Question 1

Sean, Penelope, and Juan formed the SPJ partnership by each contributing assets with a basis and fair market value of $200,000. In the following year, Penelope sold her one- third interest to Pedro for $225,000. At the time o the sale, the SPJ partnership had the following balance sheet: $$\begin{array} { c c c } 
& \text { Basis } & \text { FMV } \
\text { Cash } & \$ 200,000 & \$ 200,000 \
\text { Land } & \$ 400,000 & \$ 475,000 \
& \$ 600,000 & \$ 675,000
\end{array}$$ Shortly after Pedro became a partner, SPJ sold the land for $475,000. What are the tax consequences of the sale to and the partnership (1) assuming there is no Section 754 election in place, and (2) assuming the partnership has a Section 754 election?

Accepted Answer

The answer of Sean, Penelope, and Juan formed the SPJ...

Question 2

Han purchases a 25% interest in the CHOP Partnership from Huang for $600,000. The partnership has assets with a basis of $1,600,000. What is the amount of the basis adjustment, if the partnership has a 754 election in place?

Accepted Answer

With a 754 election in place, the basis adjustment is made according to the percentage of the partnership interest purchased. Han purchased a 25% interest, so the basis adjustment will be 25% of the $800,000 ($1,600,000/2) increase in partnership assets resulting from the purchase. That is $200,000, so Han's share of the basis in partnership assets will increase by $200,000.

Question 3

The limited liability company (LLC) has become a popular business form because of its limited liability protection for its owner. The S corporation also provides limited liability protection for its owner. What advantages does an LLC provide that are not available with an S corporation?

Accepted Answer

The answer of The limited liability company (LLC) has become...

Question 4

What is an electing large partnership? What are the advantages to the partnership of electing to be taxed under the electing large partnership rules?

Accepted Answer

The answer of What is an electing large partnership? What...

Question 5

A limited liability company is a form of business entity that combines the legal benefits of the corporate form with the tax benefits of the partnership form.

Accepted Answer

A limited liability company (LLC) is a hybrid business entity that provides limited liability to its owners (like a corporation) while also allowing for pass-through taxation (like a partnership). This makes it a popular choice for small businesses and startups.

Question 6

The AB, BC, and CD Partnerships merge into the ABCD Partnership. AB (owned by Austin and Ben) contributes assets worth $100,000. BC (owned by Ben and Charlie) contributes assets worth $200,000. CD (owned by Charlie and Dennis) contributes assets worth $300,000. The capital and profits interest in ABCD is owned by: Austin, 10%; Ben, 30%; Charlie, 25%; and Dennis, 35%. ABCD Partnership is a continuation of

Accepted Answer

The ABCD Partnership is a continuation of the CD Partnership because CD contributed the largest amount of assets ($300,000) to the new partnership.

Question 7

When must a partnership make mandatory basis adjustments?

Accepted Answer

A partnership must make mandatory basis adjustments on any sale of a partnership interest where the partnership's adjusted basis in its assets exceeds their fair market value by $250,000 or more. This is known as a substantial built-in loss (SBIL) and the adjustment ensures that the partnership's future tax benefits are not unfairly distributed to a new partner who did not contribute to the loss.

Question 8

All states have adopted laws providing for limited liability companies. Describe a limited liability company (LLC).

Accepted Answer

The answer of All states have adopted laws providing for...

Question 9

What are some advantages and disadvantages of making a Section 754 election?

Accepted Answer

The answer of What are some advantages and disadvantages of...

Question 10

What are the advantages of a firm being formed as a limited liability company (LLC) instead of as a limited partnership?

Accepted Answer

The answer of What are the advantages of a firm...

Question 11

Patrick purchases a one- third interest in the PPP partnership for $600,000. The partnership has assets with a value of $1,500,000. PPP has a 754 election in effect. What is the amount of the basis adjustment?

Accepted Answer

When a partner purchases an interest in a partnership, the partner's basis in the partnership interest is equal to the amount of cash and the adjusted basis of any property contributed to the partnership. In this case, Patrick purchased a one-third interest in the partnership for $600,000, so his initial basis in the partnership is $600,000.

Since the partnership has a 754 election in effect, when a partner purchases an interest in the partnership, the partner's share of the basis in the partnership assets is adjusted upward by the excess of the inside basis over the outside basis of the assets. In other words, if the partnership assets have an inside basis of $1,800,000 and an outside basis of $1,500,000, there is a $300,000 difference that can be allocated to Patrick's share of the assets. Since Patrick purchased a one-third interest in the partnership, his share of the basis adjustment is $100,000 ($300,000 x 1/3).

Therefore, the correct answer is B, which is a $100,000 increase in Patrick's share of the basis in the partnership assets.

Question 12

Which of the following is a valid reason for making a 754 election?

Accepted Answer

Making a 754 election allows an incoming partner to adjust their basis in the partnership interest to reflect the fair market value of the partnership assets at the time they purchased the interest, even if it exceeds their proportionate share of the partnership's basis in those assets. This can be beneficial for the incoming partner as it may reduce their potential tax liability upon the sale of their partnership interest in the future.

Question 13

The STU Partnership, an electing Large Partnership, has no passive activities and reports the following transactions for the year: net long- term capital losses $50,000, Sec. 1231 gain $60,000, ordinary income $20,000, charitable contributions $15,000, and tax- exempt income $2,000. How much will be reported as ordinary income to its partners?

Accepted Answer

The answer of The STU Partnership, an electing Large Partnership,...

Question 14

Rod owns a 65% interest in the RRR Partnership, a general partnership, which he sells to the two remaining partners - Roger and Regis. The three partners have agreed that Rod will receive $160,000 in cash from the sale. Rod's basis in the partnership interest before the sale is $125,000, which includes his $35,000 share of partnership recourse liabilities. The partnership has assets with a $310,000 FMV and a $210,000 adjusted basis. What issues should Rod, Roger, and Regis consider before this sale takes place?

Accepted Answer

The answer of Rod owns a 65% interest in the...

Question 15

Identify which of the following statements is true.

Accepted Answer

A limited liability company (LLC) is indeed a form of business entity that combines the legal benefits of the corporate form (such as limited liability) with the tax benefits of the partnership form (such as pass-through taxation). Option B is false because a partnership can also be "publicly traded" if its interests are traded on the over-the-counter (OTC) market, which is not an established securities exchange. Option C is also false because when a partnership is divided into two or more new partnerships, the resulting partnerships may or may not be considered new partnerships depending on various factors, such as whether there has been a liquidation or whether the partners have changed.

Question 16

The STU Partnership, an electing Large Partnership, has no passive activities and reports the following transactions for the year: net long- term capital losses $50,000, Sec. 1231 gain $60,000, ordinary income $20,000, charitable contributions $15,000, and tax- exempt income $2,000. How much will be reported as long- term capital gains to its partners?

Accepted Answer

The net long-term capital loss of $50,000 offsets the Sec. 1231 gain of $60,000, resulting in a net long-term capital gain of $10,000.

Question 17

Which of the following statements is correct?

Accepted Answer

The Sec. 754 election allows a partnership to adjust the basis of its assets in the case of both sales of partnership interests and distributions of partnership property.

Question 18

Quinn and Pamela are equal partners in the QP Partnership. On December 30 of the current year, the QP Partnership agrees to liquidate Quinn's partnership interest for a cash payment on December 30 of each of the next five years. What tax issues should Quinn and Pamela consider with respect to the liquidation of Quinn's partnership interest?

Accepted Answer

The answer of Quinn and Pamela are equal partners in...

Question 19

Brown Company recently has been formed as a limited liability company (LLC). Brown Company is owned equally by three individuals-Gene, Susan, and Sandra-all of whom have substantial income from other sources. Brown is a manufacturing firm and expects to earn approximately $130,000 of ordinary income and
$30,000 of long- term capital gain each year for the next several years. Gene will be a full- time manager and will receive a salary of $60,000 each year. What tax issues should the owners consider regarding the LLC's initial year of operations?

Accepted Answer

The answer of Brown Company recently has been formed as...

Question 20

Patrick purchased a one- third interest in the PPP partnership for $600,000. At the time of the purchase, the partnership had a 754 election in effect and its only asset was land with a basis of $1,500,000. This year, PPP sells the land for $1,800,000. What is Patrick's recognized share of the gain on the sale of the land?

Accepted Answer

The answer of Patrick purchased a one- third interest in...

Quiz 10: Special Partnership Issues