and the remaining costs ($1,000 of organizational costs and $45,000 of startup costs)may be amortized over 60 months.

Answer 1

False

Question 2

Seven years ago,Paul purchased residential rental estate that he has been depreciating as MACRS property over 27.5 years.This year,when his adjusted basis in the property was $250,000,Paul transferred the property to the newly formed PLA LLC in exchange for a one-third interest in the LLC.PLA incurred $10,000 of transfer taxes and fees related to the property.PLA must treat the $260,000 basis in the property,fees,and expenses,as new MACRS property depreciable over 27.5 years.

Answer 2

False

Question 3

Ken and Lars formed the equal KL Partnership during the current year,with Ken contributing $100,000 in cash and Lars contributing land (basis of $60,000,fair market value of $40,000)and equipment (basis of $0,fair market value of $60,000).Lars recognizes a $40,000 gain on the contribution and his basis in his partnership interest is $100,000.

Answer 3

False

Question 4

Section 721 provides that,in general,no gain or loss is recognized by the partnership or the partner on contribution of appreciated or depreciated property to a partnership in exchange for an interest in the partnership.

Question 5

An example of the "aggregate concept" underlying partnership taxation is the fact that the partners (rather than the partnership)pay tax on partnership income.

Question 6

Morgan and Kristen formed an equal partnership on August 1 of the current year.Morgan contributed $60,000 cash and land with a basis of $18,000 and a fair market value of $40,000.Kristen contributed equipment with a basis of $42,000 and a value of $100,000.Kristen and Morgan each have a basis of $100,000 in their partnership interests.

Question 7

The "inside basis" is defined as a partner's basis in the partnership interest.

Question 8

The taxable income of a partnership flows through to the partners,who report the income on their tax returns.

Question 9

George received a fully-vested 10% interest in partnership capital and a 20% interest in future partnership profits in exchange for services rendered to the GHP,LLC (not a publicly-traded partnership interest).The future profits of the partnership are subject to normal operating risks.George will report ordinary income equal to the fair market value of the profits interest,but the capital interest will not be currently taxed to him.

Question 10

A partnership is an association formed by two or more taxpayers (who may be any type of entity)to carry on a trade or business.

Question 11

In a limited liability company,all members are protected from all debts of the partnership unless they personally guaranteed the debt.

Question 12

Section 721 provides that no gain or loss is recognized on a contribution of property to a partnership in exchange for an interest in the partnership.An exception might apply if the taxpayer receives a cash distribution from the partnership soon after the property contribution is made.

Question 13

Each partner's profit-sharing,loss-sharing,and capital-sharing ownership percentages are always the same.

Question 14

The primary purpose of the partnership agreement is to document the various tax elections made by the partners regarding depreciation methods,treatment of research and experimental costs,calculation of the § 199 deduction,and the § 754 election.

Question 15

Laura is a real estate developer and owns property that is treated as inventory (not a capital asset)in her business.She contributes a parcel of this land (basis of $15,000)to a partnership,also to be held as inventory.The fair market value of the property is $12,000 at the contribution date.After three years,the partnership sells the land for $10,000.The partnership will recognize a $5,000 ordinary loss on sale of the property.

Question 16

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.

Question 17

A limited partnership offers all partners protection from claims by the LP's creditors.

Question 18

If the partnership properly makes an election for treatment of a specific tax item,the partner is bound by that treatment.

Question 19

The partnership reports each partner's share of income to the partner in a single amount on Form 1099.

Question 20

Syndication costs arise when partnership interests are being marketed to investors.These costs cannot be amortized or deducted.

Question 21

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 these calculations are made by the partnership.

Question 22

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

A)The aggregate concept treats partners and partnerships as separate units and gives the partnership its own tax "personality."
B)A partner's capital sharing ratio is defined as the percent of partnership assets (capital)that would be allocated to the partner upon liquidation of the partnership.
C)The partnership's outside basis is defined as the sum of each partner's capital account balance.
D)A special allocation is defined as an amount that could differently affect the tax liabilities of two or more partners.
E)None of these statements is correct.

Question 23

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.

Question 24

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.

Question 25

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.

Question 26

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.

Question 27

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?

A)Jason recognizes a $20,000 gain on his property transfer.
B)Jason has a $200,000 tax basis for his partnership interest.
C)Anna has a $150,000 tax basis for her partnership interest.
D)The partnership has a $150,000 adjusted basis in the land contributed by Anna.
E)None of the statements is true.

Question 28

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.

Question 29

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

A)A partnership is a taxable entity for Federal income tax purposes.
B)Partnership income is comprised of ordinary partnership income or loss and separately stated items.
C)A partnership is required to file a return with the IRS.
D)A partner's profit-sharing percent may differ from the partner's loss-sharing percent.
E)All of these statements are correct.

Question 30

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.

Question 31

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

A)A general partner in a general partnership.
B)A member of a limited liability company.
C)A partner in a limited liability partnership.
D)A limited partner in a limited liability limited partnership.
E)None of the above.

Question 32

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.

Question 33

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.

Question 34

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.

Question 35

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.

Question 36

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.

Question 37

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?

A)Tim's basis in his partnership interest is $120,000.
B)Al realizes and recognizes a loss of $10,000.
C)Pat realizes a gain of $40,000 but recognizes $0 gain.
D)TAP has a basis of $80,000,$50,000,and $0 in the land and property (excluding cash)contributed by Tim,Al,and Pat,respectively.
E)All of these statement are correct.

Question 38

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

A)The partnership acquires the asset through a § 1031 like-kind exchange.
B)A partner owning 25% of partnership capital and profits sells the asset to the partnership.
C)The partnership leases the asset from a partner on a one-year lease.
D)The partnership acquires the asset from a partner as a contribution to partnership capital under § 721(a).
E)None of the above.

Question 39

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.

Question 40

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.

Question 41

Which of the following statements is always correct regarding assets acquired by a newly formed partnership? If a partner contributes:

A)Depreciable property: the partnership treats the property as newly acquired depreciable property,and may claim a § 179 deduction.
B)Unrealized (cash-basis)receivables: the partnership will report a capital gain when the receivable is collected.
C)Inventory (in the partner's hands): the partnership reports ordinary income if the property is held as a capital asset and sold within five years of the contribution date.
D)Land valued at less than its basis: the partnership reports a § 1231 loss if the property is sold at a loss.
E)None of these statements is correct.

Question 42

On a partnership's Form 1065,which of the following statements is not true?

A)The partnership reconciles its net income (including separately stated items)to book income on Schedule M-1 or M-3.
B)The partnership balance sheet on Schedule L is generally presented on a financial (book)basis.
C)All partnership income and expense items are reported on Form 1065,page 1.
D)The partnership's equivalent of taxable income is reported in the "Analysis of Income (Loss)."
E)None of the above statements are true.

Question 43

Binita contributed property with a basis of $40,000 and a value of $50,000 to the BE Partnership in exchange for a 20% interest in partnership capital and profits.During the first year of partnership operations,BE had net taxable income of $30,000 and tax-exempt interest income of $10,000.The partnership distributed $10,000 cash to Binita.Binita's adjusted basis (outside basis)for her partnership interest at year-end is:

A)$36,000.
B)$38,000.
C)$60,000.
D)$70,000.
E)None of the above.

Question 44

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

A)Calculation of a § 199 deduction amount.
B)Whether to capitalize,amortize,or expense research and experimental costs.
C)The partnership's overall accounting method.
D)Whether to claim a § 179 deduction related to property acquired by the partnership.
E)All of the above elections are made by the partnership.

Question 45

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

A)Partner George contributes appreciated property to the GM Partnership,and three years later GM distributes $100,000 proportionately to the partners.
B)Brianna contributes property with a basis of $20,000 and a fair market value of $50,000 to the BGB Partnership in exchange for a 20% interest therein.The partnership agrees to distribute $20,000 to Brianna in fifteen months,if partnership cash flows from operations exceed $100,000 at that time.The partnership does not expect to produce operating cash flows of over $100,000 for at least five years.
C)Luis contributes appreciated property to the BLP Partnership.Thirty months later,he receives a distribution from the partnership of $15,000 cash.None of the other partners received a distribution.There was no agreement that BLP would make the distribution,and Luis would have made the contribution whether or not the partnership made the distribution.
D)None of the above transactions will be treated as a disguised sale.
E)a.,b.,and c.are all treated as disguised sales.

Question 46

Brooke and John formed a partnership.Brooke received a 40% interest in partnership capital and profits in exchange for contributing land (basis of $30,000 and fair market value of $120,000).John received a 60% interest in partnership capital and profits in exchange for contributing $180,000 of cash.Three years after the contribution date,the land contributed by Brooke is sold by the partnership to a third party for $150,000.How much taxable gain will Brooke recognize from the sale?

A)$102,000.
B)$90,000.
C)$48,000.
D)$36,000.
E)$0.

Question 47

Which of the following statements is not a requirement of the substantial economic effect test?

A)Income,gains,losses,and deductions must be allocated to the partners in accordance with their capital contributions.
B)An allocation of income must increase the partner's capital account balance,and an allocation of deduction must decrease the partner's capital account balance.
C)A partner with a negative capital account balance must "restore" that capital account,generally by contributing cash to the partnership.
D)On liquidation of the partner's interest in the partnership,the partner must receive assets that have a fair market value equal to that partner's (positive)capital account balance.
E)All of the above statements are requirements of the substantial economic effect test.

Question 48

Allison is a 40% partner in the BAM Partnership.At the beginning of the tax year,Allison's basis in the partnership interest was $100,000,including her share of partnership liabilities.During the current year,BAM reported an ordinary loss of $60,000.In addition,BAM distributed $8,000 to Allison and paid partner Brian a $20,000 consulting fee (neither of these amounts was deducted in determining the $60,000 loss from operations).At the end of the year,Allison's share of partnership liabilities decreased by $10,000.Assuming loss limitation rules do not apply,Allison's basis in the partnership interest at the end of the year is:

A)$2,000.
B)$50,000.
C)$70,000.
D)$100,000.
E)None of the above.

Question 49

Which of the following would be currently taxable as ordinary income to the service partner if received in exchange for services performed for the partnership? (In all cases,assume the interest is not sold within two years after the time it is granted to the service partner.)

A)A 10% interest in the capital of the partnership that will vest in 3 years.
B)A 20% interest in the future profits of the partnership received in exchange for future services to be performed for the partnership.
C)A 25% interest in the capital of the partnership where there are no restrictions on transferability of the interest.
D)A 30% interest in ongoing profits of the partnership where the partnership is not a publicly-traded partnership and the income stream is not assured.
E)All of the above.

Question 50

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.She will also receive a 25% interest in future partnership profits.On July 1 of the current year,the unrestricted partnership capital 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?

A)Nontaxable.
B)$25,000 ordinary income.
C)$25,000 short-term capital gain.
D)$25,000 long-term capital gain.
E)None of the above.

Question 51

Which of the following statements is always true regarding accounting methods available to a partnership?

A)If a partnership is a tax shelter,it can use the cash method of accounting.
B)If a non-tax-shelter partnership had "average annual gross receipts" of less than $5 million in all prior years,it can use the cash method.
C)If a partnership has a partner that is a personal service corporation,it cannot use the cash method.
D)If a partnership has a partner that is a C corporation,it cannot use the cash method.
E)All of the above statements are false.

Question 52

Fern,Inc.,Ivy,Inc.,and Jeremy formed a general partnership.Fern owns a 50% interest and Ivy and Jeremy each own 25% interests.Fern,Inc.files its tax return on an October 31 year-end; Ivy,Inc.,files with a July 31 year-end,and Jeremy is a calendar year taxpayer.Which of the following statements is true regarding the taxable year the partnership can choose?

A)The partnership must choose the calendar year because it has no principal partners.
B)The partnership must choose an October year-end because Fern,Inc.,is a principal partner.
C)The partnership can request permission from the IRS to use a March 31 fiscal year under § 444.
D)The partnership must use the "least aggregate deferral" method to determine its taxable year.
E)None of the above.

Question 53

Which one of the following is not shown on the partnership's Schedule K on Page 4 of Form 1065?

A)The partnership's self-employment income.
B)The partnership's separately stated income and deductions.
C)The partnership's tax preference and adjustment items.
D)The partnership's net operating loss carryforward.
E)All of the above.

Question 54

ABC LLC reported the following items on the LLC's Schedule K: ordinary income,$100,000; interest income,$3,000; long-term capital loss,($4,000); charitable contributions,$1,000; post-1986 depreciation adjustment,$10,000; and cash distributions to partners,$50,000.How much will ABC show as net income (loss)on its Analysis of Income (Loss)?

A)$68,000.
B)$78,000.
C)$95,000.
D)$98,000.
E)$102,000.

Question 55

Misty and John formed the MJ Partnership.Misty contributed $50,000 of cash in exchange for her 50% interest in the partnership capital and profits.During the first year of partnership operations,the following events occurred: the partnership had a net taxable income of $20,000; Misty received a distribution of $12,000 cash from the partnership; and Misty had a 50% share in the partnership's $60,000 of recourse liabilities on the last day of the partnership year.Misty's adjusted basis for her partnership interest at year end is:

A)$48,000.
B)$60,000.
C)$78,000.
D)$88,000.
E)$90,000.

Question 56

Ryan is a 25% partner in the ROCC Partnership.At the beginning of the tax year,Ryan's basis in the partnership interest was $90,000,including his share of partnership liabilities.During the current year,ROCC reported net ordinary income of $100,000.In addition,ROCC distributed $10,000 to each of the partners ($40,000 total).At the end of the year,Ryan's share of partnership liabilities increased by $10,000.Ryan's basis in the partnership interest at the end of the year is:

A)$90,000.
B)$100,000.
C)$115,000.
D)$125,000.
E)None of the above.

Question 57

At the beginning of the year,Heather's "tax basis" capital account balance in the HEP Partnership was $85,000.During the tax year,Heather contributed property with a basis of $6,000 and a fair market value of $10,000.Her share of the partnership's ordinary income and separately stated income and deduction items was $40,000.At the end of the year,the partnership distributed $15,000 of cash to Heather.Also,the partnership allocated $12,000 of recourse debt and $10,000 of nonrecourse debt to Heather.What is Heather's ending capital account balance determined using the "tax basis" method?

A)$116,000.
B)$120,000.
C)$126,000.
D)$128,000.
E)$138,000.

Question 58

Mark and Addison formed a partnership.Mark received a 25% interest in partnership capital and profits in exchange for land with a basis of $40,000 and a fair market value of $60,000.Addison received a 75% interest in partnership capital and profits in exchange for $180,000 of cash.Three years after the contribution date,the land contributed by Mark is sold by the partnership to a third party for $76,000.How much taxable gain will Mark recognize from the sale?

A)$0.
B)$9,000.
C)$24,000.
D)$36,000.
E)None of the above.

Question 59

TEC Partners was formed during the current tax year.It incurred $10,000 of organizational expenses,$80,000 of startup expenses,and $5,000 of transfer taxes to retitle property contributed by a partner.The property had been held as MACRS property for ten years by the contributing partner,and had an adjusted basis to the partner of $300,000 and fair market value of $400,000.Which of the following statements is correct regarding these items?

A)TEC treats the contributed property as a new MACRS asset placed in service on the date the property title is transferred.
B)TEC must amortize the $10,000 of organizational expenses over 180 months.
C)TEC's startup expenses are amortized over 60 months.
D)TEC must capitalize the transfer tax and treat if as a new asset placed in service on the date the property is contributed.
E)None of the above statements are true.

Question 60

When property is contributed to a partnership in exchange for a capital and profits interest,when does the partner's holding period begin for the partnership interest?

A)The day after the contribution date.
B)The day the property was contributed.
C)The day the contributed property was purchased.
D)The day the partnership interest was acquired.
E)Either (or both)c.and d.may be true,depending upon the types of property contributed.

Question 61

Rebecca is a limited partner in the RST Partnership,which is not publicly traded.Her allocable share of RST's passive ordinary losses from a nonrealty activity for the current year is ($60,000).Rebecca has a $40,000 adjusted basis (outside basis)for her interest in RST (before deduction of any of the passive losses).Her amount "at risk" under § 465 is $30,000 (before deduction of any of the passive losses).She also has $25,000 of passive income from other sources.How much of her ($60,000)allocable loss can Rebecca deduct on her current year's tax return?

A)$25,000.
B)$30,000.
C)$40,000.
D)$60,000.
E)None of the above.

Question 62

Stephanie is a calendar year cash basis taxpayer.She owns a 50% profit and loss interest in a cash basis partnership with a September 30 year-end.The partnership's operating income (after deducting guaranteed payments)was $120,000 ($10,000 per month)and $144,000 ($12,000 per month),respectively,for the partnership tax years ended September 30,2013 and 2014.The partnership paid guaranteed payments to Stephanie of $2,000 and $3,000 per month during the fiscal years ended September 30,2013 and 2014.How much will Stephanie's adjusted gross income be increased by these partnership items for her tax year ended December 31,2013?

A)$60,000.
B)$72,000.
C)$84,000.
D)$90,000.
E)$108,000.

Question 63

George and James are forming the GJ Partnership.George contributes $600,000 cash and James contributes nondepreciable property with an adjusted basis of $400,000 and a fair market value of $750,000.The property is subject to a $150,000 liability,which is also transferred into the partnership and is shared equally by the partners for basis purposes.George and James share in all partnership profits equally except for any precontribution gain,which must be allocated according to the statutory rules for built-in gain allocations.
a. What James's adjusted tax basis for his partnershp interest munediately after the partnership is formed?
b. What is the partnership's adjusted basis for the property contributed by James?
c. If the partnership sells the property contributed by James for $800,000, how is the tax gain allocated between the partners?

Question 64

Which of the following is not a correct statement regarding the advantage of the partnership entity form over the subchapter C corporate form?

A)A partnership typically has easier administrative and filing requirements than does a C corporation.
B)Partnership income is subject to a single level of taxation; corporate income is double taxed.
C)Partnerships may specially allocate income and expenses among the partners,provided the substantial economic effect requirements are met; corporate dividends must be proportionate to shareholdings.
D)Partners in a general partnership have less personal liability for entity claims than shareholders of a C corporation.
E)All of the above are advantages of partnership taxation.

Question 65

Paul sells one parcel of land (basis of $100,000)for its fair market value of $160,000 to a partnership in which he owns a 60% capital interest.Paul held the land for investment purposes.The partnership is in the real estate development business,and will build residential housing (for sale to customers)on the land.Paul will recognize:

A)$0 gain or loss.
B)$36,000 ordinary income.
C)$36,000 capital gain.
D)$60,000 ordinary income.
E)$60,000 capital gain.

Question 66

Which of the following is not a specific adjustment to the partners' basis in the partnership interest?

A)Increased by contributions the partner made to the partnership.
B)Decreased by the amount of guaranteed payments shown on the partner's Schedule K-1.
C)Increased by the partner's share of tax-exempt income.
D)Decreased by any decrease in the partner's share of partnership liabilities.
E)Increased by the partner's share of separately stated income items.

Question 67

Molly is a 30% partner in the MAP Partnership.During the current tax year,the partnership reported ordinary income of $200,000 before payment of guaranteed payments and distributions to partners.The partnership made an ordinary cash distribution of $20,000 to Molly,and paid guaranteed payments to partners Molly,Amber,and Pat of $20,000 each ($60,000 total).How much will Molly's adjusted gross income increase as a result of the above items?

A)$42,000.
B)$60,000.
C)$62,000.
D)$80,000.
E)None of the above.

Question 68

In the current year,the CAR Partnership received revenues of $400,000 and paid the following amounts: $160,000 in rent,utilities,and salaries; a $40,000 guaranteed payment to partner Ryan; $20,000 to partner Amy for consulting services; and a $40,000 distribution to 25% partner Cameron.In addition,the partnership realized a $12,000 net long-term capital gain.Cameron's basis in his partnership interest was $60,000 at the beginning of the year,and included his $25,000 share of partnership liabilities.At the end of the year,his share of partnership liabilities was $15,000.

Question 69

The MOP Partnership is involved in leasing heavy equipment under long-term leases of five years or more.Patricia has an adjusted basis for her partnership interest on January 1 of the current year of $600,000,consisting of the following:
$\begin{array}{lr}\text { Capital account } & \$ 350,000 \\\text { Share of partnersing re course debt } & 50,000 \\\text { Share of partnership nonrecourge debt } & \underline{200,000}\\&\underline{\$600,000}\end{array}$ During the year,the partnership has an operating loss of $1.2 million and distributes $60,000 of cash to Patricia.Partnership liabilities were the same at the end of the tax year,and the nonrecourse debt is not "qualified nonrecourse debt." If she owns a 60% share of partnership profits,capital,and losses,and is a material participant in the partnership,how much of her share of the operating loss can Patricia deduct? What Code provisions could cause a suspension of the loss? How would your answer change if MOP were an LLC and Patricia had not personally guaranteed any of the debt?

Question 70

Which of the following statements is correct regarding the manner in which partnership liabilities are reflected in the partners' bases in their partnership interests?

A)Nonrecourse debt is allocated to the partners according to their loss-sharing ratios.
B)Recourse debt is allocated to the partners to the extent of the partnership's minimum gain in the property.
C)An increase in partnership debts results in a decrease in the partners' bases in the partnership interest.
D)A decrease in partnership debt is treated as a distribution from the partnership to the partner and reduces the partner's basis in the partnership interest.
E)Partnership debt is not reflected in the partners' bases in their partnership interests.

Question 71

During the current tax year,Jordan and Whitney each contributed $50,000 to form the J&W LLC.Each member has a 50% interest in LLC capital,profits,and losses,except that depreciation expense is allocated 40% to Jordan and 60% to Whitney.During the first year,the LLC reported income (before depreciation expense)of $20,000 and had depreciation expense of $10,000.The LLC incurred recourse debt (that was personally guaranteed by both of the LLC members)of $60,000.Partnership assets are $170,000 at the end of the year.Under the constructive liquidation scenario,how is the recourse debt allocated to Jordan and Whitney?

A)The recourse debt is shared equally ($30,000 each)by Jordan and Whitney.
B)The recourse debt is allocated $36,000 to Whitney and $24,000 to Jordan.
C)The recourse debt is allocated $31,000 to Whitney and $29,000 to Jordan.
D)The recourse debt is allocated $29,000 to Whitney and $31,000 to Jordan.
E)The recourse debt is allocated $24,000 to Whitney and $36,000 to Jordan.

Question 72

Jeordie and Kendis created the JK Partnership by contributing $100,000 each.The $200,000 cash was used by the partnership to acquire a depreciable asset.The partnership agreement provides that the partners' capital accounts will be maintained in accordance with Reg.§ 1.704-1(b)(the "economic effect" Regulations)and that any partner with a deficit capital account will be required to restore that capital account when the partner's interest is liquidated.The partnership agreement provides that MACRS will be allocated 20% to Jeordie and 80% to Kendis.All other items of partnership income,gain,loss,deduction,and credit will be allocated equally between the partners.In the first year,MACRS is $40,000 and no other operating transactions occur.The property is sold at the end of the year for $160,000 and the partnership is liquidated immediately thereafter.

Question 73

The LN partnership reported the following items of income and deduction during the current tax year: revenues,$300,000; cost of goods sold,$180,000; tax-exempt interest income,$2,000; salaries to employees,$80,000; and long-term capital gain,$10,000.In addition,the partnership distributed $20,000 of cash to 50% partner Nina and $10,000 of cash to 50% partner Len.What is Nina's share of ordinary partnership income and separately stated items?

Question 74

Palmer contributes property with a fair market value of $4,000,000 and an adjusted basis of $3,000,000 to AP Partnership.Palmer shares in $1,000,000 of partnership debt under the liability sharing rules,giving him an initial adjusted basis for his partnership interest of $4,000,000.One month after the contribution,Palmer receives a cash distribution from the partnership of $2,000,000.Palmer would not have contributed the property if the partnership had not contractually obligated itself to make the distribution.Assume Palmer's share of partnership liabilities will not change as a result of this distribution.

Question 75

An examination of the RB Partnership's tax books provides the following information for the current year:
Rachel is a 30% general partner in partnership capital,profits,and losses.Assume the adjusted basis of her partnership interest is $60,000 at the beginning of the year,and she shares in 30% of the partnership's liabilities for basis purposes.

Question 76

Samuel is the managing general partner of STU,in which he owns a 25% interest.For the year,STU reported ordinary income of $400,000 (after deducting all guaranteed payments).In addition,the LLC reported interest income of $10,000.Samuel received a guaranteed payment of $120,000 for services he performed for STU.How much income from self-employment did Samuel earn from STU?

A)$100,000.
B)$120,000.
C)$220,000.
D)$222,000.
E)None of the above.

Question 77

On the formation of a partnership,when might a "disguised sale" occur? How can this treatment be avoided?

Question 78

Your client owns a parcel of land that has depreciated in value.He wants to know if there is a way he can contribute the property to his partnership,have the partnership sell the property,and convert the existing capital loss into an ordinary loss.He also wants to know if part of the loss would be allocated to his other partners.What is your reaction?

Question 79

During the current year,MAC Partnership reported the following items of receipts and expenditures: $600,000 sales,$80,000 utilities and rent,$200,000 salaries to employees,$20,000 guaranteed payment to partner Antonio,investment interest income of $4,000,a charitable contribution of $8,000,and a distribution of $30,000 to partner Carl.Antonio is a 25% general partner.Based on this information,what items will be reflected on Antonio's Schedule K-1?

Question 80

At the beginning of the tax year,Zach's basis for his partnership interest and his amount at risk in the partnership was $30,000.His share of partnership items for the year consisted of tax-exempt interest income of $2,000 and an ordinary loss of $44,000.He also received a distribution from the partnership of $20,000 cash during the year.For the tax year,Zach will report:

A)A nontaxable distribution of $20,000,an ordinary loss of $10,000,and a suspended loss carryforward of $34,000.
B)An ordinary loss of $32,000,a suspended loss carryforward of $12,000,and a taxable distribution of $20,000.
C)A nontaxable distribution of $20,000,an ordinary loss of $12,000,and a suspended loss carryforward of $32,000.
D)An ordinary loss of $44,000 and a nontaxable distribution of $20,000.