Question 1

Atiqa receives a nonliquidating distribution of land from her partnership.The partnership purchased the land five years ago for $20,000.At the time of the distribution,it is worth $28,000.Prior to the distribution,Atiqa's basis in her partnership interest is $37,000.Due to the distribution Atiqa and the partnership will recognize income of

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Question 2

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?

Accepted Answer

As Richard materially participates in the partnership's business and has a 50% interest, he can claim a deduction for his share of the partnership loss on his individual tax return. His share of the loss would be $160,000 (50% of $320,000). However, Richard's adjusted basis in the partnership increased to $220,000 due to the partnership borrowing $160,000. As Richard's share of the loss exceeds his adjusted basis in the partnership, he can claim a loss deduction up to his adjusted basis in the partnership, which is $220,000. Therefore, Richard can claim a loss deduction of $140,000 ($220,000 - $80,000 share of the loss not deductible due to basis limitation). Choice C is correct.

Question 3

Ben is a 30% partner in a partnership.The partnership guarantees Ben payments of $25,000 for the year.If the partnership has ordinary income of $15,000 before adjustment for the guaranteed payment,Ben must report

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Question 4

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

Accepted Answer

When the land is sold, Lois will recognize a gain of $70,000 (selling price of $210,000 minus adjusted basis of $90,000), which will be split equally between her and Clark, resulting in a $35,000 gain for each of them. In addition, since Clark's initial contribution was cash, he has no basis in the land and will also recognize a gain of $25,000 (selling price of $210,000 minus his half of the partnership's basis of $80,000). Therefore, the total gains for Clark and Lois will be $25,000 and $95,000 respectively, making choice D the correct answer.

Question 5

Sandy and Larry each have a 50% interest in SL Partnership.The partnership and the individuals file on a calendar year basis.In 2015,SL Partnership had a $30,000 ordinary loss.Sandy's adjusted basis in her partnership interest on January 1,2015 was $12,000.In 2016,SL Partnership had ordinary income of $20,000.Assuming there were no other adjustments to Sandy's basis in the partnership,what amount of partnership income (loss)would Sandy show on her 2015 and 2016 individual income tax returns?

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Question 6

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)

Accepted Answer

Under the elective proration method with a monthly convention, the allocation of the loss is determined by multiplying the monthly allocation by the number of months the partnership interest was held by each partner during the year. Since Joan contributed cash on October 1, she held the interest for 3 months (October, November, and December).

The monthly allocation of the loss is $36,000 divided by 12 months = $3,000.

Before Joan's contribution, Edmond and Samuel shared a two-thirds interest in the partnership. They each held their interest for 9 months (January-September). Therefore, their allocation of the loss is:
($3,000 x 9 months) x 2 partners = $54,000 total loss allocation before Joan's contribution.

After Joan's contribution, all partners hold one-third interest in the partnership. Since Joan held her interest for only 3 months, her allocation of the loss is:
$3,000 x 3 months = $9,000.

The remaining $27,000 ($36,000 total loss - $9,000 allocated to Joan) is split between Edmond and Samuel. Since they both now hold one-third interest in the partnership, they split the remaining loss equally:
$27,000 divided by 2 partners = $13,500 loss allocation to each of Edmond and Samuel.

Therefore, the answer is C ($16,500).

Question 7

All of the following statements are true with regard to the formation of a partnership except:

Accepted Answer

The nonrecognition rules apply only to property contributed to a partnership, not to services. When services are contributed, the contributing partner may recognize income.

Question 8

Ariel receives from her partnership a nonliquidating distribution of $9,000 cash plus a parcel of land.The partnership had purchased the land five years ago for $20,000,but it is worth $28,000 at the time of the distribution.Ariel's predistribution basis is $17,000.How much income will Ariel recognize due to the distribution,and what is her basis in the land?

Accepted Answer

To calculate the income that Ariel will recognize due to the distribution, we need to compare the fair market value (FMV) of the land to Ariel's basis. The FMV of the land is $28,000, which is higher than Ariel's basis of $17,000. Therefore, Ariel will recognize income of $11,000 ($28,000 FMV - $17,000 basis) due to the distribution.

To determine Ariel's basis in the land, we need to allocate the total basis of the partnership between the cash and the land received by Ariel. The total basis of the partnership is the sum of the partners' capital accounts, which is not given in the question. However, we can assume that Ariel and her partner share the partnership equally, so the total basis of the partnership would be twice Ariel's basis, or $34,000 ($17,000 x 2).

Since the cash distribution is non-taxable, Ariel's basis in the land is equal to her basis allocation after the distribution. Her basis allocation is $17,000 (her predistribution basis), and the total basis of the partnership is $34,000. Therefore, Ariel's basis in the land is $17,000.

Question 9

All of the following are separately stated items that pass through from the partnership to the partners except

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Question 10

Atiqa receives a nonliquidating distribution of land from her partnership.The partnership purchased the land five years ago for $20,000.At the time of the distribution,it is worth $28,000.Prior to the distribution,Atiqa's basis in her partnership interest is $37,000.Atiqa's basis in the distributed land and her post-distribution basis in her partnership interest are:

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Question 11

Jamahl has a 65% interest in a partnership.Jamahl sells land to the partnership for $70,000.Prior to the sale,the land had a FMV of $70,000 and an adjusted basis of $90,000 to Jamahl.Due to the sale,Jamahl will recognize

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Question 12

Joy is a material participant in a partnership.Her basis in her partnership interest is $250,000.Due to a major expansion,the partnership will generate a significant loss this year,and Joy's share is expected to be $300,000.The partners expect the partnership to report a large profit next year.Joy is in the top tax bracket this year,and she expects to be in a lower tax bracket next year.Due to her higher marginal tax rate this year,Joy would like to deduct her full share of the partnership loss this year.What strategies can she employ before year-end to assure full deduction of this year's loss?

Accepted Answer

D)Joy's deduction of the loss will be limited to her basis.She will need to increase her basis before year-end in order to deduct the full loss.She can raise her partnership basis by either making a loan to the partnership or contributing capital to the partnership.

Question 13

Jamahl has a 65% interest in a partnership.Jamahl sells land to the JK partnership for $70,000.Prior to the sale,the land had a FMV of $70,000 and an adjusted basis of $90,000 to Jamahl.Two years later the partnership sells the land for $123,000.Due to the sale,the partnership will recognize

Accepted Answer

When Jamahl sold the land to the partnership for $70,000, he recognized a loss of $20,000 ($90,000 adjusted basis - $70,000 selling price). However, since Jamahl only has a 65% ownership interest in the partnership, he can only recognize 65% of that loss, which is $13,000.

Two years later, when the partnership sells the land for $123,000, they will recognize a gain of $53,000 ($123,000 selling price - $70,000 purchase price). But since Jamahl only has a 65% ownership interest, he can only recognize 65% of that gain, which is $33,000. Therefore, the correct answer is C.

Question 14

Joey and Bob each have 50% interest in a Partnership.Both Joey and the partnership file returns on a calendar year basis.Partnership Q had a $12,000 loss in 2015.Joey's adjusted basis in his partnership interest on January 1,2015 was $5,000.In 2016,the partnership had a profit of $10,000.Assuming there were no other adjustments to Joey's basis in the partnership,what amount of partnership income (loss)should Joey show on his 2015 and 2016 individual income tax returns?

Accepted Answer

For 2015, Joey's share of the partnership loss would be:
$12,000 x 50% = $6,000

Joey's adjusted basis at the end of 2015 would be:
$5,000 (beginning basis) - $6,000 (share of loss) = ($1,000)

Since Joey's basis is negative at the end of 2015, he cannot deduct any losses on his individual tax return for that year.

For 2016, Joey's share of the partnership profit would be:
$10,000 x 50% = $5,000

Joey's adjusted basis at the end of 2016 would be:
($1,000) (beginning basis) + $5,000 (share of profit) = $4,000

Therefore, Joey should report $5,000 of partnership income on his 2016 individual income tax return.

Question 15

Brittany receives a nonliquidating distribution of $48,000 cash from her partnership.Brittany's basis in her partnership interest prior to the distribution is $25,000.What are the tax consequences of the distribution?

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Question 16

On July 1,Joseph,a 10% owner,sells his interest in ABC Partnership to Andy,an outsider,for $165,000 cash and the release from $20,000 of partnership liabilities.Joseph's partnership interest at the beginning of the year was $120,000.The partnership earned income through June 30 of $100,000.Joseph's share of partnership liabilities increased by $5,000 from January 1 to June 30.What are the tax consequences to Joseph on the sale of his partnership interest (assume the partnership does not hold any inventory or unrealized receivables)?

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Question 17

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

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Question 18

All of the following statements are true regarding nonliquidating distributions of a partnership except:

Accepted Answer

This statement is not true. In some circumstances, a partner or the partnership may recognize gain or loss from a nonliquidating distribution. For example, if the distributee partner assumes a liability in excess of their basis in the partnership interest, they will recognize gain on the excess amount. Additionally, if the distributed property has a fair market value in excess of its basis in the hands of the partnership, the partnership will recognize gain on the excess amount.

Question 19

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

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Question 20

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)

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Quiz 17: Partnerships and S Corporations