Deck 21: Partnerships

Question 1

JLK Partnership incurred $15,000 of organizational costs and $75,000 of startup costs in 2011.JKL may deduct $5,000 each of organizational and startup costs,and the remaining costs ($10,000 of organizational costs and $70,000 of startup costs)may be amortized over 180 months.

Answer 1

False

Question 2

Tyler and Travis formed the equal T&T Partnership during the current year,with Tyler contributing $300,000 in cash and Travis contributing land (basis of $120,000,fair market value of $160,000)and inventory (basis of $30,000,fair market value of $140,000).Travis recognizes no gain or loss on the contribution and his basis in his partnership interest is $150,000.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

The MNO Partnership,a calendar year taxpayer,was formed on July 1 of the current year and started business on October 1.MNO incurred $30,000 in startup costs.MNO may deduct $5,000 and amortize the remaining $25,000 over 120 months starting in July.

Question 5

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.

Question 6

Justin and Kevin formed the equal JK Partnership during the current year,with Justin contributing $60,000 in cash and Kevin contributing land (basis of $40,000,fair market value of $30,000)and equipment (basis of $0,fair market value of $30,000).Kevin recognizes a $20,000 gain on the contribution and his basis in his partnership interest is $60,000.

Question 7

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's tax basis in her interest is $42,000; Morgan's tax basis is $78,000.

Question 8

The governing document of a limited liability company (LLC)is a partnership agreement which should spell out the partners' rights and obligations.

Question 9

Julie owns property that is treated as a capital asset in her hands.She contributed a parcel of land (basis $60,000; fair market value $58,000)to a real estate partnership,which will hold it as inventory.After three years,the partnership sells the land for $56,000.The partnership will recognize a $4,000 ordinary loss on sale of the property.

Question 10

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

Question 11

Section 721 provides that no gain or loss is recognized on contribution of property to a partnership in exchange for an interest in the partnership.A disguised sale is an exception to nonrecognition of gain or loss under § 721.

Question 12

In a limited partnership,all partners are protected from debts of the partnership.

Question 13

A limited liability limited partnership (LLLP)is a limited partnership (LP)in which all partners,including the general partners,are protected from debts of the partnership.

Question 14

Syndication costs arise when partnership interests are being marketed to investors.These costs are amortized over 180 months.

Question 15

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

Question 16

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

Question 17

A limited liability company offers all "members" protection from claims by the LLC's creditors.

Question 18

A partner has a profit-sharing percent,a loss-sharing percent,and a capital-sharing ownership percent.Depending on the provisions in the partnership agreement,these amounts may or may not be the same for a given partner.

Question 19

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

Question 20

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.

Question 21

The partnership must allocate nonrecourse debt among the partners according to the "constructive liquidation scenario."

Question 22

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.

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.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.

Question 24

Hardy's basis in his partnership interest was $5,000 at the beginning of the tax year.For the year,his share of the partnership's loss was $6,000,and he also received a distribution of $3,000.Hardy can deduct a $2,000 loss,and the remaining $4,000 loss is suspended until a year in which he has adequate basis.

Question 25

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 26

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.

Question 27

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.

Question 28

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.

Question 29

During the current year,John and Ashley form the JA Partnership and agree to share profits and losses equally.Ashley contributes land with a fair market value of $80,000 (subject to a $30,000 nonrecourse mortgage).On the contribution date,Ashley's adjusted basis in the land is $40,000.Immediately after formation,Ashley's partnership outside basis is $25,000.

Question 30

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.

Question 31

Henry contributes property valued at $60,000 (basis $50,000)in exchange for a 25% interest in the HIKE Partnership.If the property is later sold for $80,000,gain of $7,500 will be allocated to Henry.

Question 32

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.

Question 33

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 34

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 35

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.

Question 36

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 37

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.

Question 38

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.

Question 39

A partnership cannot use the cash method of accounting if one of the partners is a C corporation.

Question 40

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 41

Jeremy receives a proportionate nonliquidating distribution from the JKL Partnership when the basis of his interest is $100,000.The distribution consists of cash of $25,000,land with a basis of $30,000 and a fair market value of $65,000,and inventory with a partnership basis of $50,000 and fair market value of $60,000.As a result of this distribution,Jeremy recognizes a $50,000 gain and takes a $65,000 basis in the land and a $60,000 basis in the inventory.

Question 42

Marcie is a 40% member of the M&A LLC.Her basis is $40,000 immediately before the LLC distributes to her $30,000 of cash and land (basis to the LLC of $20,000 and fair market value of $25,000).As a result of the proportionate,nonliquidating distribution,Marcie recognizes a gain of $15,000 and her basis in the land equals its fair market value of $25,000.

Question 43

A distribution cannot be "proportionate" if only one partner receives assets from the partnership.

Question 44

The LMO Partnership distributed $30,000 cash to Emma in a proportionate,nonliquidating distribution.Emma's basis in her partnership interest was $25,000 immediately before the distribution.As a result of the distribution,Emma's basis is reduced to $0 and she recognizes a $5,000 gain.

Question 45

A property distribution from a partnership to a partner is generally taxable to the partner.

Question 46

Carlos receives a proportionate liquidating distribution consisting of $8,000 cash and inventory with a basis to the partnership of $5,000 and a fair market value of $6,000.His basis in his partnership interest was $15,000 immediately before the distribution.Carlos assigns a basis of $5,000 to the inventory,and recognizes a $2,000 capital loss.

Question 47

Jared owns a 40% interest in the capital and profits of the JAJ Partnership.Immediately before he receives a proportionate nonliquidating distribution from JAJ,the basis of his partnership interest is $60,000.The distribution consists of $40,000 in cash and land with a fair market value of $25,000.JAJ's adjusted basis in the land immediately before the distribution is $30,000.As a result of the distribution,Jared recognizes no gain or loss and his basis in the land is $20,000.

Question 48

Tim and Darby are equal partners in the TD Partnership.Partnership income for the year is $60,000.Tim needs cash in order to pay tax on his share of the partnership income,but Darby wants to leave the cash in the partnership for expansion.If the partners agree,it is acceptable for TD to distribute $8,000 to Tim,and no cash or other property to Darby.

Question 49

Generally,gain is recognized on a proportionate current or liquidating distribution if the fair market value of property distributed exceeds the partner's basis in the partnership interest.

Question 50

In a proportionate nonliquidating distribution of cash and a capital asset,the partner recognizes gain to the extent the amount of cash distributed exceeds the partner's basis in the partnership interest.

Question 51

In a proportionate liquidating distribution,UVW Partnership distributes to partner William cash of $25,000,accounts receivable (basis of $10,000 and fair market value of $8,000),and land (basis of $50,000 and fair market value of $60,000).William's basis was $75,000 before the distribution.On the liquidation,William recognizes no gain or loss,and he takes a basis of $10,000 in the accounts receivable,and $50,000 in the land.

Question 52

Matt,a partner in the MB Partnership,receives a proportionate,nonliquidating distribution of property having a fair market value of $16,000 and a partnership basis of $23,000.Matt's basis in the partnership is $10,000 before the distribution.In this situation,Matt will recognize a $6,000 gain,take a $16,000 basis in the property,and his basis in the partnership interest is reduced to zero.

Question 53

For income tax purposes,proportionate and disproportionate distributions from a partnership are treated similarly.

Question 54

For purposes of determining gain on a current distribution to a partner,a distribution of cash includes relief of a partner's share of partnership liabilities and certain distributions of marketable securities.

Question 55

Pat is a 40% member of the P&J LLC.Her basis is $30,000 immediately before the LLC distributes to her $40,000 of cash and land (basis to the partnership of $25,000 and fair market value of $50,000).As a result of the proportionate nonliquidating distribution,Pat recognizes a gain of $10,000 and her basis in the land is $0.

Question 56

Zach's partnership interest basis is $80,000.Zach receives a proportionate,liquidating distribution from a liquidating partnership of $60,000 cash and inventory having a basis of $30,000 to the partnership and a fair market value of $26,000.Zach assigns a basis of $20,000 to the inventory and recognizes no gain or loss.

Question 57

Shelby,a partner in the STU partnership,received a proportionate nonliquidating distribution of $50,000 cash,unrealized receivables with a basis of $0 and a fair market value of $40,000,and land with a basis of $35,000 and a fair market value of $25,000.Her basis in the partnership interest immediately before the distributions was $70,000.She will recognize $0 gain on the distribution,and her basis in the receivables and land will be $0 and $20,000 respectively.

Question 58

For Federal income tax purposes,a distribution from a partnership to a partner is treated the same as a distribution from a C corporation to its shareholders.

Question 59

In a proportionate liquidating distribution,RST Partnership distributes to partner Riley cash of $30,000,accounts receivable (basis of $0 and fair market value of $40,000),and land (basis of $65,000 and fair market value of $50,000).Riley's basis was $40,000 before the distribution.On the liquidation,Riley recognizes a gain of $0,and her basis is $10,000 in the land and $0 in the accounts receivable.

Question 60

In a proportionate nonliquidating distribution,cash is deemed to be distributed first,followed by unrealized receivables and inventory and,last,capital and other assets.

Question 61

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.

Question 62

Kevin,Cody,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).Cody 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?

A) Kevin's basis in his partnership interest is $130,000.
B) Cody's basis in his partnership interest is $100,000.
C) Greg's basis in his partnership interest is $60,000.
D) KCG has a basis of $80,000, $40,000, and $0 in the land and property (excluding cash) contributed by Kevin, Cody, and Greg, respectively.
E) All of these statement are correct.

Question 63

In a proportionate liquidating distribution in which the partnership is also liquidated,Macy received cash of $10,000 and inventory (basis of $18,000 and fair market value of $32,000).Immediately before the distribution,Macy's basis in the partnership interest was $40,000.Macy recognizes no gain or loss,and her basis in the inventory is $30,000.

Question 64

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

A) Whether to claim a tax credit or deduction for foreign taxes.
B) Whether to capitalize, amortize, or expense research and experimental costs.
C) The taxable year of the partnership.
D) The depreciation method used for partnership property.
E) All of the above elections are made by the partnership.

Question 65

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 GMVV Partnership, and three years later GMVV distributes $100,000 proportionately to all 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 66

Nick sells his 25% interest in the LMNO Partnership to new partner Katrina for $57,500.The partnership's assets consist of cash ($100,000),land (basis of $90,000; fair market value of $70,000),and inventory (basis of $40,000; fair market value of $60,000).Nick's basis in his partnership interest was $57,500.On the sale,Nick will recognize ordinary income of $5,000 and a capital loss of $5,000.

Question 67

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) All of the above statements are true.

Question 68

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.

Question 69

Lexi and Allie formed a partnership.Lexi received a 30% interest in partnership capital and profits in exchange for land with a basis of $50,000 and a fair market value of $90,000.Allie received a 70% interest in partnership capital and profits in exchange for $210,000 of cash.Three years after the contribution date,the land contributed by Lexi is sold by the partnership to a third party for $120,000.How much taxable gain will Lexi recognize from the sale?

A) $21,000.
B) $40,000.
C) $49,000.
D) $70,000.
E) None of the above.

Question 70

Tyler's basis in his partnership interest is $110,000,including his share of partnership debt.Sarah buys Tyler's partnership interest for $60,000 cash and she assumes Tyler's $90,000 share of the partnership's debt.If the partnership owns no hot assets,Tyler will recognize a capital loss of $50,000.

Question 71

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

A) The entity 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 profits that will be allocated to the partner.
C) The partnership's inside 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 72

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?

A) If the cash distribution occurred two months after the property contribution, the IRS may treat the transaction as a disguised sale.
B) If the transaction is treated as a disguised sale, Tom's basis in the partnership interest will be $20,000.
C) If Tom would have made the property contribution anyway, even if he knew that the partnership would probably not have any cash to distribute to him, the IRS would not likely contend the transaction was a disguised sale.
D) If the IRS treated the transaction as a disguised sale, the partnership's basis in the property would be $50,000.

Question 73

Beth sells her 25% partnership interest to Katie for $50,000 cash on July 1 of the current tax year.Katie also assumed Beth's share of the partnership's liabilities.Beth'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 Beth'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.Beth recognizes a gain of $12,500 on the sale.

Question 74

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 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 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 75

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

A) Always starts the day after the contribution date.
B) Always starts the day the property was contributed.
C) May include the holding period of the contributed property.
D) Never includes the holding period of the contributed property.
E) None of the above.

Question 76

On January 1 of the current year,Jenna and Rob form an equal partnership.Jenna makes a cash contribution of $80,000 and a property contribution (adjusted basis of $120,000; fair market value of $160,000)in exchange for her interest in the partnership.Rob contributes property (adjusted basis of $190,000; fair market value of $240,000)in exchange for his partnership interest.Which of the following statements is true concerning the income tax results of this partnership formation?

A) Jenna has a $200,000 tax basis for her partnership interest.
B) Rob recognizes a $50,000 gain on his property transfer.
C) Rob has a $240,000 tax basis for his partnership interest.
D) The partnership has a $160,000 adjusted basis in the property contributed by Jenna.
E) None of the statements is true.

Question 77

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

A) A partnership is not 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 ratio equals the partner's loss-sharing ratio.
E) All of these statements are correct.

Question 78

A partnership has accounts receivable with a basis of $0 and a fair market value of $20,000 and depreciation recapture potential of $30,000.All other assets of the partnership are either cash,capital assets,or § 1231 assets.If a purchaser acquires a 40% interest in the partnership from another partner,the selling partner will be required to recognize ordinary income of $20,000.

Question 79

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

A) A partner in a limited liability partnership.
B) A member of a limited liability company.
C) A limited partner in a limited partnership.
D) A general partner in a limited partnership.
E) None of these owners are personally liable for entity debts.

Question 80

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.