Deck 9: Forming and Operating Partnerships

Question 1

Partners must generally treat the value of profits interests they receive in exchange for services as ordinary income.

Answer 1

False

Question 2

A partnership can elect to amortize organization and start-up costs; however, syndication costs are not deductible.

Answer 2

True

Question 3

Guaranteed payments are included in the calculation of a partnership's ordinary business income (loss) and are also treated as separately stated items.

Answer 3

True

Question 4

Adjustments to a partner's outside basis are made annually to prevent double taxation on the sale of a partnership interest or at the time of a partnership distribution.

Question 5

The character of each separately stated item is determined at the partner level.

Question 6

Partnerships can use special allocations to shift built-in gains and built-in losses on contributed property from a partner who contributed the property to other partners.

Question 7

A general partner's share of ordinary business income is similar to investment income; thus, a general partner only includes their guaranteed payments as self-employment income.

Question 8

Nonrecourse debt is generally allocated according to the profit-sharing ratios of the partnership.

Question 9

Tax elections are rarely made at the partnership level.

Question 10

The least aggregate deferral test uses the profit percentage of each partner to determine the minimum amount of tax deferral for the partner group as a whole in determining the permissible tax year-end of a partnership.

Question 11

Actual or deemed cash distributions in excess of a partner's outside basis are generally taxable as capital gains.

Question 12

Any losses that exceed the tax basis of a partner in their partnership interest are suspended and carried forward for 20 years.

Question 13

An additional allocation of partnership debt or relief of partnership debt is considered to be a deemed cash contribution or cash distribution, respectively.

Question 14

A purchased partnership interest has a holding period beginning on the date of purchase regardless of the type of property held by the partnership.

Question 15

A partner's outside basis must first be decreased by any negative basis adjustments and then increased by any positive basis adjustments.

Question 16

The term "outside basis" refers to the partnership's basis in its assets, whereas the term "inside basis" refersto an individual partner's basis in her partnership interest.

Question 17

Partners adjust their outside basis by adding nondeductible expenses and subtracting any tax-exempt income to avoid being double taxed.

Question 18

Partnerships can request up to a six-month extension by filing IRS Form 7004 prior to the original due date of the partnership return.

Question 19

Partnership tax rules incorporate both the entity and aggregate approaches.

Question 20

A partnership with a C corporation partner must always use the accrual method as its accounting method.

Question 21

Under general circumstances, debt is allocated from the partnership to each partner in the following manner:

A) recourse-profit-sharing ratios; nonrecourse-profit-sharing ratios.
B) recourse-capital ratios; nonrecourse-capital ratios.
C) recourse-to partners with the ultimate responsibility for paying the debt; nonrecourse-profit-sharing ratios.
D) recourse-profit-sharing ratios; nonrecourse-to partners with the ultimate responsibility for paying the debt.

Question 22

In X1, Adam and Jason formed ABC, LLC, a car dealership in Kansas City. In X2, Adam and Jason realized they needed an advertising expert to assist in their business. Thus, the two members offered Cory, a marketing expert, a one-third capital interest in their partnership for contributing his expert services. Cory agreed to this arrangement and received his capital interest in X2. If the value of the LLC's capital equals $180,000 when Cory receives his one-third capital interest, which of the following tax consequences does not occur in X2?

A) Cory reports $60,000 of ordinary income in X2.
B) Adam, Jason, and Cory receive an ordinary deduction of $20,000 in X2.
C) Adam and Jason receive an ordinary deduction of $30,000 in X2.
D) Cory reports $60,000 of ordinary income in X2, and Adam and Jason receive an ordinary deduction of $30,000 in X2.

Question 23

Which of the following statements exemplifies the entity theory of partnership taxation?

A) Partnerships are taxable entities.
B) Partnerships determine the character of separately stated items at the partnership level.
C) Partnerships make the majority of the tax elections.
D) Both partnerships are taxable entities and partnerships make the majority of the tax elections.
E) Both partnerships determine the character of separately stated items at the partnership level and partnerships make the majority of the tax elections.

Question 24

Which of the following does not represent a tax election available to either partners or partnerships?

A) Electing to change an accounting method
B) Electing to amortize organization costs
C) Electing to expense a portion of syndication costs
D) Electing to immediately expense depreciable property under Section 179

Question 25

The main difference between a partner's tax basis and at-risk amount is that qualified nonrecourse financing is not included in the at-risk basis amount.

Question 26

If a partner participates in partnership activities on a regular, continuous, and substantial basis, then the partnership's activities with respect to this individual partner are not considered passive.

Question 27

A partner can generally apply passive activity losses against passive activity income for the year.

Question 28

Sue and Andrew form SA general partnership. Each person receives an equal interest in the newly created partnership. Sue contributes $28,000 of cash and land with an FMV of $73,000. Her basis in the land is $38,000. Andrew contributes equipment with an FMV of $30,000 and a building with an FMV of $51,000. His basis in the equipment is $26,000, and his basis in the building is $38,000. How much gain must the SA general partnership recognize on the transfer of these assets from Sue and Andrew?

A) $0
B) $4,000
C) $48,000
D) $52,000

Question 29

Which of the following statements regarding capital and profits interests received for services contributed to a partnership is false?

A) The holding period of a capital or profits interest begins on the date the interest is received.
B) Partners receiving capital interests must recognize the liquidation value of their capital interests as capital gain.
C) Partners receiving only profits interests generally don't recognize income when the profits interest is received.
D) Partners receiving only profits interests include their share of partnership debt in the tax basis of their partnership interest.

Question 30

Gerald received a one-third capital and profit (loss) interest in XYZ Limited Partnership (LP). In exchange for this interest, Gerald contributed a building with an FMV of $30,000. His adjusted basis in the building was $15,000. In addition, the building was encumbered with a $9,000 nonrecourse mortgage that XYZ LP assumed at the time the property was contributed. What is Gerald's outside basis immediately after his contribution?

A) $6,000
B) $9,000
C) $21,000
D) $24,000

Question 31

Tom is talking to his friend Bob, who has an interest in Freedom, LLC, about purchasing his LLC interest. Bob's outside basis in Freedom, LLC, is $10,000. This includes his $2,500 one-fourth share of the LLC's debt. Bob's 704(b) capital account is $17,000. If Tom bought Bob's LLC interest for $17,000, what would Tom's outside basis be in Freedom, LLC?

A) $10,000
B) $14,500
C) $17,000
D) $19,500

Question 32

Partnerships may maintain their capital accounts according to which of the following rules?

A)

GAAPP1P1_E
B) 704(b)
C) Tax
D) Any of the rules
E)

Only GAAP and 704(b)P1P1_E

Question 33

Erica and Brett decide to form their new motorcycle business as an LLC. Each will receive an equal profits (loss) interest by contributing cash, property, or both. In addition to the members' contributions, their LLC will obtain a $45,000 nonrecourse loan from First Bank at the time it is formed. Brett contributes cash of $4,000 and a building he bought as a storefront for the motorcycles. The building has an FMV of $40,000 and an adjusted basis of $25,000 and is secured by a $30,000 nonrecourse mortgage that the LLC will assume. What is Brett's outside tax basis in his LLC interest?

A) $32,500
B) $34,000
C) $37,500
D) $39,000

Question 34

Tom is talking to his friend Bob, who has an interest in Freedom, LLC, about purchasing his LLC interest. Bob's outside basis in Freedom, LLC, is $9,500. This includes his $2,400 one-fourth share of the LLC's debt. Bob's 704(b) capital account is $16,500. If Tom bought Bob's LLC interest for $16,000, what would Tom's outside basis be in Freedom, LLC?

A) $9,500
B) $13,600
C) $16,000
D) $18,400

Question 35

Gerald received a one-third capital and profit (loss) interest in XYZ Limited Partnership (LP). In exchange for this interest, Gerald contributed a building with an FMV of $17,000. His adjusted basis in the building was $8,500. In addition, the building was encumbered with a $5,100 nonrecourse mortgage that XYZ LP assumed at the time the property was contributed. What is Gerald's outside basis immediately after his contribution?

A) $3,400
B) $5,100
C) $11,900
D) $13,600

Question 36

Which of the following statements is true when property is contributed in exchange for a partnership interest?

A) Any contributed property in a partnership has a carryover basis, and the character of the property is determined by the way the contributing partner used the property.
B) The partnership's inside basis is typically increased by any gain the partner recognizes from the property contribution.
C) The holding period for a partner's partnership interest depends upon the type of assets a partner contributes.
D) Services are not allowed to be contributed to a partnership in return for a partnership interest.
E) All of these choices are true.

Question 37

Zinc, LP was formed on August 1, 20X9. When the partnership was formed, Al contributed $10,000 in cash and inventory with an FMV and tax basis of $40,000. In addition, Bill contributed equipment with an FMV of $30,000 and adjusted basis of $25,000 along with accounts receivable with an FMV and tax basis of $20,000. Also, Chad contributed land with an FMV of $50,000 and tax basis of $35,000. Finally, Dave contributed a machine, secured by $35,000 of debt, with an FMV of $15,000 and a tax basis of $10,000. What is the total inside basis of all the assets contributed to Zinc, LP?

A) $140,000
B) $165,000
C) $175,000
D) $200,000

Question 38

Sue and Andrew form SA general partnership. Each person receives an equal interest in the newly created partnership. Sue contributes $10,000 of cash and land with an FMV of $55,000. Her basis in the land is $20,000. Andrew contributes equipment with an FMV of $12,000 and a building with an FMV of $33,000. His basis in the equipment is $8,000, and his basis in the building is $20,000. How much gain must the SA general partnership recognize on the transfer of these assets from Sue and Andrew?

A) $0
B) $4,000
C) $48,000
D) $52,000

Question 39

Erica and Brett decide to form their new motorcycle business as an LLC . Each will receive an equal profits (loss) interest by contributing cash, property, or both. In addition to the members' contributions, their LLC will obtain a $50,000 nonrecourse loan from First Bank at the time it is formed. Brett contributes cash of $5,000 and a building he bought as a storefront for the motorcycles. The building has an FMV of $45,000and an adjusted basis of $30,000 and is secured by a $35,000 nonrecourse mortgage that the LLC will assume. What is Brett's outside tax basis in his LLC interest?

A) $37,500
B) $40,000
C) $42,500
D) $45,000

Question 40

A partner's tax basis or at-risk amount can be increased by making capital contributions, by paying off partnership debt, or by increasing the profitability of the partnership.

Question 41

Kim received a one-third profits and capital interest in Bright Line, LLC, in exchange for legal services she provided. In addition to her share of partnership profits or losses, she receives a $23,000 guaranteed payment each year for ongoing services she provides to the LLC. For X4, Bright Line reported the following revenues and expenses: sales-$143,000, cost of goods sold-$83,000, depreciation expense-$40,000, long-term capital gains-$8,000, qualified dividends-$5,300, and municipal Bond interest-$3,300. How much ordinary business income (loss) will Bright Line allocate to Kim on her Schedule K-1 for X4?

A) ($13,000)
B) $6,000
C) $8,000
D) $13,000
E) None of the choices will be reported as ordinary business income (loss) on Schedule K-1.

Question 42

On 12/31/X4, Zoom,LLC, reported a $58,500 loss on its books. The items included in the loss computation were $29,000 in sales revenue, $14,000 in qualified dividends, $21,000 in cost of goods sold, $49,000 in charitable contributions, $19,000 in employee wages, and $12,500 of rent expense. How much ordinary business income (loss) will Zoom report on its X4 return?

A) ($8,000)
B) ($23,500)
C) ($58,500)
D) ($93,500)

Question 43

In what order should the tests to determine a partnership's year-end be applied?

A) Majority interest taxable year; least aggregate deferral; principal partners test
B) Principal partners test; majority interest taxable year; least aggregate deferral
C) Principal partners test; least aggregate deferral; majority interest taxable year
D) Majority interest taxable year; principal partners test; least aggregate deferral
E) None of the choices are correct.

Question 44

Sarah, Sue, and AS Incorporated formed a partnership on May 1, 20X9, called SSAS, LP. Now that the partnership is formed, they must determine its appropriate year-end. Sarah has a 30percent profits and capital interest while Sue has a 35percent profits and capital interest. Both Sarah and Sue have calendar year-ends. AS Incorporated holds the remaining profits and capital interest in the LP, and it has a September 30 year-end. What tax year-end must SSAS, LP, use for 20X9, and which test or rule requires this year-end?

A) 12/31, least aggregate deferral test
B) 9/30, majority interest taxable year
C) 12/31, majority interest taxable year
D) 12/31, principal partners test

Question 45

Which of the following would not be classified as a separately stated item?

A) Short-term capital gains
B) Charitable contributions
C) MACRS depreciation expense
D) Guaranteed payments

Question 46

What is the rationale for the specific rules partnerships must follow in determining a partnership's taxable year-end?

A) To increase the amount of aggregate tax deferral partners receive
B) To minimize the amount of aggregate tax deferral partners receive
C) To align the year-end of the partnership with the year-end of a majority of the partners
D) To spread the workload of tax practitioners more evenly over the year
E) Both to minimize the amount of aggregate tax deferral partners receive and to align the year-end of the partnership with the year-end of a majority of the partners

Question 47

A partner's self-employment earnings (loss) may be affected by her share of ordinary business income (loss) and any guaranteed payments she receives. The impact of these amounts typically depends on the status of the partner. Which of the following statements correctly describes the effect these items have on the partner's self-employment earnings (loss)?

A) General partner-only guaranteed payments affect self-employment earnings (loss)
B) General partner-ordinary business income (loss) and guaranteed payments affect self-employment earnings (loss)
C) Limited partner-only guaranteed payments affect self-employment earnings (loss)
D) Limited partner-only ordinary business income (loss) affects self-employment income (loss)
E) Both general partner-ordinary business income (loss) and guaranteed payments affect self-employment earnings (loss) and limited partner-only guaranteed payments affect self-employment earnings (loss)

Question 48

Which of the following items is subject to the net investment income tax when a partner is not a material participant in the partnership?

A) Partner's distributive share of dividends
B) Partner's distributive share of interest
C) Partner's distributive share of ordinary business income
D) All of these choices are correct.

Question 49

Which of the following items is subject to the net investment income tax when an individual partner is a material participant in the partnership?

A) Partner's distributive share of dividends
B) Partner's distributive share of interest
C) Partner's distributive share of ordinary business income
D) Both partner's distributive share of dividends and partner's distributive share of interest

Question 50

Kim received a one-third profits and capital interest in Bright Line, LLC, in exchange for legal services she provided. In addition to her share of partnership profits or losses, she receives a $30,000 guaranteed payment each year for ongoing services she provides to the LLC. For X4, Bright Line reported the following revenues and expenses: sales-$150,000, cost of goods sold-$90,000, depreciation expense-$45,000, long-term capital gains-$15,000, qualified dividends-$6,000, and municipal bond interest-$3,000. How much ordinary business income (loss) will Bright Line allocate to Kim on her Schedule K-1 for X4?

A) ($15,000)
B) $6,000
C) $9,000
D) $15,000
E) None of the choices will be reported as ordinary business income (loss) on Schedule K-1.

Question 51

Tim, a real estate investor, Ken, a dealer in securities, and Hardware, Incorporated, a retail lumber store, form a partnership called HKT, LP. HKT is in the home-building business. Tim recently purchased his interest in HKT, while the other partners purchased their interests several years ago. During X3, HKT reports a $12,000 gain from the sale of a stock in a wholesale lumber company it purchased in X1 for investment purposes. Which of the following statements best represents how their portion of the gain should be reported to the partner?

A) Tim-Short-term capital gain
B) Ken-Ordinary Income
C) Hardware, Incorporated-Long-term capital gain
D) All of the choices accurately report the gain to the partner
E) None of the choices accurately report the gain to the partner.

Question 52

Which requirement must be satisfied in order to specially allocate partnership income or losses to partners?

A) Special allocations must have economic effect.
B) At least one partner must agree to the special allocations.
C) Special allocations must be insignificant.
D) Special allocations must reduce the combined tax liability of all the partners.

Question 53

How does a partnership make a tax election for the current year?

A) Partnerships make certain elections automatically by simply filing their returns.
B) Partnerships make certain tax elections by filing a separate form with the IRS.
C) Partnerships do not need to file anything to make a tax election.
D) Partnerships do not make tax elections. Partners must make tax elections separately.
E) Both partnerships make certain elections automatically by simply filing their returns and partnerships make certain tax elections by filing a separate form with the IRS.

Question 54

TQK,LLC, provides consulting services and was formed on 1/31/X5. Aaron and ABC, Incorporated, each hold a 50percent capital and profits interest in TQK. If TQK averaged $29,000,000 in annual gross receipts over the last three years, what accounting method can TQK use for X9?

A) Accrual method
B) Cash method
C) Hybrid method
D) Accrual method or cash method

Question 55

On 12/31/X4, Zoom, LLC, reported a $60,000 loss on its books. The items included in the loss computation were $30,000 in sales revenue, $15,000 in qualified dividends, $22,000 in cost of goods sold, $50,000in charitable contributions, $20,000 in employee wages, and $13,000 of rent expense. How much ordinary business income (loss) will Zoom report on its X4 return?

A) ($8,000)
B) ($25,000)
C) ($60,000)
D) ($95,000)

Question 56

This year, HPLC, LLC, was formed by H Incorporated, P Incorporated, L Incorporated, and C Incorporated. Each member had an equal share in the LLC's capital. H Incorporated, P Incorporated, and L Incorporated each had a 30percent profits interest in the LLC, with C Incorporated having a 10percent profits interest. The members had the following tax year-ends: H Incorporated [1/31], P Incorporated [5/31], L Incorporated [7/31], and C Incorporated [10/31]. What tax year-end must the LLC use?

A) 1/31
B) 5/31
C) 7/31
D) 10/31

Question 57

Which of the following statements regarding the process for determining a partnership's tax year-end is true?

A) Only the partners' profits interests are relevant when determining if a partnership has a majority interest taxable year.
B) Under the principal partners test, a principal partner is defined as a partner having an interest of 3percent or more in the profits or capital of the partnership.
C) The least aggregate deferral test utilizes the partners' capital interests to measure the amount of aggregate deferral.
D) A partnership is required to use a calendar year-end if it has a corporate partner.
E) None of the choices are true.

Question 58

A partnership may use the cash method despite having a corporate partner when the partnership's average gross receipts for the prior three taxable years don't exceed _____.

A) $5,000,000
B) $1,000,000
C) $26,000,000
D) Partnerships may never use the cash method if they have corporate partners

Question 59

Under proposed regulations issued by the Treasury Department, in which of the following situations should an LLC member be treated as a general partner for self-employment tax purposes?

A) The member is not personally liable for any of the LLC debt.
B) The member has authority to contract on behalf of the LLC.
C) The member spends 450 hours participating in the management of the LLC's trade or business during the taxable year.
D) The member is listed on the LLC's letterhead.

Question 60

XYZ, LLC, has several individual and corporate members. Abe and Joe, individuals with 4/30 year-ends, each have a 23percent profits and capital interest. RST, Incorporated, a corporation with a 6/30 year-end, owns a 4percent profits and capital interest, while DEF, Incorporated, a corporation with an 8/30 year-end, owns a 4.9percent profits and capital interest. Finally, 30 other calendar year-end individual partners (each with less than a 2percent profits and capital interest) own the remaining 45percent of the profits and capital interests in XYZ. What tax year-end should XYZ use, and which test or rule requires this year-end?

A) 4/30, principal partners test
B) 4/30, least aggregate deferral test
C) 12/31, principal partners test
D) 12/31, least aggregate deferral test

Question 61

Jerry, a partner with 30percent capital and profits interest, received his Schedule K-1 from Plush Pillows, LP. At the beginning of the year, Jerry's tax basis in his partnership interest was $50,000. His current-year Schedule K-1 reported an ordinary loss of $15,000, long-term capital gain of $3,000, qualified dividends of $2,000, $500 of non-deductible expenses, a $10,000 cash contribution, and a reduction of $4,000 in his share of partnership debt. What is Jerry's adjusted basis in his partnership interest at the end of the year?

A) $35,000
B) $40,000
C) $45,500
D) $49,500

Question 62

Frank and Bob are equal members in Soxy Socks, LLC. When forming the LLC, Frank contributed $60,000 in cash and $60,000 worth of equipment. Frank's adjusted basis in the equipment was $45,000. Bob contributed $60,000 in cash and $60,000 worth of land. Bob's adjusted basis in the land was $20,000. On 3/15/X4, Soxy Socks sells the land Bob contributed for $68,000. How much gain (loss) related to this transaction will Bob report on his X4 return?

A) $8,000
B) $12,000
C) $44,000
D) $52,000

Question 63

What is the correct order for applying the following three items to adjust a partner's tax basis in his partnership interest: (1) Increase for share of ordinary business income, (2) Decrease for share of separately stated loss items, and (3) Decrease for distributions?

A) 1, 3, 2
B) 1, 2, 3
C) 3, 1, 2
D) 2, 3, 1

Question 64

Which of the following items will affect a partner's tax basis?

A) Share of ordinary business income (loss)
B) Share of nonrecourse debt
C) Share of recourse debt
D) Share of qualified nonrecourse debt
E) All of these choices will affect a partner's tax basis.

Question 65

Styling Shoes, LLC, filed its 20X8 Form 1065 on March 15, 20X9. Styling had three members with the following ownership interests and tax bases at the beginning of 20X8: (1) Jane, a member with a 25 percent profits and capital interest and a $8,500 outside basis, (2) Joe, a member with a 45 percent profits and capital interest and a $13,500 outside basis, and (3) Jack, a member with a 30 percent profits and capital interest and a $5,500 outside basis. The following items were reported on Styling's Schedule K for the year: ordinary income of $107,000, Section 1231 gain of $18,500, charitable contributions of $28,500, and tax-exempt income of $6,500. In addition, Styling received an additional bank loan of $15,500 during 20X8. What is Jane's tax basis after adjustment for her share of these items?

A) $34,375
B) $38,250
C) $41,200
D) $67,050

Question 66

Styling Shoes, LLC, filed its 20X8 Form 1065 on March 15, 20X9. Styling had three members with the following ownership interests and tax bases at the beginning of 20X8: (1) Jane, a member with a 25percent profits and capital interest and a $5,000 outside basis, (2) Joe, a member with a 45percent profits and capital interest and a $10,000 outside basis, and (3) Jack, a member with a 30percent profits and capital interest and a $2,000 outside basis. The following items were reported on Styling's Schedule K for the year: ordinary income of $100,000, Section 1231 gain of $15,000, charitable contributions of $25,000, and tax-exempt income of $3,000. In addition, Styling received an additional bank loan of $12,000 during 20X8. What is Jane's tax basis after adjustment for her share of these items?

A) $28,250
B) $31,250
C) $33,500
D) $57,250

Question 67

Frank and Bob are equal members in Soxy Socks, LLC. When forming the LLC, Frank contributed $50,000 in cash and $50,000 worth of equipment. Frank's adjusted basis in the equipment was $35,000. Bob contributed $50,000 in cash and $50,000 worth of land. Bob's adjusted basis in the land was $30,000. On 3/15/X4, Soxy Socks sells the land Bob contributed for $60,000. How much gain (loss) related to this transaction will Bob report on his X4 return?

A) $10,000
B) $15,000
C) $25,000
D) $35,000

Question 68

Which of the following does not adjust a partner's basis?

A) Ordinary business income (loss)
B) Change in amount of partnership debt
C) Tax-exempt income
D) All of these choices adjust a partner's basis.

Question 69

On January 1, X9, Gerald received his 50percent profits and capital interest in High Air, LLC, in exchange for $2,000 in cash and real property with a $3,000 tax basis secured by a $2,000 nonrecourse mortgage. High Air reported a $15,000 loss for its X9 calendar year. How much loss can Gerald deduct, and how much loss must he suspend if he only applies the tax basis loss limitation?

A) $0, $4,000
B) $0, $7,500
C) $0, $15,000
D) $4,000, $0
E) None of the choices are correct.

Question 70

Hilary had an outside basis in LTL General Partnership of $10,000 at the beginning of the year. LTL reported the following items on Hilary's K-1 for the year: ordinary business income of $5,000, a $10,000 reduction in Hilary's share of partnership debt, a cash distribution of $20,000, and tax-exempt income of $3,000. What is Hilary's adjusted basis at the end of the year?

A) ($12,000)
B) ($9,000)
C) $0
D) $15,000
E) $18,000

Question 71

If partnership debt is reduced and a partner is deemed to receive a cash distribution, what impact does the deemed distribution have on the partner if it is in excess of her tax basis?

A) The partner will treat the distribution in excess of her basis as ordinary income.
B) The partner will treat the distribution in excess of her basis as capital gain.
C) The partner will not ever be taxed on the distribution in excess of her basis.
D) The partner will not be taxed on the distribution in excess of her basis until she sells her partnership interest.

Question 72

When must a partnership file its return?

A) By the 15^th day of the third month after the partnership's tax year-end.
B) By the seventh month after the original due date if an extension is filed.
C) By the 15^th day of the fourth month after the partnership's tax year-end.
D) By the 15^th day of the third month after the partnership's tax year-end and by the seventh month after the original due date if an extension is filed.
E) By the fifth month after the original due date if an extension is filed and by the 15^th day of the fourth month after the partnership's tax year-end.

Question 73

In what order are the loss limitations for partnerships applied?

A) Tax basis; at-risk amount; passive activity loss
B) Passive activity loss; tax basis; at-risk amount
C) Tax basis; passive activity loss; at-risk amount
D) At-risk amount; tax basis; passive activity loss

Question 74

Does adjusting a partner's basis for tax-exempt income prevent double taxation?

A) Yes, if this basis adjustment is not made, the partner will be taxed once when the income is allocated to him and a second time when he sells his partnership interest.
B) Yes, if this basis adjustment is not made, the partner will be taxed on the tax-exempt income when he sells his partnership interest and again if the tax-exempt income exceeds $10,000.
C) No, making this adjustment to the partner's basis prevents the tax-exempt income from being converted to taxable income.
D) No, the partner should not adjust his tax basis by his share of tax-exempt income.

Question 75

Which of the following rationales for adjusting a partner's basis is false?

A) To prevent partners from being double taxed when they sell their partnership interests
B) To ensure that partnership tax-exempt income is not ultimately taxed
C) To prevent partners from being double taxed when they receive cash distributions
D) To ensure that partnership nondeductible expenses are never deductible
E) None of these rationales are false.

Question 76

Jerry, a partner with 30 percent capital and profits interest, received his Schedule K-1 from Plush Pillows, LP. At the beginning of the year, Jerry's tax basis in his partnership interest was $49,000. His current-year Schedule K-1 reported an ordinary loss of $14,000, long-term capital gain of $4,100, qualified dividends of $3,100, $1,600 of non-deductible expenses, a $21,000 cash contribution, and a reduction of $5,100 in his share of partnership debt. What is Jerry's adjusted basis in his partnership interest at the end of the year?

A) $35,000
B) $42,200
C) $56,500
D) $61,600

Question 77

How does additional debt or relief of debt affect a partner's basis?

A) Debt has no effect on a partner's basis.
B) Relief of debt increases a partner's basis.
C) Both additional debt and relief of debt increase a partner's basis.
D) Additional debt increases a partner's basis.

Question 78

Which of the following statements regarding a partner's basis adjustments is true?

A) A partner's basis may never be reduced below zero.
B) A partner must adjust his basis for ordinary income (loss) but not for separately stated items.
C) A partnership fine or penalty paid by the partnership does not affect a partner's basis.
D) Relief of partnership debt increases a partner's tax basis.

Question 79

What form does a partnership use when filing an annual informational return?

A) Form 1040
B) Form 1041
C) Form 1065
D) Form 1120

Question 80

Hilary had an outside basis in LTL General Partnership of $9,200 at the beginning of the year. LTL reported the following items on Hilary's K-1 for the year: ordinary business income of $4,200, a $9,200 reduction in Hilary's share of partnership debt, a cash distribution of $19,200, and tax-exempt income of $2,200. What is Hilary's adjusted basis at the end of the year?

A) ($12,800)
B) ($10,600)
C) $0
D) $13,400
E) $15,600