Deck 9: Taxation of Partnerships and Partners

Question 1

B contributes her business property to AB Partnership.This property has a market value of $2,000 and a basis to B of $1,500.The entity theory applies in this situation.Accordingly, the basis of the property to the partnership is $2,000, and B recognizes a $500 gain.

Answer 1

False

Question 2

When a partner's share of debt is decreased, the reduction is treated as a cash distribution from the partnership to the partner.

Answer 2

True

Question 3

Syndication fees paid by a partnership may be amortized on a straight-line basis over a period of 60 months or longer.

Answer 3

False

Question 4

The partnership's holding period for assets contributed to the partnership by a partner begins with the date the assets are contributed.

Question 5

S owns a 30 percent interest in the capital and profits of ST partnership.S sold land ($5,000 basis) to ST for its fair market value of $3,000.S's $2,000 loss will be disallowed to him.

Question 6

Organization costs of a partnership can be deducted when incurred or paid, or they can be amortized on a straight-line basis over a period not to exceed 60 months, provided the partnership files the proper election.

Question 7

It is possible for a business to be taxed as a partnership even though one of its partners is a corporation.

Question 8

When noncash assets are contributed to a partnership, the entity theory usually applies and, therefore, gain or loss is recognized.

Question 9

A limited partner, by definition, may not participate in the management of the limited partnership.

Question 10

Form 1065 and Schedule K-1 are prepared according to the aggregate theory; however, special tax elections usually reflect the entity theory.

Question 11

The contribution of depreciated property in a tax-free exchange for a partnership interest does not trigger the § 1245 or § 1250 depreciation recapture provisions.

Question 12

A partner's share of liabilities is generally based on her or his economic risk of loss in the case of recourse debt and loss-sharing ratio in the case of nonrecourse debt.

Question 13

General partnerships are owned solely by two or more general partners, and limited partnerships are owned solely by two or more limited partners.

Question 14

An individual who contributes services in exchange for an unrestricted capital interest in a partnership has includible ordinary income equal to the fair market value of the capital interest.

Question 15

A contributing partner's holding period for an interest in a partnership begins on the date the partnership interest is acquired.

Question 16

Under the "check the box" regulations, any unincorporated business having two or more owners and that does not elect to be taxed as a corporation will be treated as a partnership.

Question 17

Partners may agree to specially allocate any existing revenue, expense, or other partnership item in any way they wish when (a) they have owned their interest in the partnership for the entire year, and (b) the allocation has a substantial economic effect.(Assume all partners contributed cash for their capital interests.)

Question 18

Owners of investment property can elect that Subchapter K not apply to their ventures if each owner retains a separate and undivided ownership interest in the acquisition, operation, and disposition of the property.

Question 19

An individual who contributes services in exchange for an interest in the future profits of a newly formed partnership does not recognize current year income on the receipt of the interest.

Question 20

Special allocations of depreciation, depletion, gain, and loss accrued at the date property is contributed to a partnership is optional.

Question 21

A 70 percent partner has a $5,000 recognized loss when he sells equipment with a basis of $35,000 to the partnership at its FMV of $30,000.

Question 22

For purposes of determining a year-end for the partnership, a principal partner is defined as one who owns 50 percent or more of the partnership.

Question 23

A has been a partner in the ABC Partnership for only four months.During the current year, the partnership sold investment land that it purchased six years ago and recognized a $100,000 gain.A's distributive share of this gain is long-term capital gain.

Question 24

A guaranteed payment from a partnership always represents current ordinary income to the recipient partner.

Question 25

The portion of a partner's distributive share of losses that exceeds the partner's basis may be carried forward indefinitely and deducted in a later year or years when that partner's basis is increased.

Question 26

Dividend and interest income are considered passive activity income to a partner.

Question 27

An individual received a 70 percent capital interest in a general partnership by contributing the following: • Investment land purchased 10 years ago for $40,000 and valued at $90,000.There was a $50,000 nonrecourse debt on the land that was also transferred to the partnership.
• Services to organize the partnership valued at $22,500.
• Business inventory purchased nine months ago for $10,000 and valued at $8,000.
This general partner's basis in the partnership after the contribution is

A)$0
B)$22,500
C)$35,000
D)$57,500
E)$72,500

Question 28

Individual D contributes $15,000 cash and investment land (FMV $35,000 and basis $22,000) and Individual E contributes business assets (FMV $50,000 and basis $60,000) to create the new DE Partnership.Which of the following statements is accurate?

A)Both D and E have initial capital balances of $50,000.D's outside basis in his interest is $37,000 and E's outside basis in his interest is $60,000.
B)Both D and E have initial capital balances of $50,000.D's outside basis in his interest is $22,000 and E's outside basis in his interest is $60,000.
C)Both D and E have initial capital balances and outside bases in their interests of $50,000.
D)D's initial capital account balance and outside basis in his interest are $37,000 and E's initial capital account balance and outside basis in his interest are $60,000.
E)Because D and E have equal capital account balances, they must share partnership profits and losses equally.

Question 29

Which of the following is not a legal characteristic of a general partnership?

A)Unlimited liability of partners for partnership recourse debt
B)Restricted transferability of partnership interests
C)Centralized management
D)Limited life
E)All of the above are legal characteristics of partnerships.

Question 30

An accountant performed services for EZ partnership and, in lieu of her normal fee, accepted a 10 percent unrestricted capital interest in the partnership with a fair market value of $7,500.How much income from this arrangement should the accountant report on her tax return?

A)$7,500
B)$5,000
C)$2,500
D)$0

Question 31

The flow-through of partnership losses is considered to be the last event to occur during a partnership's taxable year.

Question 32

In most instances, a new partnership should use a January 31 year-end in order to maximize deferral of partnership income for calendar year partners.

Question 33

On January 1, 2011, F exchanged proprietorship equipment ($102,000 market value and $84,000 basis) for a 20 percent capital interest in a partnership.The calendar year partnership's 2011 and 2012 tax depreciation deductions for this equipment total $8,400 (10% of contributed basis).How much of the $8,400 should be allocated to F?

A)$1,680
B)$800
C)$240
D)$232

Question 34

R exchanged a proprietorship parking lot ($23,000 market value and $15,000 basis) for a 10 percent capital interest in a partnership.The partnership uses the property for four years and then sells it for $25,000.R must recognize income from the sale of

A)$10,000
B)$8,200
C)$1,000
D)$200

Question 35

V is to perform services in exchange for a 20 percent capital interest in a partnership.Both the services and the capital interest are valued at $30,000.However, the agreement between V and the partnership states that the capital interest is forfeited if V violates any part of the service contract during the next five years.V believes the market value of the interest at the end of the fifth year will be $70,000.(Assume this $70,000 value is accurate when choosing among the answers below.) V has a choice of recognizing

A)$0 now or $70,000 at the end of the fifth year
B)$30,000 now or $40,000 at the end of the fifth year
C)$70,000 now or $0 at the end of the fifth year
D)$0 now or $70,000 when the capital interest is sold
E)None of the above

Question 36

T transfers a building ($90,000 market value, $40,000 basis), plus a $60,000 nonrecourse debt on the building, to a partnership in exchange for a 30 percent capital interest valued at $30,000.The partnership has no other debt.T's basis in his partnership interest is

A)$0
B)$2,000
C)$12,000
D)$30,000
E)$40,000

Question 37

Which of the following is not considered a partnership for Federal income tax purposes?

A)Trust
B)Pool
C)Syndicate
D)Joint venture
E)Limited Liability Company

Question 38

Any portion of a partner's distributive share of current year partnership loss that is a nondeductible passive activity loss does not reduce the partner's outside basis in the partnership interest.

Question 39

Based on the entity concept of partnerships, which of the following statements is false?

A)A partnership may enter into taxable transactions with partners.
B)A partnership is legally liable for debts of the partners.
C)A partnership must file an annual tax return (Form 1065) reporting the results of operations.
D)A partnership is required to make tax elections for partnership activities that are applicable to all partners.
E)A partnership may hold title to property in its own name.

Question 40

W, B, and G, the sole owners of a partnership, use different tax years for their individual returns.They agree to adopt concurrent tax years for their personal returns.The partnership may also change its tax year to coincide with those of the partners without approval from the IRS.

Question 41

Which of the following is not used to calculate ordinary income (loss) on Form 1065?

A)Business interest income
B)Ordinary income from other partnerships and fiduciaries
C)Payments to Keogh or IRA plans for partners
D)Cost of goods sold
E)Guaranteed payments to partners

Question 42

Which of the following partnership interests is not a § 469 passive activity?

A)A 20% limited interest in a partnership that operates a profitable restaurant business.The owner of the interest is an individual.
B)A 20% limited interest in a partnership that operates a profitable restaurant business.The owner of the interest is a publicly traded corporation.
C)A 20% general interest in a partnership that operates a profitable restaurant business.The owner of the interest is an individual who does not materially participate in the day-to-day operations of the business.
D)A 20% limited interest in a partnership that rents single family houses and duplexes.The owner of the interest is an individual.
E)A 20% limited interest in a partnership that operates a profitable restaurant business.The owner of the interest is a trust.

Question 43

G is a 50% general partner and L is a 50% limited partner in the GL limited partnership.The partnership's ordinary business income for the year is $60,000.G receives a guaranteed payment of $15,000 for managing the partnership and L receives a guaranteed payment of $5,000 for helping to arrange some financing for GL.How much of this income is subject to the self-employment tax?

A)$30,000 for G and $30,000 for L
B)$45,000 for G and $35,000 for L
C)$45,000 for G and $5,000 for L
D)$ 15,000 for G and $5,000 for L

Question 44

Which of the following is false regarding a guaranteed payment?

A)It is recognized as income by the recipient partner in the taxable year received.
B)It is either a deductible expense or a capital expenditure to the partnership.
C)It is ordinary income to the partner receiving the payment.
D)It is determined without regard to partnership income.
E)It is added to a partner's distributive share of ordinary income in calculating self-employment income.

Question 45

Two years ago, J contributed a capital asset (FMV $10,000 and basis $16,000) to the JKL Partnership.The asset was a nondepreciable § 1231 asset to the partnership.During the current year, the partnership sold the asset for $8,000.As a result of the sale, the partnership should recognize:

A)An $8,000 §1231 loss
B)A $6,000 capital loss and a $2,000 § 1231 loss
C)An $8,000 capital loss
D)A $2,000 §1231 loss
E)A $2,000 capital loss

Question 46

In return for services rendered to it by C, the ABC partnership transfers a one-fourth capital interest to C when it only has one asset, a tract of land with a basis of $20,000 and fair market value of $30,000.The partnership has no liabilities.As a result, ABC's recognized gain and basis in the land, respectively, are

A)$10,000 and $30,000
B)$2,500 and $22,500
C)$2,500 and $27,500
D)$10,000 and $20,000

Question 47

At the beginning of the current year, Corporation M had a $50,000 basis in its 50% interest in the M&N Partnership.For the year, M&N incurred a $168,000 net operating loss and a $32,000 capital loss and received $20,000 of dividend income.The amount of the partnership's debts did not change during the year and it made no distributions to its partners.Based on these facts, what amount of M&N's ordinary loss and capital loss may M recognize during the current year?

A)$42,000 ordinary loss and $8,000 capital loss
B)$50,000 ordinary loss
C)$50,400 ordinary loss and $9,600 capital loss
D)$54,000 ordinary loss and $16,000 capital loss
E)$60,000 ordinary loss

Question 48

O purchased a 20% interest in the OOPS partnership for $20,000 on January 1, 2012.He purchased another 10% interest in OOPS for $10,000 on December 1, 2012.As of January 1, 2013, what is O's holding period in his partnership interest?

A)One year
B)One month
C)One year for 50% of his interest and one month for 50% of his interest
D)One year for 67% of his interest and one month for 33% of his interest

Question 49

At the beginning of the current year, K's basis in her partnership interest was $35,000.At the end of the year, K received a K-1 from the partnership that showed the following: Increase in share of partnership liabilities $\quad$$\$ 8,700$
Cash withdrawal $\quad$$\quad$ 20,000
Partnership taxable income $\quad$ 13,500
Dividend income $\quad$$\quad 5,000$
Short-term capital loss $\quad$$\quad 1,400$
Charitable contribution $\quad$$\quad 500$
Special allocation of depreciation $\quad$$\quad$ 1,800 Based on these facts, compute K's basis in her partnership interest at the beginning of the next year.

A)$31,200
B)$42,200
C)$31,700
D)$38,500
E)$39,900

Question 50

QT Partnership, which operates a retail clothing store, had the following information at year-end: $$\begin{array} { l r } \text { Gross sales } & \$ 580,000 \\\text { Cost of goods sold } & 377,000 \\\text { Repairs } & 1,500 \\\text { Depreciation } & 2,000 \\\text { Employee salaries } & 32,000 \\\text { Charitable contributions } & 500 \\\text { Section 1231 gain } & 200 \\\text { Short-term capital gain } & 350 \\\text { Dividends } & 750\end{array}$$ What is QT Partnership's ordinary income for the year?

A)$167,500
B)$167,700
C)$167,850
D)$168,050
E)$168,300

Question 51

Partner A owns a 60% interest in the capital and profits of the ABC Partnership.During the year A sells marketable securities to the partnership for their FMV of $30,000.The partnership intends to hold the securities as an investment.Based on these facts, which of the following is accurate?

A)If A's basis in the securities was $25,000, A must recognize a $5,000 ordinary gain on the sale.
B)If A's basis in the securities was $25,000, A recognizes no gain on the sale.
C)If A's basis in the securities was $40,000, A may recognize a $10,000 capital loss on the sale.
D)If A's basis in the securities was $40,000, A recognizes no loss on the sale.
E)None of the above is accurate.

Question 52

Items that may be subject to special tax treatment and that are reported separately on Schedule K of the partnership return include all of the following except

A)Dividends
B)Capital gains and losses
C)Charitable contributions
D)Tax credits
E)Business bad debts

Question 53

G and H are individual partners in GH Partnership and share equally in its profits and losses.G had a basis of $5,000 in the partnership, before considering the $14,000 ordinary loss reported by GH for 2011.In 2012, the partnership reports a $6,000 ordinary gain on Form 1065.What income or loss should G properly report on his 2012 individual return? Assume that there are no other transactions that affect G's basis in the partnership for 2011 and 2012.

A)$0
B)$2,000 loss
C)$1,000 income
D)$2,000 income
E)$3,000 income

Question 54

Partner J, a cash basis taxpayer, is a 75% partner in the cash basis J&D Partnership.During the current year, J lends the partnership $50,000, receiving a properly executed note from the partnership bearing the market rate of interest.J&D used the loan proceeds as working capital.Which of the following is accurate?

A)Because J owns more than a 50% interest in J&D, the interest payment will be treated as a guaranteed payment made by J&D to J.
B)Because J owns more than a 50% interest in J&D, the interest payment will be treated as a distributive share of partnership taxable income to J.
C)The interest paid on the note will be ordinary interest income to J and a current interest deduction to J&D in the year paid.
D)Because J owns more than a 50% interest in J&D, the interest payment will be treated as a guaranteed payment made by J&D to J.
E)Because J owns more than a 50% interest in J&D, the interest payment will be a nondeductible expense to J&D.

Question 55

X has the following income and loss items for the current year: Salary from an unrelated corporation $\quad \$ 100,000$
Interest income $\quad$$\quad$ 1,000
Loss from a general partnership in which $X$ materially participated $\quad$$( 20,000 )$
Loss from a limited partnership $\quad$$\quad ( 10,000 )$ X's A.G.I.for the current year is

A)$101,000
B)$70,000
C)$81,000
D)$80,000
E)$71,000

Question 56

Unrelated individuals P, Q, R, and S are partners in PQRS Partnership.The partnership experienced an operating loss of $5,000 during the year.Based on the following information, how much loss can the partners deduct on their respective individual tax returns? $\begin{array}{lll}\text { Partner }&\text { Distributive Profit and Loss \% }&\text { Basis in Partnership}\\&&\text { Determined before Loss Distribution }\\\mathrm{P} & 40 & \$ 10,000 \\\mathrm{Q} & 25 & 8,000 \\\mathrm{R} & 25 & 1,000 \\\mathrm{~S} & 10 & 1,000\\&100 \%&\$20,000\end{array}$ The following answer choices are arranged in partner order of P, Q, R, and S.

A)$2,000, $ 1,250, $ 1,250, $500
B)$2,000, $ 1,250, $ 1,000, $500
C)$2,000, $1,250, $0, $500
D)$5,000, $3,000, $0, $0
E)$4,000, $2,500, $2,500, $1,000

Question 57

For the current year, Gamma Partnership has $60,000 net operating revenues before consideration of any payment to its two equal partners, G and H.During the year, Gamma made a $25,000 guaranteed payment to Partner G.It also distributed $5,000 cash to both G and H.Gamma and its two partners all use the calendar year for tax purposes.Based on these facts, how much partnership income should G and H report on their current year individual returns?

A)Both G and H should report $30,000 of partnership income.
B)Both G and H should report $17,500 of partnership income.
C)Both G and H should report $12,500 of partnership income.
D)G should report $42,500 and H should report $17,500 of partnership income.
E)G should report $37,500 and H should report $12,500 of partnership income.