Deck 33: Partnerships and S Corporations

Question 1

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 1

True

Question 2

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.

Answer 2

True

Question 3

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.

Answer 3

True

Question 4

All the following are types of pass-through entities except

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

Question 5

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 6

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

Question 7

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

Question 8

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 9

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.

Question 10

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 11

All of the following will file partnership tax returns except

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

Question 12

Etta transfers property with an adjusted basis of $60,000 in exchange for a 50% partnership interest.The property is subject to a $70,000 mortgage which the partnership will assume.The partnership has no other liabilities.Etta will recognize a $10,000 gain on the exchange due to the negative basis limitation.

Question 13

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 14

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 15

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

Question 16

S corporations are a common form for small businesses because they offer more flexibility than partnerships in terms of ownership structure and allocation of income.

Question 17

The transfer of property to a partnership in exchange for a partnership interest will generally be a nontaxable event.

Question 18

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 19

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 20

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 21

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 22

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

Question 23

The deduction limitation on net business interest expense is applied at the partner,not the partnership,level.

Question 24

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 25

The expenses associated with promoting and marketing partnership interests can be currently deducted if $5,000 or less.Expenses in excess of $5,000 are amortized over 180 months.

Question 26

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 27

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 28

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 29

A partner in a partnership will deduct her qualified business income deduction as a deduction for AGI.

Question 30

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 31

Ron,a single taxpayer,receives $750,000 of taxable income from the family trust fund.In addition,he has a 50% interest in a partnership in which he is a material participant.The partnership incurs a $600,000 loss,50% of which is allocated to Ron.Ron's basis in his partnership interest before adjustment for the loss is $800,000.Ron will be able to deduct his full $300,000 share of the partnership loss.

Question 32

The qualified business deduction is calculated and applied at the partner,not the partnership,level.

Question 33

Treasury Regulations require maintenance of partnership capital accounts under book accounting principles rather than tax accounting principles.The capital accounts will be maintained following GAAP accounting standards.

Question 34

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 35

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

Question 36

A partnership's liabilities have increased by year-end.As a result,partners' bases in their partnership interests will increase.

Question 37

The excess business loss limitations apply at the partner,not partnership,level.

Question 38

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 39

A partnership sells an asset for a gain.The asset had been transferred to the partnership two years ago by Partner J in exchange for a partnership interest.The asset was worth substantially more than its cost as of the transfer date.The partnership gain will be allocated to all of the partners in accordance with their profit and loss sharing ratios.

Question 40

The limitation on the deductibility of business interest expense does not apply to taxpayers whose average gross receipts for the three preceding years is less than $26 million in 2019.

Question 41

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 42

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 43

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

Question 44

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 45

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.Principal partners are those with 10% or greater interest in the partnership.

Question 46

Tess buys Harry's partnership interest in Oval Partnership.Oval holds several highly appreciated assets,and this appreciation is reflected in the price Tess paid for the partnership interest.Tess can make a Sec.754 election to increase the basis of her share of partnership assets.

Question 47

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 a 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 48

Sari transferred an office building with a $500,000 FMV and a $300,000 adjusted basis to the Oak Partnership in exchange for a one-quarter ownership interest.Sari had acquired the building three years earlier and had used it in her sole proprietorship.Sari's holding period for her partnership interest

A)will begin the day after she acquires the partnership interest.
B)will include the holding period of the transferred building.
C)will depend on the election she files.
D)none of the above.

Question 49

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 2010.The partnership owes no other liabilities.Lance,Rhonda,and Zach share profits and losses equally and each has a 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 50

Ezinne transfers land with an adjusted basis of $50,000 and a FMV of $95,000 to a new business in exchange for a 50% ownership interest.The land is subject to a $60,000 mortgage which the business will assume.The business has no other liabilities outstanding.Indicate the amount of gain recognized by Ezinne due to this exchange if the building is transferred to (1)a corporation and (2)a partnership.Assume Sec.351 is satisfied in the case of the corporation and Sec.721 is satisfied in the case of the partnership.

A) $$\begin{array} { | l | l | } \hline \text { Corporation } & \text { Partnership } \\\hline \$ 0 & \$ 0 \\\hline\end{array}$$
B) $$\begin{array} { | l | l | } \hline \text { Corporation } & \text { Partnership } \\\hline \$ 10,000 & \$ 0 \\\hline\end{array}$$
C) $$\begin{array} {| l | l | } \hline \text { Corporation } & \text { Partnership } \\\hline \$ 10,000 & \$ 10,000 \\\hline\end{array}$$
D) $$\begin{array} { | l | l | } \hline \text { Corporation } & \text { Partnership } \\\hline \$ 0 & \$ 10,000 \\\hline\end{array}$$

Question 51

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 52

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 53

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 be required to recognize a $14,000 gain due to the negative basis rules and will have a basis in his partnership interest of zero.

Question 54

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 55

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 56

When a partnership interest is sold,ordinary income may result if a partnership has unrealized receivables or inventory items.

Question 57

Kuda exchanges property with a FMV of $630,000 and an adjusted basis of $450,000 in exchange for a one-third interest in a partnership.The property is subject to a mortgage with a principal balance of $300,000 which the partnership assumes.As a result of Kuda joining the partnership,Alejandro,a pre-existing partner,now has a one-third interest in the partnership.Alejandro will adjust his basis to

A)increase it by $150,000.
B)increase it by $210,000.
C)decrease by $100,000.
D)increase it by $100,000.

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

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 60

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 61

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 62

Dara,a single taxpayer,is a 50% partner in a CPA partnership.The partnership reports $500,000 of ordinary business income and no separately stated items in 2019.Dara also has $30,000 of taxable interest income and $25,000 of itemized deductions.Dara will be allowed a qualified business income deduction of

A)$100,000.
B)$50,000.
C)$51,000.
D)$0.

Question 63

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 64

Which of the following will be separately stated by a partnership reporting its operations for the year to the IRS?

A)interest income
B)Sec.1245 depreciation recapture
C)bad debt expense
D)None of the items will be separately stated.

Question 65

Rowan and Sanjay are equal partners in a partnership,which uses the calendar year as its tax year.On September 1,this year,Hailley contributed $60,000 cash for a one-third interest in the partnership.The partnership reports $72,000 of ordinary income for the tax year ending on December 31 of this year.The income allocation to Hailley is (assume the elective proration method with a monthly convention)

A)$24,000.
B)$12,000.
C)$0.
D)$8,000.

Question 66

A taxpayer has various businesses which operate in different legal and tax forms.The qualified business income deduction will apply to the business income earned from all of the following businesses except

A)the partnership.
B)the sole proprietorship.
C)the C corporation.
D)the S corporation.

Question 67

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 68

JK Partnership earns $30 million of non-interest ordinary income.The partnership incurs $12 million of interest expense.Jen and Kai are each 50% partners,sharing all partnership items equally.Assume no taxpayer qualifies for the small business exception.The partnership's ordinary income,after taking interest expense into account,will be

A)$18 million.
B)$21 million.
C)$24 million.
D)$30 million.

Question 69

In 2019,Phuong transferred land having a $150,000 FMV and a $120,000 adjusted basis,which is subject to a $110,000 mortgage in exchange for a one-third interest in the DSF Partnership.Phuong had purchased the land in 2015,but the mortgage was not received until 2016.The partnership owes no other liabilities.Phuong,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 Phuong commences in

A)2015.
B)2016.
C)2019.
D)The holding period is the same number of years that the partnership has been in existence.

Question 70

Evie,a single taxpayer,is a 50% partner in a partnership.The partnership reports $100,000 of ordinary business income and no separately stated items in 2019.Evie also has $30,000 of taxable interest income and takes a $12,200 standard deduction.Evie will be allowed a qualified business income deduction of

A)$10,000.
B)$20,000.
C)$13,560.
D)$50,000.

Question 71

On April 5,2019,Joan contributes business equipment (she had purchased on October 24,2017)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) $$\begin{array} {| l | l | } \hline \text { Basis } & \text { Holding Period Begins } \\\hline \$ 40,000 & \text { October } 24,2017 \\\hline\end{array}$$
B) $$\begin{array} {| l | l |} \hline\text { Basis } & \text { Holding Period Begins } \\\hline \$ 40,000 & \text { April 5, 2019 }\\\hline\end{array}$$
C) $$\begin{array} { |l | l | } \hline \text { Basis } & \text { Holding Period Begins } \\\hline \$ 45,000 & \text { October } 24,2017 \\\hline\end{array}$$
D) $$\begin{array} {| l | l | } \hline \text { Basis } & \text { Holding Period Begins } \\\hline \$ 45,000 & \text { April 5, 2019 } \\\hline\end{array}$$

Question 72

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 73

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 is (assume the elective proration method with a monthly convention)

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

Question 74

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 75

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 76

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 77

A partnership's interest expense deduction is limited by the 30% of adjusted taxable income limitation.The excess interest expense

A)is carried over by the partnership and applied against future partnership taxable income.
B)is carried over by the partner as a net operating loss.
C)is allocated to the partners to be used in the partner's succeeding tax years when excess limits are allocated.
D)is lost.

Question 78

Mia is a 50% partner in a partnership with a beginning of the year adjusted basis in her partnership interest of $50,000.For the current year,no distributions are made to partners,and there is no change in partnership liabilities.The partnership incurred a $140,000 ordinary loss for the year.How does Mia treat her loss in excess of basis?

A)She will recognize $3,000 this year and carry forward the balance.
B)She will first carry back the excess loss for two years and then carry forward the balance up to 20 years.
C)She will carry over the excess loss indefinitely until a subsequent year when she again has a positive basis in her partnership interest.
D)She will first carry back the excess loss three years and then carry forward the balance up to five years.

Question 79

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)$60,000 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 80

Duo Partnership reports the following items for the year: $$\begin{array} { | l | r | } \hline \text { Sales } & \$ 750,000 \\\hline \text { Wage expense } & 300,000 \\\hline \text { Rent expense } & 50,000 \\\hline \text { Charitable contributions } & 10,00 \\\hline \text { Short-term capital gain } & 20,000 \\\hline \text { Sec. } 179 \text { expense } & 100,00 \\\hline\end{array}$$ In addition to reporting separately stated items on the Form 1065,Duo will report ordinary income of

A)$400,000.
B)$300,000.
C)$420,000.
D)$310,000.