Deck 21: Partnerships

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

In a limited liability partnership, all members may participate in management and have personal liability for entity debts except for malpractice committed by the other partners.

Question 10

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

Question 11

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

Question 12

In a limited liability company, all members may participate in management (the operating agreement cannot limit participation), and all entity debts are treated as nonrecourse liabilities for purposes of allocating the LLC's liabilities to basis.

Question 13

When Kevin and Marshall formed the equal KM LLC, the fair market values of their interests were each $100,000.
Kevin contributed $60,000 cash, equipment with a basis of $0 and a fair market value of $10,000, and a small parcel of land in which he had a basis of $50,000 and that was valued at $30,000. Marshall contributed receivable that was valued at $100,000 and in which his basis was $0. Kevin has a basis in his partnership interest of $110,000 and Marshall's basis is $0.

Question 14

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

Question 15

An example of the aggregate concept of partnership taxation is that the partnership makes elections related to depreciation, tax credit calculations (except the foreign tax credit), and whether to claim a § 179 deduction.

Question 16

A partnership reports each partner's share of income to the partner on a Form 1099-MISC.

Question 17

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

Question 18

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

Question 19

The partnership agreement might provide, for example, that the first $40,000 of ordinary income is allocated to
Partner A. Allocating income in this manner is an example of a separately stated item.

Question 20

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

Question 21

The amount of a partnership's income and loss from operating activities is combined with separately stated income and expenses to determine the partnership's equivalent of taxable income. This amount is reconciled to book income on the partnership's Schedule M-1 or Schedule M-3.

Question 22

Blaine contributes property valued at $50,000 (basis of $40,000) in exchange for a 25% interest in the BIKE Partnership. If the property is later sold for $70,000, gain of $15,000 will be allocated to Blaine.

Question 23

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

Question 24

To meet the substantial economic effect tests, a partnership's allocations of income and deductions to the partners are required to be proportionate to the partners' percentage ownership of partnership capital.

Question 25

ABC, LLC is equally owned by three corporations. Two corporations have June 30 fiscal year-ends and the third is a calendar year taxpayer. ABC will use the least aggregate deferral method to determine its taxable year-end.

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 in proportion to those ending capital account balances.

Question 27

Greene Partnership had average annual gross receipts for the past three years of $24.8 million and never has reported average annual gross receipts above $25 million. One of the partners is Jackson, Inc., a C corporation. Because Greene meets the average annual gross receipts test, it may use the cash method of accounting even though it has a partner that is a C corporation.

Question 28

Items that are not required to be shown on the partners' Schedules K-1 include AMT adjustments and preferences and taxes paid to foreign countries, because AMT and the foreign tax credit are calculated by the partnership.

Question 29

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, whereas 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 30

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

Question 31

Nicholas, a one-third partner, received a guaranteed payment in the current year of $50,000. Partnership income before consideration of the guaranteed payment was $20,000. Assuming that no loss limitation rules apply, Nicholas reports a $10,000 ordinary loss from partnership operations and the $50,000 guaranteed payment as ordinary income.

Question 32

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

Question 33

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

Question 34

BRW Partnership reported gross income from operations of $60,000, interest income of $3,000, utilities expense of
$20,000, and a charitable contribution of $6,000. On its Schedule K, the partnership reports ordinary business income of $40,000, separately stated interest income ($3,000), and charitable contributions ($6,000).

Question 35

A partnership must provide any information to the partners that they 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 36

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

Question 37

MNO Partnership has three equal partners. Moon, Inc. and Neptune, Inc. each have fiscal years ending March 31.
Omega uses the calendar year. MNO's required taxable year-end is March 31 under the majority partner rule.

Question 38

The BMR LLC conducted activities that were eligible for a $20,000 credit for increasing research activities. In addition, the LLC paid foreign taxes of $1,200. On the partners' Schedules K-1, BMR will allocate the $20,000 credit, and it will provide the necessary information so the partners can calculate the foreign tax credit if they so choose.

Question 39

The RGBY LLC operating agreement provides that 50% of depreciation expense is allocated to Red, and all remaining income (including the remaining 50% of depreciation) is allocated equally among the four partners. Before guaranteed payments and depreciation, RGBY's net income is $120,000 for the year. RGBY's depreciation expense is $20,000, and it paid a guaranteed payment to Yellow of $8,000. Assume that all allocations and payments meet the substantial economic effect rules. After all deductions and special allocations are taken into account, Red is allocated a net deduction of $15,500 from the partnership.

Question 40

DDP Partnership reported gross income from operations of $125,000, a long-term capital gain of $5,000, a short-term capital loss of $2,000, and a charitable contribution of $5,000. On its Schedule K, the partnership reports ordinary business income of $120,000, a long-term capital gain of $5,000, and a short-term capital loss of $2,000.

Question 41

Micah's beginning capital account on his Schedule K-1 is $60,000. During the year, he is allocated $20,000 of partnership income, $8,000 of nondeductible expenses, and a $12,000 share of tax-exempt income. His Schedule K-
1s show allocations of nonrecourse debt of $20,000 (last year) and $30,000 (this year). Micah's ending capital account is $94,000.

Question 42

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 43

The total tax burden on entity income is greater for a partner in a partnership (up to 37% for an individual partner) than on a shareholder in a corporation (21% for an individual shareholder), so partnerships are used only in special situations.

Question 44

The qualified business income deduction is calculated at the partner level. The partnership reports information the partner needs to calculate the deduction, such as W-2 wages and the unadjusted basis of the partnership's depreciable property.

Question 45

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 it to the partnership for $50,000. The partnership immediately started using the land as a parking lot for its employees. Maria may recognize her $10,000 loss on the sale.

Question 46

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

Question 47

The sum of the partners' ending basis amounts equals the partners' ending capital account balances. These amounts are shown on the partnership's Schedule K.

Question 48

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 even if it is not distributed.

Question 49

Debt of a limited liability company is allocated among its members using the nonrecourse debt allocation rules unless an LLC member has personally guaranteed the debt.

Question 50

Steve's basis in his SAW Partnership interest is $200,000 including all adjustments at the beginning of the tax year, .
His allocable share of partnership items is: ($120,000) of ordinary loss, $6,000 tax-exempt interest income, and a
$14,000 long-term capital gain. In addition, during the year, the LLC distributed $20,000 of cash to Steve. Also during the year, Steve's share of partnership debt increased by $10,000. Steve's ending basis in his LLC interest is $80,000.

Question 51

Anna and Brad are equal partners in the AB LLC. If AB distributes $10,000 of cash to Anna and a capital asset valued at $10,000 to Brad, and if both Anna and Brad continue to be members of the LLC, the distribution is classified as a proportionate current distribution.

Question 52

In a current (nonliquidating) distribution, loss never is recognized.

Question 53

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 that the LLC had no liabilities at the beginning or the end of the year, Emma's ending basis in her LLC interest is $76,000.

Question 54

Ashley purchased her partnership interest from Lindsey on the first day of the current year for $40,000 cash. Ashley received a $10,000 cash distribution from the partnership during the year, and her share of partnership income is
$15,000. Her share of partnership liabilities on the last day of the partnership year is $20,000. Ashley's outside basis for her partnership interest at the end of the year is $45,000.

Question 55

Gina is a single taxpayer and an active partner in the GMA LLC. Gina's Schedule K-1 reflects a $20,000 ordinary income share, $2,000 of interest income, and a $10,000 guaranteed payment for services. Gina's self-employment income from other sources and modified adjusted gross income is about $300,000. With respect to the income from the LLC, Gina is subject to the 0.9% additional Medicare tax on $30,000 and the 3.8% net investment income tax of
$2,000.

Question 56

Julie and Kate form an equal partnership during the current year. Julie contributes cash of $200,000, and Kate contributes property (adjusted basis of $90,000, fair market value of $260,000) subject to a nonrecourse liability of
$60,000. As a result of these transactions, Kate has a basis in her partnership interest of $120,000.

Question 57

Harry's basis in his partnership interest was $10,000 at the beginning of the tax year. For the year, his share of the partnership's loss was $8,000, and he also received a distribution of $4,000. Harry can deduct an $8,000 loss, and he recognizes a gain of $2,000 on the distribution of cash in excess of his remaining basis.

Question 58

Belinda owns a 30% profit and loss interest in the BOW LLC, and her basis in the interest is $30,000 excluding her share of the LLC's liabilities. Belinda guarantees a $40,000 LLC debt. Remaining liabilities (not guaranteed by any of the LLC members) are $100,000. Belinda's basis in the LLC is $100,000.

Question 59

If a partnership allocates losses to the partners, the partners first applies the passive loss limitations, then the basis limitation, and finally the at-risk limitations. If all three hurdles are met, a partner may deduct the loss.

Question 60

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 61

A gain arises only on a distribution from a partnership of cash that exceeds the partner's basis in the partnership interest. For this purpose, only cash, checks, and credit card charges are treated as cash.

Question 62

Loss cannot be recognized on a current (nonliquidating) distribution from a partnership unless cash, unrealized receivables, and/or § 1231 assets are the only items distributed.

Question 63

In a proportionate current (nonliquidating) distribution, cash is deemed to be distributed first followed by capital and §
1231 assets, and last, unrealized receivables and inventory.

Question 64

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 $7,000 to the inventory and recognizes no gain or loss.

Question 65

Marcie is a 40% member of the M&A LLC. Her basis is $10,000 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, current (nonliquidating) distribution, Marcie recognizes a gain of $20,000 and her basis in the land is
$0.

Question 66

Lori, a partner in the JKL partnership, received a proportionate current (nonliquidating) distribution of $10,000 cash, unrealized receivables with a basis of $0 and a fair market value of $15,000, and land with a basis of $6,000 and a fair market value of $10,000. Her basis in the partnership interest immediately before the distributions was $14,000. She will recognize $0 gain on the distribution, and her basis in the receivables and land will be $0 and $4,000, respectively.

Question 67

The BAM Partnership distributed the following assets to partner Barbie in a proportionate nonliquidating distribution:
$10,000 cash, land parcel A (basis of $5,000, fair market value of $30,000) and land parcel B (basis of $10,000, fair market value of $30,000). Barbie's basis in her partnership interest was $40,000 immediately before the distribution. Barbie will allocate a basis of $10,000 and $20,000, respectively, to the two land parcels, and her basis in her partnership interest will be reduced to $0.

Question 68

In a proportionate liquidating distribution, RST Partnership distributes to partner Riley cash of $30,000, accounts receivable (basis of $0, fair market value of $40,000), and land (basis of $65,000, 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 69

Tim and Darby are equal partners in the TD Partnership. Partnership income for the year is $60,000. Tim needs cash 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 but no cash or other property to
Darby.

Question 70

Randi owns a 40% interest in the capital and profits of the RAY Partnership. Immediately before she receives a proportionate current (nonliquidating) distribution from RAY, the basis for her partnership interest is $60,000. The distribution consists of $45,000 in cash and land with a fair market value of $72,000. RAY's adjusted basis in the land immediately before the distribution is $36,000. As a result of the distribution, Randi recognizes a gain of $57,000.

Question 71

Nick sells his 25% interest in the LMNO Partnership to new partner Katrina for $67,500. The partnership's assets consist of cash ($100,000), land (basis of $90,000, fair market value of $110,000), 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 gain of $5,000.

Question 72

In a liquidating distribution that liquidates the partnership, each partner recognizes gain or loss equal to the difference between the value of assets received less the partner's basis in the partnership interest.

Question 73

Taylor's basis in his partnership interest is $140,000, including his $60,000 share of partnership debt. Sandy buys Taylor's partnership interest for $100,000 cash, and she assumes Taylor's $60,000 share of the partnership's debt. If the partnership owns no hot assets, Taylor will recognize a capital loss of $40,000.

Question 74

The ELF Partnership distributed $20,000 cash to Emma in a proportionate, current (nonliquidating) distribution.
Emma's basis in her partnership interest was $12,000 immediately before the distribution. As a result of the distribution, Emma's basis is reduced to $0 and she recognizes an $8,000 gain.

Question 75

A distribution can be proportionate even if only one partner receives assets from the partnership.

Question 76

In a proportionate current (nonliquidating) distribution of cash and a capital asset, the partner recognizes gain to the extent the amount of cash plus the fair market value of property distributed exceeds the partner's basis in the partnership interest.

Question 77

In a proportionate liquidating distribution, WYX Partnership distributes to partner William cash of $40,000, cash basis accounts receivable (basis of $0, fair market value of $10,000), and land (basis of $30,000, fair market value of
$50,000). William's basis was $80,000 before the distribution. On the liquidation, William recognizes a $20,000 gain, and he takes a basis of $10,000 in the accounts receivable and $50,000 in the land.

Question 78

Matt, a partner in the MB Partnership, receives a proportionate, current (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 no gain or loss. He takes a $10,000 basis in the property, and his basis in the partnership interest is reduced to zero.

Question 79

Midway through the current tax year, Georgie sells her 40% interest in the GHI Partnership to new partner Kelly for
$150,000, including Georgie's share of partnership liabilities. At the beginning of the tax year, Georgie's basis in her partnership interest was $40,000 (excluding her share of partnership debt). The partnership reported income of
$120,000 for the year, and Georgie's share of partnership debt was $50,000 at the sale date. (Assume that the partnership uses a monthly proration of income.) On the sale date, the partnership's assets consist of cash ($195,000), land (basis of $90,000, fair market value of $120,000), and unrealized receivables (basis of $0, fair
market value of $60,000). Georgie will recognize ordinary income of $24,000 and a capital gain of $12,000, for a total of $36,000 on the sale.

Question 80

Scott owns a 30% interest in the capital and profits of the SOS Partnership. Immediately before he receives a proportionate current (nonliquidating) distribution from SOS, the basis of his partnership interest is $40,000. The distribution consists of $30,000 in cash and land with a fair market value of $80,000. SOS's adjusted basis in the land immediately before the distribution is $50,000. As a result of the distribution, Scott recognizes no gain or loss and his basis in the land is $10,000.