Question 1

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) provides limited liability protection for its owners, similar to a corporation, while also offering tax flexibility and simplicity of management like a partnership.

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, the basis of partnership assets is adjusted to the fair market value of the assets. Since Han purchases a 25% interest in the partnership for $600,000, his share of the partnership's basis adjustment would be calculated as follows:
Fair market value of partnership assets = $1,600,000
25% share of partnership assets = $400,000
Purchase price of 25% interest = $600,000
Excess purchase price = $200,000 (the amount by which the purchase price exceeds Han's share of the fair market value of the assets)
Therefore, Han's share of the basis adjustment would be a $200,000 increase in his share of the partnership assets' basis.

Question 3

Identify which of the following statements is true.

Accepted Answer

Option C is true as a limited liability company (LLC) is a flexible business structure that combines advantages of both partnership and corporation structures. They offer limited liability protection to owners along with pass-through taxation benefits like partnerships. Option A is false as when a partnership is divided into two or more new partnerships, the resulting partnerships may or may not be considered new partnerships. Option B is false as a partnership interest can be traded publicly without being listed on an established securities exchange.

Question 4

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 answer of The AB, BC, and CD Partnerships merge...

Question 5

When must a partnership make mandatory basis adjustments?

Accepted Answer

Mandatory basis adjustments are required when there is a substantial value shift in the partnership’s assets. This occurs when the partnership's adjusted basis in its assets exceeds their fair market value by $250,000 or more. Therefore, option D is the correct choice. Options A and B are incorrect because the sale of a partnership interest does not necessarily trigger mandatory basis adjustments unless there is a substantial value shift. Option C is also incorrect because the distribution of assets does not always result in a substantial value shift that triggers mandatory basis adjustments.

Question 6

A partnership terminates for federal income tax purposes if

Accepted Answer

According to the Internal Revenue Code, a partnership terminates for federal income tax purposes if, within a 12-month period, there is a sale or exchange of at least 50% of the total interest in partnership capital and profits. This means that if more than 50% of the partnership interests are sold or exchanged during a 12-month period, the partnership is deemed to have terminated and a new partnership is considered to have been formed.

Question 7

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 8

Sally is a calendar-year taxpayer who owns a 30% capital and profits interest in the SEM Partnership. Eric sells the remaining 70% capital and profits interest to Michelle on October 3. The partnership year-end is March 31 as permitted by the IRS for business purposes. Which of the following statements is correct?

Accepted Answer

Sally will need to include partnership distributive shares for both periods, as she was a partner for both periods. The partnership will need to file two tax returns for the year, one for the period ending March 31 and one for the period ending September 30 (the day before Eric sold his interest). This will allow for accurate reporting of each partner's share of the income and expenses for each period. Sally is not required to conform her tax year with the partnership tax year. The new partnership is not a continuation of the old partnership, as there has been a significant change in ownership.

Question 9

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 the...

Question 10

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

Accepted Answer

A 754 election allows a partnership to adjust the basis of its assets when there is a transfer of a partnership interest or a distribution of property, which can be beneficial when an incoming partner pays more than their proportionate share of the partnership's assets.

Question 11

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 12

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 13

Identify which of the following statements is false.

Accepted Answer

The statement in option B is false. When using the 50% rule to terminate a partnership, if an interest is sold more than once during the 12-month period, all the sales are aggregated to determine whether the 50% threshold has been crossed.

Question 14

Which of the following statements is correct?

Accepted Answer

The Sec. 754 election applies to both sales and distributions. Options A, C, and D are incorrect. A partnership may make a Sec. 754 election when it is formed or when there is a transfer of an interest in the partnership. Once made, the election applies to both sales and distributions. This election is beneficial because it allows the partnership to adjust the basis of its assets when there is a transfer of an interest, which helps allocate the correct amount of depreciation or gains to the transferee partner. The election cannot be revoked without IRS consent.

Question 15

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 basis of the partner's share of the partnership's assets is adjusted based on the purchase price. Since Patrick purchases a one-third interest in the partnership for $600,000, his share of the partnership assets is $1,800,000 ($600,000 / 0.33). However, the partnership's assets are only valued at $1,500,000, so there is a $300,000 built-in gain. Because the partnership has a 754 election in effect, Patrick's basis in his share of the partnership assets is increased by his share of the built-in gain, which is $100,000 (one-third of $300,000). Therefore, the correct answer is choice D - a $100,000 increase in Patrick's share of the basis in the partnership assets.

Question 16

Marc is a calendar-year taxpayer who owns a 30% capital and profits interest in the MN Partnership. Nancy sells the remaining 70% capital and profits interest to Henry on October 31. The partnership year-end is March 31 as permitted by the IRS for business purpose reasons. The MN Partnership

Accepted Answer

The answer of Marc is a calendar-year taxpayer who owns...

Question 17

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 18

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 of the sale, the SPJ partnership had the following balance sheet:  Shortly after Pedro became a partner, SPJ sold the land for $475,000. What are the tax consequences of the sale to Pedro and the partnership (1)assuming there is no Section 754 election in place, and (2)assuming the partnership has a valid Section 754 election?

Accepted Answer

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

Question 19

The LM Partnership terminates for tax purposes on July 15 when Latasha sells her 60% capital and profits interest to Zoe for $100,000. The partnership has no liabilities, and its assets at the time of termination are as follows:  Marika, a 40% partner in the LM Partnership, has a $64,800 basis in her partnership interest (outside basis)at the time of the termination. She has held her LM Partnership interest for three years at the time of the termination. The basis of Marika and Zoe in the new LM Partnership is:

Accepted Answer

The basis of a partner's interest in a partnership includes the partner's initial capital contribution as well as any increases or decreases over time due to partnership operations. When a partnership terminates, the partnership's assets are deemed to be sold to the partners at fair market value, and any gain or loss is allocated to the partners' capital accounts based on their profit and loss sharing ratios. 
In this case, Latasha sells her 60% interest to Zoe for $100,000, which represents the fair market value of the partnership's assets. The remaining 40% interest is held by Marika. The total value of the partnership's assets is $166,800, so Zoe's basis in her new 60% interest is $100,080 ($100,000 purchase price plus $80 of her share of the partnership's basis), and Marika's basis in her new 40% interest is $66,720 ($64,800 outside basis plus $1,920 of her share of the partnership's basis). 
Therefore, the correct answer is Choice C.

Question 20

Identify which of the following statements is true.

Accepted Answer

The statements provided are all false based on the U.S. Internal Revenue Code and regulations governing partnerships. A) The partnership tax year does not close simply because a partner transfers his interest by gift. B) The death of a partner does not automatically terminate a partnership, especially in a two-member partnership where the business can continue with the successor-in-interest. C) The complete liquidation of a partner's interest (even if it's 60%) does not terminate the partnership if other partners remain and continue the business.

Quiz 10: Special Partnership Issues

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.

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?

Identify which of the following statements is true.

When must a partnership make mandatory basis adjustments?

A partnership terminates for federal income tax purposes if

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

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

Identify which of the following statements is false.

Which of the following statements is correct?

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?

Marc is a calendar-year taxpayer who owns a 30% capital and profits interest in the MN Partnership. Nancy sells the remaining 70% capital and profits interest to Henry on October 31. The partnership year-end is March 31 as permitted by the IRS for business purpose reasons. The MN Partnership

Identify which of the following statements is true.