Question 1

At the end of year 1, Tony had a tax basis of $40,000 in Tall Ladders, Limited Partnership. Tony has a 20 percent profits interest in Tall Ladders. For year 2, Tall Ladders will pay Tony a $10,000 guaranteed payment for extra services he provides to the partnership. Given the following Income Statement and Balance Sheet from Tall Ladders, what is Tony's adjusted tax basis at the end of year 2?

Accepted Answer

The answer of At the end of year 1, Tony...

Question 2

Illuminating Light Partnership had the following revenues, expenses, gains, losses, and distributions: $\begin{array}{c}
\begin{array}{lll}
\text{Sales}\
\text{Long-Term Capital Gain}\
\text{Qualified Dividends}\
\text{Cost of Goods Sold}\
\text{Employee Wages}\
\text{Guaranteed Payment to Managing Partner}\
\text{Municipal Bond Interest}\
\text{Section 179 Expense}\
\text{MACRS Depreciation}\
\text{Section 1231 Gains}\
\text{Fines and Penalties}\
\end{array}
\begin{array}{lll}
&&
\end{array}
\begin{array}{lll}
\$ 60,000 \
\$ 8,000 \
\$ 5,000 \
\$ 40,000 \
\$ 15,000 \
\$ 25,000 \
\$ 5,000 \
\$ 10,000 \
\$ 8,000 \
\$ 3,000 \
\$ 1,500\
\end{array}
\end{array}$ Given these items, what is Illuminating Light's ordinary business income (loss) for the year?

Accepted Answer

The answer of Illuminating Light Partnership had the following revenues,...

Question 3

Jordan, Inc., Bird, Inc., Ewing, Inc., and Barkley, Inc. formed Nothing-But-Net Partnership on June 1st, 20X9. Now, Nothing-But-Net must adopt its required tax year-end. The partners' year-ends, profits interests, and capital interests are reflected in the table below. Given this information, what tax year-end must Nothing-But-Net use and what rule requires this year-end? $$\begin{array} {c } 
 { \text { Nothing-But-Net Partnership } } 
\end{array}$$
$$\begin{array} { | c | c | c | c | } 
\hline & \text { Year-End } & \text { Profits } & \text { Capital } \
\hline \text { Jordan, Inc. } & 4 / 30 & 45 \% & 25 \% \
\hline \text { Bird, Inc. } & 9 / 30 & 25 \% & 25 \% \
\hline \text { Ewing, Inc. } & 10 / 31 & 0 \% & 25 \% \
\hline \text { Barkley, Inc. } & 12 / 31 & 30 \% & 25 \% \
\hline
\end{array}$$

Accepted Answer

The answer of Jordan, Inc., Bird, Inc., Ewing, Inc., and...

Question 4

On June 12, 20X9, Kevin, Chris, and Candy Corp. came together to form Scrumptious Sweets General Partnership. Now, Scrumptious Sweets must decide which tax year-end to use. Kevin and Chris have calendar year-ends and each holds a 35% profits and capital interest. However, Candy Corp. has a September 30th year-end and holds the remaining 30% profits and capital interest. What tax year-end must Scrumptious Sweets adopt and what rule mandates this year-end?

Accepted Answer

The answer of On June 12, 20X9, Kevin, Chris, and...

Question 5

On March 15, 20X9, Troy, Peter, and Sarah formed Picture Perfect general partnership. This partnership was created to sell a variety of cameras, picture frames, and other photography accessories. When it was formed, the partners received equal profits and capital interests and the following items were contributed by each partner:
• Troy - cash of $3,000, inventory with a FMV and tax basis of $5,000, and a building with a FMV of $22,000 and adjusted basis of $10,000. Additionally, the building was secured by a $10,000 nonrecourse mortgage.
• Peter - cash of $5,000, accounts payable of $12,000 (recourse debt for which each partner becomes equally responsible), and land with a FMV of $27,000 and tax basis of $20,000.
• Sarah - cash of $2,000, accounts receivable with a FMV and tax basis of $1,000, and equipment with a FMV of $40,000 and adjusted basis of $3,500. Sarah also contributed a $23,000 nonrecourse note payable secured by the equipment.
What is each partner's outside basis and how much gain (loss) must the partners recognize in 20X9 when Picture Perfect was formed?

Accepted Answer

The answer of On March 15, 20X9, Troy, Peter, and...

Question 6

What general accounting methods may be used by a partnership and how and by whom are they selected?

Accepted Answer

The answer of What general accounting methods may be used...

Question 7

Why are guaranteed payments deducted in calculating the ordinary business income (loss) of partnerships and treated as a separately-stated item for the partners that receive the payment?

Accepted Answer

The answer of Why are guaranteed payments deducted in calculating...

Question 8

On April 18, 20X8, Robert sold his 35 percent partnership interest in Fruit Wonder, LLC to Richard for $120,000. Prior to selling his interest, Robert had a basis in Fruit Wonder of $80,000. Robert's basis included $5,000 of recourse debt and $15,000 of nonrecourse debt that had been allocated to him. Immediately after the purchase, what is Richard's tax basis in Fruit Wonder?

Accepted Answer

The answer of On April 18, 20X8, Robert sold his...

Question 9

On March 15, 20X9, Troy, Peter, and Sarah formed Picture Perfect General Partnership. This partnership was created to sell a variety of cameras, picture frames, and other photography accessories. The following items were contributed by each partner in exchange for a 1/3 capital and profits interest:
• Troy - cash of $3,000, inventory with a FMV and tax basis $5,000, and a building with a FMV of $8,000 and adjusted basis of $10,000. Additionally, the building is secured by a $10,000 mortgage.
• Peter - cash of $5,000, accounts payable with a FMV and tax basis of $19,000, and land with a FMV and tax basis of $20,000.
• Sarah - cash of $2,000, accounts receivable with a FMV and tax basis of $1,000, and equipment with a FMV of $26,000 and adjusted basis of 4,000. Also, the equipment is secured by a $23,000 note payable.
What is the partnership's inside basis in each asset? How much gain or loss must Picture Perfect recognize? Prepare Picture Perfect's balance sheet reflecting the partners' capital accounts on both a tax basis and 704(b)/FMV basis.

Accepted Answer

The answer of On March 15, 20X9, Troy, Peter, and...

Question 10

Ruby's tax basis in her partnership interest at the beginning of the partnership's tax year was $13,000. The following items were included in her Schedule K-1 from the partnership for the year: Cash Distribution$\mathbf { \quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\$ 2 , 0 0 0 }$
Ordinary Business Loss$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad \mathbf {(\$ 1 4 , 0 0 0 ) }$
Short-Term Capital Gains$\mathbf { \quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\$ 2 , 0 0 0 }$
Reduction in Ruby's Share of Partnership Debt$\mathbf {\quad\quad\quad\quad\quad\quad\quad\quad \$ 4 , 0 0 0 }$

Accepted Answer

The answer of Ruby's tax basis in her partnership interest...

Question 11

In each of the independent scenarios below, how does the partner or partnership determine its holding period in the property received?
a. A partner contributes property in exchange for a partnership interest
b. The partnership receives contributed property
c. A partner contributes services in exchange for a partnership interest
d. A partner purchases a partnership interest from an existing partner

Accepted Answer

The answer of In each of the independent scenarios below,...

Question 12

Explain why partners must increase their tax basis for their share of partnership taxable and nontaxable income or gain and reduce their basis by their share of partnership deductible and nondeductible expenses or losses?

Accepted Answer

The answer of Explain why partners must increase their tax...

Question 13

Lloyd and Harry, equal partners, form the Ant World Partnership. During the year, Ant World had the following revenue, expenses, gains, losses, and distributions: $\begin{array}{c}
\begin{array}{lll}
\text{Cost of Goods Sold}\
\text{Cash Distribution to Harry}\
\text{Municipal Bond Interest}\
\text{Short-Term Capital Gains}\
\text{Employee Wages}\
\text{Rent}\
\text{Charitable Contributions}\
\text{Sales}\
\text{Repairs and Maintenance}\
\text{Long-term Capital Gains}\
\text{Fines and Penalties}\
\text{Guaranteed Payment to Lloyd}\
\end{array}
\begin{array}{lll}
&&
\end{array}
\begin{array}{r}
\mathbf{\$ 8 5 , 0 0 0} \
\mathbf{\$ 1 5 , 0 0 0} \
\mathbf{\$ 1 , 5 0 0} \
\mathbf{\$ 4 , 5 0 0} \
\mathbf{\$ 4 0 , 0 0 0} \
\mathbf{\$ 1 0 , 0 0 0} \
\mathbf{\$ 2 5 , 0 0 0} \
\mathbf{\$ 1 7 5 , 0 0 0} \
\mathbf{\$ 5 , 0 0 0} \
\mathbf{\$ 1 2 , 0 0 0} \
\mathbf{\$ 5 , 0 0 0} \
\mathbf{\$ 2 5 , 0 0 0}\
\end{array}
\end{array}$ Given these items, what amount of ordinary business income (loss) and what separately-stated items should be allocated to each partner for the year?

Accepted Answer

The answer of Lloyd and Harry, equal partners, form the...

Question 14

Greg, a 40% partner in GSS Partnership, contributed land to the partnership in exchange for his partnership interest when the partnership was formed. At the time, his basis in the land was $30,000 and its FMV was $133,000. Three years after the partnership was formed, GSS Partnership decided to sell the land to an unrelated party for $150,000. When the land is sold, how much of the gain should be allocated to each partner of GSS Partnership if Sam and Steve are each 30% partners?

Accepted Answer

The answer of Greg, a 40% partner in GSS Partnership,...

Question 15

This year, Reggie's distributive share from Almonte Partnership includes $8,000 of interest income, $4,000 of dividend income, and $60,000 ordinary business income.
A. Assume that Reggie materially participates in the partnership. How much of his distributive share from Almonte Partnership is potentially subject to the Medicare contribution tax?
A. If Reggie materially participates in the business, the ordinary income is not passive to him and should not be subject to the Medicare contribution tax. The $8,000 of interest income and the $4,000 of dividend income are potentially subject to the Medicare contribution tax.
B. Assume that Reggie does not materially participate in the partnership. How much of his distributive share from Almonte Partnership is potentially subject to the Medicare contribution tax?
B. If Reggie is not a material participant in the partnership the $8,000 of interest income, the $4,000 of dividend income, and the $60,000 of ordinary business income are potentially subject to the Medicare contribution tax.

Accepted Answer

The answer of This year, Reggie's distributive share from Almonte...

Question 16

Alfred, a 33% profits and capital partner in Pizzeria Partnership, needs help in adjusting his tax basis to reflect the information contained in his most recent Schedule K-1 from the partnership. Unfortunately, the Schedule K-1 he recently received was for year 3 of the partnership, but Alfred only knows that his tax basis at the beginning of year 2 of the partnership was $23,000. Thankfully, Alfred still has his Schedule K-1 from the partnership for years 1 and 2.
Using the following information from Alfred's year 1, year 2, and year 3 Schedule K-1, calculate his tax basis the end of year 2 and year 3. $\begin{array}{c}
\begin{array}{lll}
\text{Year 1:}\
\text{Ordinary business income}\
\text{Cash distribution}\
\text{Alfred's share of partnership debt}\
\text{Guaranteed payment}\
\text{Nondeductible expense}\
\text{Tax-exempt income}\
\
\text{Year 2:}\
\text{Ordinary business loss}\
\text{Cash contribution}\
\text{Alfred's share of partnership debt}\
\text{Guaranteed payment}\
\text{Nondeductible expense}\
\text{Tax-exempt income}\
\
\text{Year 3:}\
\text{Ordinary business loss}\
\text{Alfred's share of partnership debt}\
\text{Nondeductible expenses}\
\text{Guaranteed payment}\
\end{array}
\begin{array}{lll}
&&
\end{array}
\begin{array}{lll}
\
\$ 10,000 \
\$ 7,000 \
\mathbf{\$ 8 5 , 0 0 0} \
(\$ 4,500) \
(\$ 1,000) \
\$ 1,200 \
\
\
(\$ 5,000) \
\$ \mathbf{1 0 , 0 0 0} \
\mathbf{\$ 7 3 , 0 0 0} \
(\mathbf{\$ 7 , 5 0 0}) \
(\$ 3,000) \
\$ 1,500 \
\
\
(\$ \mathbf{1 3}, \mathbf{0 0 0})\
\mathbf{\$ 5 8 , 0 0 0} \
 (\$ 3,000) \
(\$ 7,500) \
\end{array}
\end{array}$

Accepted Answer

The answer of Alfred, a 33% profits and capital partner...

Question 17

On January 1, 20X9, Mr. Blue and Mr. Grey each contributed $100,000 to form the B&G general partnership. Their partnership agreement states that they will each receive a 50% profits and loss interest. The partnership agreement also provides that Mr. Blue will receive an annual $36,000 guaranteed payment.
B&G began business on January 1, 20X9. For its first taxable year, its accounting records contained the following information. $\begin{array}{c}
\begin{array}{lll}
\text{Gross receipts from sales}\
\text{Cost of sales}\
\text{Gross profit}\
\
\text{Guaranteed payments to Mr. Blue}\
\text{Interest paid on business debt}\
\text{Dividend income}\
\text{Tax exempt interest}\
\text{Operating expenses}\
\text{Depreciation expense}\
\text{Sec. 1231 Gains}\
\end{array}
\begin{array}{lll}
&&
\end{array}
\begin{array}{lll}
 \$ 150,000 \
(\$ 2 2 0 , 0 0 0)\
(\$ 70,000)\
\
(\$36,000)\
(\$ 3,000)\
\$ 500 \
 \$ 1,500 \
(\$138,000)\
 (\$ 9,000) \
 \$ 8,000\ 
\end{array}
\end{array}$

Accepted Answer

The answer of On January 1, 20X9, Mr. Blue and...

Question 18

Lincoln, Inc., Washington, Inc., and Adams, Inc. form Presidential Suites Partnership on February 15, 20X9. Now, Presidential Suites must adopt its required tax year-end. The partners' year-ends, profits interests, and capital interests are reflected in the table below. Given this information, what tax year-end must Presidential Suites use and what rule requires this year-end? $$\begin{array}{l}
\quad\quad\quad\quad\quad\quad\text { Presidential Suites Partnership }\
\begin{array} { | c | c | c | c | } 
\hline & \text { Year-End } & \text { Profits } & \text { Capital } \
\hline \text { Lincoln, Inc. } & 3 / 31 & 35 \% & 30 \% \
\hline \text { IVashington, Inc. } & 7 / 31 & 30 \% & 40 \% \
\hline \text { Adams, Inc. } & 11 / 30 & 35 \% & 30 \% \
\hline
\end{array}
\end{array}$$

Accepted Answer

The answer of Lincoln, Inc., Washington, Inc., and Adams, Inc....

Question 19

J&J, LLC was in its third year of operations when J&J decided to expand the number of members from two, A & B, with equal profits and capital interests to three members, A, B, andC. The third member, C, will contribute her financial expertise to the LLC in exchange for a 1/3 capital interest in J&J. Given the balance sheet below reflecting the financial position of J&J on the date member C is admitted, what are the tax consequences to members A, B, and C, and to J&J when C receives her capital interest? If, instead, member C receives a 1/3 profit interest, what would be the tax consequences to members A, B, and C, and to J&J?
 $\begin{array}{|c|}
\hline
\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad
\text{JEJ Limited Liability Company}\quad\quad\quad\quad\quad\quad\quad
\
\hline
\text{Balance Sheet}\
\end{array}$
$\begin{array}{|l|r|r|l|r|r|}
\hline & {\text { Basis }} & {\text { FMV }} & & {\text { Basis }} & {F M V} \
\hline \text { Cash } & 20,000 & 20,000 & \text { Accounts Payable } & 7,000 & 7,000 \
\hline \text { Inventory } & 5,000 & 5,000 & \text { Mortgage Payable } & 20,000 & 20,000 \
\hline \text { Equipment } & 10,000 & 17,000 & & & \
\hline \text { Building } & 30,000 & 45,000 & \text { A - Capital } & 22,000 & 30,000 \
\hline & & & \text { B - Capital } & 16,000 & 30,000 \
\hline\
\hline \text{Total Assets} & \text{65,000} & \text{87,000} & \text {Total Liab. \& OE} & \text{65,000}& \text{87,000} \
\hline
\end{array}$

Accepted Answer

The answer of J&J, LLC was in its third year...

Question 20

KBL, Inc., AGW, Inc., Blaster, Inc., Shiny Shoes, Inc., and a group of 24 individuals form Shoes Galore General Partnership on October 11, 20X9. Now, Shoes Galore must adopt its required tax year-end. The partners' year-ends, profits interests, and capital interests are reflected in the table below. Given this information, what tax year-end must Shoes Galore use and what rule requires this year-end? $\begin{array}{c}

\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad
\text{Shoes Galore Partnership}\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad
\end{array}$
$$\begin{array} { | c | c | c | c | } 
\hline & \text { Year-End } & \text { Profits } & \text { Capital } \
\hline \text { KBL, Inc. } & 1 / 31 & 25 \% & 25 \% \
\hline \text { AGIV, Inc. } & 1 / 31 & 20 \% & 20 \% \
\hline \text { Blaster, Inc. } & 3 / 31 & 4 \% & 4 \% \
\hline \text { Shiny Shoes, Inc. } & 6 / 30 & 3 \% & 3 \% \
\hline 24 \text { Individuals }&12/31& \begin{array} { c } 
2 \% \text { each } \
( 48 \% \text { total } )
\end{array} & \begin{array} { c } 
2 \% \text { each } \
( 48 \% \text { total } )
\end{array} \
\hline
\end{array}$$

Accepted Answer

The answer of KBL, Inc., AGW, Inc., Blaster, Inc., Shiny...

Quiz 20: Forming and Operating Partnerships

What general accounting methods may be used by a partnership and how and by whom are they selected?

Why are guaranteed payments deducted in calculating the ordinary business income (loss) of partnerships and treated as a separately-stated item for the partners that receive the payment?

Explain why partners must increase their tax basis for their share of partnership taxable and nontaxable income or gain and reduce their basis by their share of partnership deductible and nondeductible expenses or losses?