Question 1

On January 1, Helmut pays $2,000 for a 10% capital, profits, and loss interest in a partnership, which has recourse liabilities of $20,000. The partners share economic risk of loss from recourse liabilities in the same way they share partnership losses. In the same year, the partnership incurs losses of $6,000 and the recourse liabilities increase by $5,000. Helmut and the partnership use a calendar tax year- end. Helmut's basis at year- end is

Accepted Answer

Helmut's initial basis is $2,000 (the amount he paid for his partnership interest). His basis is then increased by his share of partnership losses and recourse liabilities, and decreased by any distributions received.

First, we need to calculate Helmut's share of the partnership losses: 
- Helmut's capital interest is 10%, so he is responsible for 10% of the partnership's losses: 10% of $6,000 = $600 
- Helmut shares economic risk of loss from recourse liabilities in the same way he shares partnership losses, so he is also responsible for 10% of the increase in recourse liabilities: 10% of $5,000 = $500

Now we can calculate Helmut's basis at year-end: 
Initial basis: $2,000 
Plus: Share of partnership losses (-$600) 
Plus: Share of increase in recourse liabilities (-$500) 
Final basis: $2,000 - $600 - $500 = $900 
However, Helmut cannot have a negative basis and would have to include the amount of recourse liabilities that could potentially be paid by Helmut. 
Helmut's share of the recourse liabilities is 10% of $20,000 = $2,000. 
Helmut's final basis: $900 + $2,000 = $2,900. 
However, we need to further add back the amount of partnership losses because partnership losses are not deductible by Helmut due to his limited partner status. 
Helmut's final basis: $2,900 + $600 = $3,500.

Therefore, choice C is the correct answer.

Question 2

Doug purchases a 20% interest in the Quix Partnership for $10,000 on January 1, 2019, and begins to materially participate in the partnership's business. The Quix Partnership uses the calendar year as its tax year. At the time of the purchase, the Quix Partnership has $4,000 in liabilities, and Doug's share is 20%. What is Doug's basis in his partnership interest on January 1, 2010?

Accepted Answer

$\begin{array}{ll}
\text { Purchase of partnership interest }&\$10,000\
\text { Plus: share of liabilities }(0.20 \times \$ 4,000)&800\
\text { Basis in partnership interest on January } 1&\$10,800
\end{array}$

Question 3

Identify which of the following statements is true.

Accepted Answer

For federal income tax purposes, the formation of a partnership is governed by Section 721 of the Internal Revenue Code. Option A and B are incorrect statements.

Question 4

Identify which of the following statements is true.

Accepted Answer

A is false because income from a limited partnership is generally passive income for the purpose of the passive activity loss rules. B is false because his at-risk basis includes only his share of the partnership's recourse debt and his basis in the partnership interest, which in this case is only $95,000 ($140,000 - $45,000). Finally, C is true because a partner's basis in the partnership is separate from the partner's equity in the partnership, and the equity can be negative if the partnership has losses or if the partner makes withdrawals exceeding their basis.

Question 5

The definition of a partnership does not include

Accepted Answer

All of the options (a pool, a group, and a syndicate) can be considered forms of partnerships, so none of them are excluded from the definition of a partnership.

Question 6

Yong contributes a machine having an adjusted basis of $20,000 and an FMV of $25,000 for a 10% partnership interest. Yong had taken $10,000 of depreciation prior to the contribution. The partnership has no liabilities. As a result of the contribution, Yong must recognize

Accepted Answer

When contributing property to a partnership in exchange for a partnership interest, generally no gain or loss is recognized under IRC Section 721.

Question 7

Explain the difference between partnership distributions and distributive shares.

Accepted Answer

The answer of Explain the difference between partnership distributions and...

Question 8

A partner's basis for his partnership interest can be negative.

Accepted Answer

A partner's basis in a partnership cannot be negative; it can decrease to zero, but any losses or deductions beyond that point cannot further reduce the basis below zero.

Question 9

Identify which of the following statements is true.

Accepted Answer

A limited partnership can have a corporate general partner, not all partners have limited liability as general partners have unlimited liability, and a limited partnership requires only one general partner.

Question 10

Identify which of the following statements is true.

Accepted Answer

Cash distributions from a partnership to partners are generally tax-free because partners are taxed on their share of the partnership's income, not on the distributions. However, if distributions exceed a partner's basis, the excess is taxable as a capital gain, not an ordinary gain.

Question 11

The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date the partner transfers the asset to the partnership.

Accepted Answer

The answer of The holding period of a partnership interest...

Question 12

Dan purchases a 25% interest in the Haymarket Partnership for $20,000 on January 1, and begins to materially participate in the partnership's business. The Haymarket Partnership uses the calendar year as its tax year. At the time of the purchase, the Haymarket Partnership has $2,000 in liabilities, and Dan's share is 25%. During the year, the Haymarket Partnership incurs $8,000 in losses and its liabilities increase by $4,000. What is Dan's basis in his partnership interest on December 31?

Accepted Answer

The answer of Dan purchases a 25% interest in the...

Question 13

Identify which of the following statements is true.

Accepted Answer

Formation of a partnership does require legal documentation, so statement A is false. Statement C is also false as an individual engaged in the active conduct of a business is automatically considered a sole proprietorship for tax purposes unless they choose to be taxed as a different entity such as a partnership. Statement B is true as it accurately defines a partnership and what is needed for it to exist.

Question 14

On the first day of the partnership's tax year, Karen purchases a 50% interest in a general partnership for $30,000 cash and she materially participates in the operation of the partnership for the entire year. The partnership has $40,000 in recourse liabilities when Karen enters the partnership. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. There is no minimum gain related to the nonrecourse liability. During the year, the partnership incurs a $120,000 loss and a $20,000 increase in liabilities. How much of the loss can Karen report on her tax return for the current year?

Accepted Answer

The answer of On the first day of the partnership's...

Question 15

Electing large partnership rules differ from other partnership rules in all of the following areas except

Accepted Answer

All of the above areas - partnership audits, termination, and income reporting - have specific rules and requirements for large partnerships that differ from those of traditional partnerships. For example, large partnerships are subject to mandatory audits by the IRS, have specialized rules for terminating the partnership, and are required to file an additional tax form for income reporting.

Question 16

Which of the following is false?

Accepted Answer

A large partnership can have 100 or more partners, so the statement that it must have fewer than 100 partners is false.

Question 17

Formation of a partnership requires legal documentation filed with the Secretary of State.

Accepted Answer

Formation of a partnership generally does not require filing legal documents with the Secretary of State. Partnerships are often formed through a partnership agreement between the parties involved, without the need for formal state registration, unlike corporations.

Question 18

Jeremey is a partner in the Jimmy partnership. Why does he need to know his basis in his partnership interest?

Accepted Answer

The answer of Jeremey is a partner in the Jimmy...

Question 19

George pays $10,000 for a 20% interest in a general partnership, which has recourse liabilities of $20,000. The partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. George's basis in his partnership interest is

Accepted Answer

George's basis in the partnership interest includes his initial investment plus his share of the partnership's recourse liabilities. He invested $10,000 and his share of the $20,000 recourse liabilities is 20%, which is $4,000. Therefore, his basis is $10,000 + $4,000 = $14,000.

Question 20

Dan purchases a 25% interest in the Haymarket Partnership for $20,000 on January 1, and begins to materially participate in the partnership's business. The Haymarket Partnership uses the calendar year as its tax year. At the time of the purchase, the Haymarket Partnership has $2,000 in liabilities, and Dan's share is 25%. During the year, the Haymarket Partnership incurs $100,000 in losses and its liabilities increase by $4000. What is Dan's basis in his partnership interest on December 31?

Accepted Answer

The answer of Dan purchases a 25% interest in the...

Quiz 9: Partnership Formation and Operation

Identify which of the following statements is true.

Identify which of the following statements is true.

The definition of a partnership does not include

Yong contributes a machine having an adjusted basis of $20,000 and an FMV of $25,000 for a 10% partnership interest. Yong had taken $10,000 of depreciation prior to the contribution. The partnership has no liabilities. As a result of the contribution, Yong must recognize

Explain the difference between partnership distributions and distributive shares.

A partner's basis for his partnership interest can be negative.

Identify which of the following statements is true.

Identify which of the following statements is true.

The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date the partner transfers the asset to the partnership.

Identify which of the following statements is true.

Electing large partnership rules differ from other partnership rules in all of the following areas except

Which of the following is false?

Formation of a partnership requires legal documentation filed with the Secretary of State.

Jeremey is a partner in the Jimmy partnership. Why does he need to know his basis in his partnership interest?

George pays $10,000 for a 20% interest in a general partnership, which has recourse liabilities of $20,000. The partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. George's basis in his partnership interest is