Deck 33: Partnerships and S Corporations

Question 1

In a limited partnership,the limited partners are liable for partnership debts only to the extent of their investment in the partnership plus any amount they commit to contribute to the partnership if called upon.

Answer 1

True

Question 2

A contribution of services to a partnership will result in recognition of compensation to the contributing partner equal to the fair market value of the services as well as an increase in partnership basis to the extent of the income recognized.

Answer 2

True

Question 3

Pass-through entities are taxed at only one level-the ownership level.

Answer 3

True

Question 4

When capital or Sec.1231 assets are transferred to a partnership in exchange for a partnership interest qualifying under Sec.721,the holding period for the partnership interest includes the holding period of the contributed property.

Question 5

The primary purpose of a partnership tax return is to determine the income,deduction,loss and credit items of the partnership and thus the amounts that should be reported by the individual partners.

Question 6

The transfer of property to a partnership in exchange for a partnership interest will generally not be a taxable event.

Question 7

The basis of a partner's interest in a partnership is adjusted to reflect each partner's share of income and deduction items only if a distribution is made to the partners.

Question 8

If a partner contributes inventory to the partnership in exchange for a partnership interest,the holding period for the partnership interest begins on the date the inventory was acquired by the transferor partner.

Question 9

If a partner contributes property to a partnership,and that property is subject to a liability,the noncontributing partners increase the basis of their partnership interests by their share of the partnership liabilities that were transferred to the partnership.

Question 10

A partnership sells equipment and recognizes depreciation recapture under Sec.1245.In reporting its results for the year,the partnership will separately state the Sec.1245 depreciation recapture.

Question 11

The income of a single member LLC is taxed to its owner under the sole proprietorship rules if no election to be taxed as a corporation is made.

Question 12

The basis of a partnership interest is equal to the sum of money contributed plus the FMV of the property transferred to the partnership.

Question 13

If a partner contributes depreciable property to a partnership in exchange for a partnership interest,the depreciation recapture potential of the contributed assets does not carry over to the partnership.

Question 14

Under the "check-the-box" Treasury Regulations,an LLC with more than one member is treated as a partnership unless the LLC affirmatively elects to be classified as a corporation.

Question 15

Because a partnership is a pass-through entity rather than a taxable entity,partnerships need not file tax returns.

Question 16

The partnership's assumption of a liability from a partner is treated as a cash distribution to the partner whose liability is assumed,which decreases his basis in the partnership.

Question 17

Although a partner's distributive share of income,deductions,losses,and credits is generally determined by partnership agreement,special allocation provisions restrict the partners' freedom to shift some tax benefits among partners.

Question 18

All costs of organizing a partnership can be deducted in the year in which the partnership begins business.

Question 19

When property is contributed to a partnership,the partnership's basis in the property is the same as that of the transferor partner even if gain is recognized on the transfer.

Question 20

An LLC that elects to be taxed like a partnership is also classified as a partnership for legal purposes.

Question 21

An S corporation may not have more than 75 shareholders.

Question 22

Ordinary income may result if a partnership has unrealized receivables or inventory items when a partnership interest is sold.

Question 23

An accounting partnership can become an electing large partnership as long as it has at least 100 partners and files the appropriate election.

Question 24

Guaranteed payments are not deductible by the partnership in arriving at partnership ordinary income but are included in the receiving partner's income.

Question 25

Members of a single family may be counted as one shareholder for S corporation purposes.

Question 26

An S corporation can have both voting and nonvoting common stock as long as the shares of stock have identical rights to share in the profits and assets of the corporation.

Question 27

A partnership's liabilities have increased by year-end.Partners' bases in their partnership interests will increase.

Question 28

A shareholder's basis for the S corporation stock is adjusted for ordinary income or loss and separately stated items that flow through to the shareholders as well as for additional capital contributions by shareholders and distributions to shareholders.

Question 29

Losses are disallowed on sales or exchanges between a partner and the partnership if the partner owns directly or indirectly more than a 50% interest in the capital or profits.

Question 30

If partners having a majority interest in the partnership do not have the same tax year,the partnership uses the same tax year as all of its principal partners-those with 10% or greater interest in the partnership.

Question 31

A liquidating distribution is treated as a sale or exchange of a partnership interest.

Question 32

Voluntary revocation of an S corporation election is permitted only if consent is obtained from all shareholders.

Question 33

Gains on sales or exchanges between a partner and the partnership are treated as ordinary income if the partner owns more than a 50% interest in the capital or profits and the asset that is exchanged is not a capital asset in the transferee's hands.

Question 34

Separately stated items are allocated to the S corporation shareholders based on the number of shares of stock owned on the last day of the S corporation's taxable year.

Question 35

A partnership is generally required to use the tax year of one or more partners who own more than a 50% interest in partnership profits and capital.

Question 36

A nonliquidating distribution of cash or property from the partnership to a partner is generally treated as a tax-free return of capital to the extent of a partner's basis.

Question 37

A partnership may elect to use a fiscal year if the business recognizes 25% or more of its annual gross receipts in the last two months of the fiscal year for three consecutive 12-month periods.

Question 38

To receive S corporation treatment,a qualifying shareholder must be an individual,partnership,estate,qualifying trust,or certain kinds of tax-exempt organizations.

Question 39

S status can be elected if 50% of all shareholders consent to the S corporation election on the date of the S corporation election.

Question 40

Ordinary losses and separately stated deduction and loss items that exceed a partner's basis carry over indefinitely until the partner has a positive partnership basis.

Question 41

Hunter contributes property having a $75,000 FMV and a $65,000 adjusted basis which is subject to a $36,000 mortgage in exchange for a one-fourth interest in the ABC Partnership.The partnership owes no other debts,but does assume this mortgage.Profits and losses are shared equally and each partner has a one-fourth interest in partnership capital.Hunter's basis in the partnership is

A)$38,000.
B)$48,000.
C)$74,000.
D)$84,000.

Question 42

The corporate built-in gains tax does not apply to a corporation that has always been taxed as an S corporation.

Question 43

Hal transferred land having a $160,000 FMV and a $75,000 adjusted basis which is subject to a $150,000 mortgage in exchange for a one-third interest in the HEF Partnership.Hal acquired the land ten years ago.The partnership owes no other liabilities.Hal,Ellen,and Felix share profits and losses equally and each has an one-third interest in partnership capital.Hal's basis in the one-third partnership interest is

A)$0.
B)($25,000).
C)$75,000.
D)$85,000.

Question 44

Passive activity loss limitations apply to S corporation shareholders in the same manner as partners.

Question 45

Patrick acquired a 50% interest in a partnership by contributing property that had an adjusted basis of $8,000 and a fair market value of $29,000.The property was subject to a liability of $22,000,which the partnership assumed for legitimate business purposes.Which of the following statements is correct?

A)Patrick will be required to recognize a $3,000 gain due to the negative basis rules and will have a basis in his partnership interest of zero.
B)Patrick will not be required to recognize a gain on his return and will have a basis in his partnership interest of negative $3,000.
C)Patrick will be required to recognize a $21,000 gain due to the negative basis rules and will have a basis in his partnership interest of zero.
D)Patrick will not be required to recognize a gain on his return but the realized gain will increase the basis of his partnership interest.

Question 46

Scott provides accounting services worth $40,000 to the ABC Partnership in exchange for a 20% interest in the capital and profits of the partnership.The tax result to Scott is

A)a partnership interest with a zero basis and no gain or loss.
B)a partnership interest with a zero basis and $40,000 of ordinary income.
C)a partnership interest with a $40,000 basis and $40,000 capital gain.
D)a partnership interest with a $40,000 basis and $40,000 ordinary income.

Question 47

Gain is recognized by an S corporation when it distributes appreciated property to its shareholders.

Question 48

On July 1,Alexandra contributes business equipment (which she had purchased two years ago)having a $45,000 FMV and a $40,000 adjusted basis to the AX Partnership in exchange for a 25% interest in the capital and profits.The basis of Alexandra's partnership interest is

A)$5,000.
B)$40,000.
C)$45,000.
D)None of the above.

Question 49

All of the following could file partnership tax returns except

A)general partnership.
B)limited liability partnership.
C)limited liability company.
D)single member limited liability company.

Question 50

Felicia contributes property with a FMV of $48,000 (adjusted basis $36,000)for a one-third interest in the partnership.The property is subject to a $24,000 mortgage.Betty (a one-third partner after Felicia's contribution)has an increase in her basis in the partnership of

A)$0.
B)$4,000.
C)$8,000.
D)$12,000.

Question 51

An S corporation recognizes gain or loss if it distributes property other than money to its shareholders.

Question 52

Many professional service partnerships have adopted the LLP form primarily because it

A)limits legal liability.
B)limits the number of members.
C)allows for the transfer of partners interests.
D)assures the continuity of life.

Question 53

All the following are types of pass-through entities except

A)LLP.
B)LLC.
C)C corporations.
D)S corporations.

Question 54

John contributes land having $110,000 FMV and a $90,000 adjusted basis which is subject to a $60,000 mortgage in exchange for a one-third interest in the AJK Partnership.The partnership owes no other liabilities.After the contribution,Abby,John,and Kent share profits and losses equally and each has a one-third interest in the partnership capital.John's basis in the partnership interest is

A)$50,000.
B)$90,000.
C)$110,000.
D)$150,000.

Question 55

David transferred land having a $150,000 FMV and a $45,000 adjusted basis,which is subject to a $110,000 mortgage in exchange for a one-third interest in the DSF Partnership.David had purchased the land in 2010.The partnership owes no other liabilities.David,Austin,and Alison share profits and losses equally and each has a one-third interest in partnership capital.The partnership's holding period for the land transferred by partner David commences in

A)2010.
B)2011.
C)2012.
D)The holding period is the same number of years that the partnership has been in existence.

Question 56

Edith contributes land having $100,000 FMV and a $85,000 adjusted basis,which is subject to a $66,000 mortgage in exchange for a one-third interest in the EHK Partnership.The partnership owes no other liabilities.After the contribution,Kate,Edith,and Helen share profits and losses equally and each has a one-third interest in the partnership capital.Assume that Kate has a basis in her partnership interest of $50,000 before Edith's contribution to the partnership.The effect of Edith's contribution on partner Kate's basis is to

A)decrease Kate's basis to $28,000.
B)increase Kate's basis to $72,000.
C)increase Kate's basis to $77,000.
D)No effect on Kate's basis.

Question 57

Chen contributes a building worth $160,000 (adjusted basis $180,000)and $40,000 in services to a partnership for a partnership interest.Chen's basis in the partnership interest is

A)$160,000.
B)$180,000.
C)$200,000.
D)$220,000.

Question 58

Emma contributes property having a $24,000 FMV and a $15,000 adjusted basis and also renders legal services valued at $22,000 in exchange for a 30% interest in the capital and profits of the ABC partnership.The tax results to Emma will be

A)no income is recognized and a partnership basis of $37,000.
B)ordinary income of $22,000 and a partnership basis of $37,000.
C)ordinary income of $22,000 and a partnership basis of $46,000.
D)no income is recognized and a partnership basis of $46,000.

Question 59

Lance transferred land having a $180,000 FMV and a $105,000 adjusted basis,which is subject to a $150,000 mortgage in exchange for a one-third interest in the Trois Partnership.Lance acquired the land in 2002.The partnership owes no other liabilities.Lance,Rhonda,and Zach share profits and losses equally and each has an one-third interest in partnership capital.The tax effect to Lance is

A)no gain or loss recognized.
B)recognized gain of $45,000 on the transfer.
C)recognized gain of $75,000 on the transfer.
D)recognized loss of $45,000 on the transfer.

Question 60

Limited liability of partners or members is an advantage of all the following with the exception of

A)LLP.
B)LLC.
C)limited partnerships.
D)general partnerships.

Question 61

Atiqa receives a nonliquidating distribution of land from her partnership.The partnership purchased the land five years ago for $20,000.At the time of the distribution,it is worth $28,000.Prior to the distribution,Atiqa's basis in her partnership interest is $37,000.Due to the distribution Atiqa and the partnership will recognize income of

A)
B)
C)
D)

Question 62

Atiqa receives a nonliquidating distribution of land from her partnership.The partnership purchased the land five years ago for $20,000.At the time of the distribution,it is worth $28,000.Prior to the distribution,Atiqa's basis in her partnership interest is $37,000.Atiqa's basis in the distributed land her post-distribution basis in her partnership interest are:

A)
B)
C)
D)

Question 63

All of the following statements are true with regard to the formation of a partnership except:

A)The partnership's basis in the transferred property carries over from the transferor partners.
B)With regard to capital assets and 1231 assets,the partnership's holding period for the transferred property includes the contributing partner's holding period.
C)The nonrecognition rules apply to both property and services contributed to a partnership.
D)A transfer of property in exchange for a partnership interest causes nonrecognition of gain or loss treatment.

Question 64

Thomas and Miles are equal partners in a partnership,which uses the calendar year as its tax year.On September 1,this year,Katie contributed $60,000 cash for a one-third interest in the partnership.The partnership reports a $24,000 ordinary loss for the tax year ending on December 31 of this year.The loss allocation to Katie (new partner)is

A)$0.
B)$2,667.
C)$4,000.
D)$8,000.

Question 65

All of the following statements are true regarding nonliquidating distributions of a partnership except:

A)If money is distributed in excess of the partnership interest,the partner receiving the distribution has capital gain.
B)In no circumstances will the partner or the partnership recognize gain or loss from a nonliquidating distribution.
C)In no circumstances may the partner's basis in the partnership interest be reduced below zero as a result of a nonliquidating distribution.
D)If,after money distributions reduce the partnership basis,the adjusted basis of distributed property does not exceed the partner's basis in the partnership interest,the basis of the distributed property carries over to the partner.

Question 66

Ariel receives from her partnership a nonliquidating distribution of $9,000 cash plus a parcel of land.The partnership had purchased the land five years ago for $20,000,but it is worth $28,000 at the time of the distribution.Ariel's predistribution basis is $17,000.How much income will Ariel recognize due to the distribution,and what is her basis in the land?

A)
B)
C)
D)

Question 67

Richard has a 50% interest in a partnership,and he materially participates in the partnership's business.Richard's adjusted basis in the partnership was $60,000 at the beginning of the year,including his share of partnership liabilities.There were no distributions to Richard during the year.During the current year,the partnership borrowed $160,000 from a local bank to purchase equipment needed in the business.All of the partners are personally liable for all partnership debts.The partnership incurred a $320,000 loss this year.What amount can Richard claim as a loss from the partnership on his individual tax return this year?

A)$60,000
B)$80,000
C)$140,000
D)$160,000

Question 68

Martha transferred property with a FMV of $60,000 (adjusted basis $30,000),which is subject to a $40,000 mortgage in exchange for a one-third interest in a partnership.The partnership has no other liabilities.The partners of MNO own the partnership equally.The partnership's basis in the property contributed is

A)$ 0.
B)$40,000.
C)$ 30,000.
D)$ 60,000.

Question 69

David and Joycelyn form an equal partnership in the current year.No special allocation is provided for in the partnership agreement.During the year David contributes land having a $90,000 basis and a $100,000 FMV in exchange for the initial partnership interest.In addition,the partnership earns $50,000 of ordinary income while partnership liabilities increase from zero to $30,000 by the end of the tax year.The partnership earns $20,000 of tax-exempt interest during the year.David's basis at the end of the current year is

A)$115,000.
B)$125,000.
C)$130,000.
D)$140,000.

Question 70

All of the following are separately stated items that pass through from the partnership to the partners except

A)1231 gains or losses.
B)charitable contributions.
C)capital gains and losses.
D)1245 and 1250 recapture.

Question 71

Joey and Bob each have 50% interest in a Partnership.Both Joey and the partnership file returns on a calendar year basis.Partnership Q had a $12,000 loss in 2013.Joey's adjusted basis in his partnership interest on January 1,2013 was $5,000.In 2014,the partnership had a profit of $10,000.Assuming there were no other adjustments to Joey's basis in the partnership,what amount of partnership income (loss)should Joey show on his 2013 and 2014 individual income tax returns?

A)
B)
C)
D)

Question 72

At the beginning of this year,Edmond and Samuel were equal partners in a partnership that uses the calendar year as its tax year.On October 1,this year,Joan contributed $48,000 cash for a one-third interest in the partnership.The interests of both Edmond and Samuel drop to one-third.The partnership reports a $36,000 ordinary loss for the current tax year ending December 31.The loss allocation to Samuel (one of the original partners)is

A)$12,000.
B)$13,500.
C)$16,500.
D)$18,000.

Question 73

George transferred land having a $170,000 FMV and a $60,000 adjusted basis,which is subject to a $150,000 mortgage in exchange for a one-third interest in the GEF Partnership.The partnership owes no other liabilities.George,Elena,and Franz share profits and losses equally and each has a one-third interest in partnership capital.The basis to the partnership of the land transferred by George is

A)$20,000.
B)$60,000.
C)$110,000.
D)$170,000.

Question 74

In the syndication of a partnership,brokerage and registration fees,printing fees,and legal fees of the underwriter total $50,000.With respect to these fees,the partnership must

A)capitalize the fees,which are not amortizable.
B)deduct $5,000 of the expenses in the accounting period incurred and permanently capitalize the remainder.
C)capitalize and amortize the fees over a period of not less than 60 months.
D)deduct $5,000 of the expenses in the accounting period incurred and amortize the remaining amount over 180 months.

Question 75

Clark and Lois formed an equal partnership three years ago.Clark contributed cash of $160,000 while Lois contributed land with a $90,000 adjusted basis and a $160,000 FMV.Three years later the land is sold for $210,000.The tax results to Clark and Lois are

A)$25,000 of gain to both Clark and Lois.
B)$50,000 of gain to both Clark and Lois.
C)$25,000 of gain to Clark and $70,000 gain to Lois.
D)$25,000 of gain to Clark and $95,000 gain to Lois.

Question 76

Sandy and Larry each have a 50% interest in SL Partnership.The partnership and the individuals file on a calendar year basis.In 2013,SL Partnership had a $30,000 ordinary loss.Sandy's adjusted basis in her partnership interest on January 1,2013 was $12,000.In 2014,SL Partnership had ordinary income of $20,000.Assuming there were no other adjustments to Sandy's basis in the partnership,what amount of partnership income (loss)would Sandy show on her 2013 and 2014 individual income tax returns?

A)
B)
C)
D)

Question 77

Brittany receives a nonliquidating distribution of $48,000 cash from her partnership.Brittany's basis in her partnership interest prior to the distribution is $25,000.What are the tax consequences of the distribution?

A)$48,000 ordinary income; $25,000 partnership basis
B)$48,000 nontaxable return of capital,($23,000)partnership basis
C)$25,000 nontaxable return of capital,capital gain of $23,000,$0 partnership basis
D)$25,000 nontaxable return of capital,ordinary income of $23,000,$0 partnership basis

Question 78

On April 4,2013,Joan contributes business equipment (she had purchased on October 23,2010)having a $45,000 FMV and a $40,000 adjusted basis to the EJK Partnership in exchange for a 25% interest in the capital and profits.The basis of the property and the date the holding period begins for the partnership is

A)
B)
C)
D)

Question 79

Ben is a 30% partner in a partnership.The partnership guarantees Ben payments of $25,000 for the year.If the partnership has ordinary income of $15,000 before adjustment for the guaranteed payment,Ben must report

A)ordinary income of $22,000.
B)an ordinary loss of $3,000.
C)ordinary income of $25,000 and a partnership income of $4,500.
D)ordinary income of $25,000 and a partnership loss of $3,000.

Question 80

Maxine has a 65% interest in a partnership.Maxine sells land to the partnership for $60,000.Prior to the sale,the land had a FMV of $60,000 and an adjusted basis of $90,000 to Maxine.Later,the partnership sells the land to an outsider for $110,000.The partnership must report a gain of

A)$0.
B)($30,000).
C)$20,000.
D)$50,000.