Question 1

For a 30% interest in partnership capital, profits, and losses, Carol contributes a machine with a basis of $40,000 and an FMV of $80,000. The partnership assumes a $70,000 recourse liability on the machine. At the time of the contribution, the partnership had recourse liabilities of $10,000. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. Following the contribution, Carol has
A) a capital loss due to the contribution of $6,000 and a zero basis in the partnership interest.
B) a capital gain due to the contribution of $6,000 and a zero basis in the partnership interest.
C) a $34,000 basis in the partnership interest and no gain or loss.
D) a $43,000 basis in the partnership interest and no gain or loss.

Accepted Answer

The answer of For a 30% interest in partnership capital,...

Question 2

David contributes investment land with a basis of $24,000 and an FMV of $40,000 to a partnership for a 10% interest in partnership capital, profits, and losses. The land is subject to a $30,000 recourse liability, which is assumed by the partnership. The partnership has other recourse liabilities of $18,000. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. David must recognize a
A) $3,000 capital gain.
B) $3,000 capital loss.
C) $1,200 capital gain.
D) $1,200 capital loss.

Accepted Answer

To determine the amount of gain or loss that David must recognize, we need to calculate his outside basis in the partnership.

David's initial outside basis in the partnership is equal to the FMV of his contributed property ($40,000), minus the amount of any liabilities assumed by the partnership ($30,000 + $18,000) = $40,000 - $48,000 = -$8,000.

Since David has a negative outside basis in the partnership, he must recognize gain on the contribution of the investment land by the lesser of: 
- The amount of the partnership liability assumed ($30,000) OR the excess of the partnership liability assumed ($48,000) over David's outside basis in the partnership (-$8,000), which is $40,000.

Therefore, David must recognize gain of $30,000, which is the lesser of the two amounts.

David's recognized gain is then calculated as follows: 
- Sale price of investment land: $40,000 
- Basis in the investment land: $24,000 
- Recognized gain: $16,000

Since David's share of the recognized gain is equal to his percentage interest in the partnership (10%), he must recognize a capital gain of $1,600 ($16,000 x 10%).

However, the question asks for the amount of capital gain or loss that David must recognize, and since David's recognized gain ($1,600) is greater than his initial outside basis (-$8,000), he cannot recognize a capital loss. Therefore, the correct answer is (C) $1,200 capital gain.

Question 3

Bob contributes cash of $40,000 and Carol contributes land with a basis of $25,000 and an FMV of $40,000 to become equal partners in the BC Partnership. The partnership immediately obtains a $30,000 mortgage on the land and the partners will share the economic risk of loss equally. What are the two partners' bases in the partnership after these transactions are completed?

Accepted Answer

The answer of Bob contributes cash of $40,000 and Carol...

Question 4

Mario contributes inventory to a partnership on August 1 of this year in exchange for a 20% partnership interest. Mario had purchased the inventory on July 2 of last year. His holding period for the partnership interest begins
A) July 2 of last year.
B) July 3 of last year.
C) August 1 of the current year.
D) August 2 of the current year.

Accepted Answer

The answer of Mario contributes inventory to a partnership on...

Question 5

Rashad contributes a machine having a basis of $30,000 and an FMV of $25,000 to a partnership in exchange for a 20% interest in partnership capital, profits, and losses. Prior to the contribution, the partnership had recourse liabilities of $20,000. The partnership assumes a $20,000 recourse liability that is owed by Rashad on the machine. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. Rashad's basis in his partnership interest is
A) $11,000.
B) $18,000.
C) $22,000.
D) $34,000.

Accepted Answer

Rashad's basis in his partnership interest is calculated by starting with his basis in the contributed property ($30,000), then subtracting the liability relief he receives ($20,000), which equals $10,000. However, since partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses, Rashad is assumed to take back on $8,000 of the liability (20% of $20,000, reflecting his interest in the partnership). Therefore, his basis is $10,000 (initial basis minus liability relief) plus $8,000 (his share of the liability assumed by the partnership), totaling $18,000.

Question 6

Sarah purchased land for investment in 2008 for $80,000. In 2009 when the FMV of the land was only $70,000, she contributed it to the SL Partnership, which is in the business of developing and selling lots. SL Partnership developed the contributed land and sold it in 2010 for $50,000. What is the amount and character of the gain or loss?

Accepted Answer

The answer of Sarah purchased land for investment in 2008...

Question 7

Identify which of the following statements is true.
A) The contribution of Sec. 1245 property to a partnership triggers recognition of ordinary income by the contributor at the time of the transfer.
B) A partner may not recognize ordinary income when receiving a capital and profits interest in a partnership in exchange for services.
C) When a partnership interest is given to a partner in exchange for services, the partnership can deduct or capitalize the FMV of the services, depending on the nature of the services.
D) All of the above are false.

Accepted Answer

The answer of Identify which of the following statements is...

Question 8

Kay and Larry each contribute property to become equal partners in the KL General Partnership. Kay contributes office furniture with an adjusted basis of $40,000 and an FMV of $50,000, which she has depreciated using MACRS. Larry contributes land with a basis of $60,000 and an FMV of $50,000, which he had been holding as an investment. The partnership will use the land as a parking lot for their business.
a) What is the partnership's basis in each of the two pieces of property?
b) If the land that Larry contributed is sold four years after the contribution for $45,000, what is the amount and character of the gain or loss which Larry should report?

Accepted Answer

The answer of Kay and Larry each contribute property to...

Question 9

For a 20% interest in partnership capital, profits, and losses, Kasi contributes a machine having a basis of $30,000 and an FMV of $40,000. The partnership also assumes a $24,000 recourse liability secured by the machine. The partnership has $6,000 in recourse liabilities immediately preceding Kasi's contributions. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. Kasi's basis in the partnership interest is
A) $10,800.
B) $12,000.
C) $13,200.
D) $30,000.

Accepted Answer

To calculate Kasi's basis in the partnership interest, we need to take into account the following:

1. The FMV of the machine: Kasi contributes a machine that has an FMV of $40,000. This increases Kasi's basis in the partnership interest by $40,000.

2. The partnership's assumption of a recourse liability: The partnership assumes a $24,000 recourse liability that is secured by the machine. Because this is a recourse liability, Kasi shares the economic risk of loss from this liability in the same way they share partnership losses. Therefore, we need to reduce Kasi's basis in the partnership interest by their share of this liability. Kasi's share of the liability is 20% x $24,000 = $4,800. Therefore, we reduce Kasi's basis by $4,800.

3. Pre-existing recourse liabilities: The partnership has $6,000 in recourse liabilities immediately preceding Kasi's contributions. Because Kasi is only responsible for 20% of partnership losses, we only need to take into account 20% of this liability when calculating Kasi's basis. Kasi's share of the pre-existing recourse liabilities is 20% x $6,000 = $1,200. Therefore, we reduce Kasi's basis by $1,200.

Therefore, Kasi's basis in the partnership interest is $40,000 - $4,800 - $1,200 = $34,000. However, Kasi also contributed a machine with a basis of $30,000. Because Kasi's basis in the partnership interest cannot exceed their basis in the contributed property, we need to limit Kasi's basis to $30,000. Therefore, Kasi's basis in the partnership interest is $30,000.

The best choice is B) $12,000.

Question 10

Bao had investment land that he purchased in 1990 for $80,000. Two years ago, when the land was contributed to a partnership, the FMV was $50,000. The land is inventory in the hands of the partnership. The partnership then sells the land in the current year for $46,000. The partnership's recognized loss is
A) a $34,000 capital loss.
B) a $34,000 ordinary loss.
C) a $30,000 capital loss and a $4,000 ordinary loss.
D) a $4,000 capital loss and a $30,000 ordinary loss.

Accepted Answer

The answer of Bao had investment land that he purchased...

Question 11

Jane contributes land with an FMV of $100,000 and a basis of $80,000 to the Green Partnership in exchange for a 25% partnership interest. The partnership assumes the $40,000 mortgage on the land. Mary has a 25% share of partnership liabilities. The Green Partnership has $8,000 in liabilities immediately before Jane's contribution. What is Jane's basis in her partnership interest?

Accepted Answer

The answer of Jane contributes land with an FMV of...

Question 12

Stella acquired a 25% interest in the STUV Partnership by contributing land having an adjusted basis of $32,000 and a fair market value of $100,000. The land was subject to a $48,000 mortgage, which was assumed by STUV. No other liabilities existed at the time of contribution. What is Stella's basis in her partnership interest?
A) $0
B) $32,000
C) $52,000
D) $64,000

Accepted Answer

Stella's basis in her partnership interest starts with her adjusted basis in the contributed land ($32,000), but then she must reduce that basis by the $48,000 mortgage assumed by the partnership, which exceeds her basis in the land. This results in a negative number, but a partner's basis cannot go below zero, so Stella's basis in her partnership interest is $0.

Question 13

George receives a 10% limited partnership interest (capital and profits interest) in the HIJ Partnership in return for managing the partnership's rental property. The partnership interest has an FMV of $35,000. What is the amount and character of the income (if any) that George must report as a result of becoming a partner?

Accepted Answer

The answer of George receives a 10% limited partnership interest...

Question 14

Karl arranges financing for a limited partnership to purchase real estate in exchange for a 50% interest in partnership profits. Two weeks later, Karl sells the profits interest for $30,000. In this tax year, Karl must recognize
A) no gain or loss.
B) a $30,000 short-term capital gain.
C) a $30,000 ordinary income.
D) a $30,000 Sec. 1231 gain.

Accepted Answer

Karl received the profits interest in exchange for arranging financing, which is considered compensation for services rendered. Therefore, when he sells the profits interest, it is treated as ordinary income.

Question 15

Identify which of the following statements is true.
A) A partner's relief of debt is treated as if the partner receives a cash distribution.
B) When a partnership assumes any liabilities of the transferor, the transferor has an increase in the basis of his or her partnership interest.
C) Gain recognized by a contributing partner because of the assumption of liabilities by the partnership increases the partnership's basis in the contributed property.
D) All of the above are false.

Accepted Answer

A partner's relief of debt is indeed treated as if the partner receives a cash distribution. This is because the reduction in personal liability is considered to provide the partner with an economic benefit, similar to receiving a cash distribution from the partnership.

Question 16

Jane contributes land with an FMV of $100,000 and a basis of $40,000 to the Green Partnership in exchange for a 25% partnership interest. The partnership assumes the $80,000 mortgage on the land. Mary has a 25% share of partnership liabilities. The Green Partnership has $8,000 in liabilities immediately before Jane's contribution. What is Jane's basis in her partnership interest?

Accepted Answer

The answer of Jane contributes land with an FMV of...

Question 17

Allen contributed land, which was being held for sale to Allen's customers, to a partnership in exchange for a 20% interest. The partnership uses the land in its business for three years and then sells the property. When the property was contributed, it had a basis in Allen's hands of $500,000 and an FMV of $600,000. The partnership sells the land for $700,000. The gain reported by the partnership is
A) $100,000 of ordinary income and $100,000 of Sec. 1231 gain.
B) $100,000 of Sec. 1231 gain and $100,000 of capital gain.
C) $200,000 of ordinary income.
D) $200,000 of Sec. 1231 gain.

Accepted Answer

The answer of Allen contributed land, which was being held...

Question 18

The RT Limited Partnership incurs the following expenses during the time that the partnership is being organized:
Attorneys' fees:
For drawing up the partnership agreement $10,000
For advice on marketing the partnership interests on a stock exchange 14,000
Accountants' fees:
For establishing the accounting system 6,000
For the first quarter's bookkeeping 600
What is the maximum amount that the partnership can deduct as an organization and syndication expense for the first year in which the partnership begins business, assuming the business began on October 1?

Accepted Answer

The answer of The RT Limited Partnership incurs the following...

Question 19

Ali, a contractor, builds an office building for a construction partnership in exchange for a capital and profits interest in the partnership worth $500,000. Which of the following statements is correct?
A) Ali recognizes $500,000 of ordinary income and the partnership can deduct $500,000 in the current year.
B) Ali recognizes no income and the partnership can deduct nothing in the current year.
C) Ali recognizes $500,000 ordinary income and the partnership deducts the $500,000 over the building's MACRS recovery period as a depreciation expense.
D) Ali recognizes ordinary income in the current year in an amount equal to the depreciation deduction the partnership claims this year for the $500,000 capitalized amount.

Accepted Answer

When a contractor receives a capital and profits interest in a partnership in exchange for building a property, the contractor must recognize ordinary income equal to the fair market value of the interest received. In this case, Ali's income is $500,000. The partnership can deduct the cost of the property over its MACRS recovery period as a depreciation expense. Therefore, option C is correct.

Question 20

Albert contributes a Sec. 1231 asset to a partnership on June 1 of this year in exchange for a 10% partnership interest. He had purchased the asset on March 1, 2002. His holding period for the partnership interest begins
A) March 1, 2002.
B) March 2, 2002.
C) June 1 of the current year.
D) June 2 of the current year.

Accepted Answer

The holding period for a partnership interest received in exchange for a capital asset (like a Sec. 1231 asset) includes the holding period of the asset contributed. Therefore, Albert's holding period for the partnership interest begins on the same date he originally acquired the asset, which is March 1, 2002.

Quiz 9: Partnership Formation and Operation

Mario contributes inventory to a partnership on August 1 of this year in exchange for a 20% partnership interest. Mario had purchased the inventory on July 2 of last year. His holding period for the partnership interest begins

Identify which of the following statements is true.

Karl arranges financing for a limited partnership to purchase real estate in exchange for a 50% interest in partnership profits. Two weeks later, Karl sells the profits interest for $30,000. In this tax year, Karl must recognize

Identify which of the following statements is true.

Ali, a contractor, builds an office building for a construction partnership in exchange for a capital and profits interest in the partnership worth $500,000. Which of the following statements is correct?

Albert contributes a Sec. 1231 asset to a partnership on June 1 of this year in exchange for a 10% partnership interest. He had purchased the asset on March 1, 2002. His holding period for the partnership interest begins