Question 1

What is the difference between the aggregate and entity theories of partnership taxation? Provide two examples of how partnership tax rules reflect the aggregate theory and two examples of how they reflect the entity theory.

Accepted Answer

The answer of What is the difference between the aggregate...

Question 2

In what order are the loss limitations for partnerships applied?

Accepted Answer

The correct order for applying loss limitations for partnerships is first, the tax basis limitation, which ensures that a partner can only deduct losses to the extent of their basis in the partnership. Second, the at-risk limitation applies, restricting losses to the amount the partner has at risk in the activity. Finally, the passive activity loss rules limit the deduction of losses from passive activities to the income generated from other passive activities.

Question 3

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

Accepted Answer

The answer of Does adjusting a partner's basis for tax-exempt...

Question 4

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 $5,000 outside basis, (2) Joe, a member with a 45 percent profits and capital interest and a $10,000 outside basis, and (3) Jack, a member with a 30 percent 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?

Accepted Answer

To calculate Jane's tax basis after adjustment for her share of the items reported on Styling's Schedule K, we'll need to take the following steps:

1. Start with Jane's outside basis at the beginning of the year: $5,000
2. Add her share of Styling's ordinary income: $100,000 x 25% = $25,000
3. Add her share of Styling's Section 1231 gain: $15,000 x 25% = $3,750
4. Subtract her share of Styling's charitable contributions: $25,000 x 25% = $6,250
5. Add her share of Styling's tax-exempt income: $3,000 x 25% = $750
6. Add her share of Styling's additional bank loan: $12,000 x 25% = $3,000
7. Jane's adjusted tax basis = $5,000 + $25,000 + $3,750 - $6,250 + $750 + $3,000 = $31,250

Therefore, the correct answer is B.

Question 5

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?

Accepted Answer

Hilary's adjusted basis at the end of the year is calculated as follows: 
Beginning basis: $10,000 
Add: Ordinary business income: $5,000 
Reduce by: Reduction in share of partnership debt: ($10,000) 
Reduce by: Cash distribution: ($20,000) 
Add: Tax-exempt income: $3,000 
Adjusted basis: $0 
Since Hilary's share of the partnership debt was reduced by $10,000 and the cash distribution was $20,000, her adjusted basis is reduced to $0.

Question 6

Which person would generally be treated as a material participant in an activity?

Accepted Answer

General partners are typically involved in the day-to-day operations of a partnership, making them material participants in the activity. Limited partners, LLC members not involved in management, and participants in rental activities generally have less active roles, limiting their ability to be considered material participants.

Question 7

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 $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?

Accepted Answer

The answer of Jerry, a partner with 30 percent capital...

Question 8

John, a limited partner of Candy Apple, LP, is allocated $30,000 of ordinary business loss from the partnership.Before the loss allocation, his tax basis is $20,000 and his at-risk amount is $10,000.John also has ordinary business income of $20,000 from Sweet Pea, LP, as a general partner and ordinary business income of $5,000 from Red Tomato as a limited partner.How much of the $30,000 loss from Candy Apple can John deduct currently?

Accepted Answer

The answer of John, a limited partner of Candy Apple,...

Question 9

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

Accepted Answer

All of the choices will affect a partner's tax basis.

A partner's tax basis is determined by their initial investment in the partnership (usually the amount they contributed to the partnership) plus any additional contributions or distributions they receive, minus any losses or deductions they claim on their tax return.

Share of ordinary business income (loss) will affect a partner's basis because it increases or decreases their share of the partnership's assets and liabilities.

Share of nonrecourse debt will increase a partner's tax basis because they are not personally liable for the debt and therefore, the partnership's lenders are only able to recoup their investment through partnership property.

Share of recourse debt will affect a partner's tax basis because they are personally liable for the debt and their share of the debt becomes part of their basis.

Share of qualified nonrecourse debt will increase a partner's tax basis because they are not personally liable for the debt, but it is secured by partnership property that is subject to certain restrictions regarding how the property can be disposed of.

Question 10

Jay has a tax basis of $14,000 in his partnership interest at the beginning of the partnership tax year.The following amounts of partnership debt were allocated to Jay and are included in his beginning-of-the-year tax basis: (1)recourse debt-$3,000, (2)qualified nonrecourse debt-$1,000, and (3)nonrecourse debt-$500.There were no changes to the debt allocated to Jay during the tax year.If Jay is allocated a $15,000 loss for the current year, how much of the loss will be suspended under the tax basis and at-risk limitations?

Accepted Answer

The answer of Jay has a tax basis of $14,000...

Question 11

What type of debt is not included in calculating a partner's at-risk amount?

Accepted Answer

Nonrecourse debt is not included in calculating a partner's at-risk amount because the partner is not personally liable for the debt.

Question 12

On January 1, X9, Gerald received his 50 percent 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?

Accepted Answer

The answer of On January 1, X9, Gerald received his...

Question 13

If a taxpayer sells a passive activity with suspended passive activity losses from prior years, what type of income can generally be offset by the suspended passive losses in the year of sale?

Accepted Answer

When a taxpayer sells a passive activity, the suspended passive activity losses from prior years can generally be used to offset any type of income in the year of sale, including passive activity income, portfolio income, and active business income. This allows for a broader application of the losses than is typically allowed under the passive activity loss rules.

Question 14

Which of the following statements regarding the rationale for adjusting a partner's basis is false?

Accepted Answer

Adjusting a partner's basis in a partnership is crucial for tax purposes, including preventing double taxation on the sale of partnership interests (A), ensuring tax-exempt income remains untaxed (B), avoiding double taxation on cash distributions (C), and properly handling nondeductible expenses (D). Therefore, none of the provided rationales are false.

Question 15

Which of the following statements regarding partnership losses suspended by the tax basis limitation is true?

Accepted Answer

Partnership losses that are suspended due to the tax basis limitation can be carried forward indefinitely until the partner has sufficient basis to utilize the losses.

Question 16

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

Accepted Answer

Additional debt increases a partner's basis by the amount of the debt. Relief of debt, on the other hand, decreases a partner's basis by the amount of the relief.

Question 17

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?

Accepted Answer

When a partner receives a cash distribution from a partnership that exceeds her tax basis in the partnership, the excess is treated as a capital gain. This is because the distribution is considered to come out of the partner's share of the partnership's profits, which are typically subject to capital gains tax when realized.

Question 18

Which of the following would not be classified as a material participant in an activity?

Accepted Answer

Participation in the preceding five taxable years is not a factor in determining whether an individual is a material participant. The other choices all describe individuals with significant participation in the activity.

Question 19

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?

Accepted Answer

The answer of What is the correct order for applying...

Question 20

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

Accepted Answer

The answer of Which of the following statements regarding a...

Quiz 15: Forming and Operating Partnerships