Question 1

Owen owns 60 percent of the Big Time partnership. He sells to the partnership a machine for $70,000 that has a $45,000 basis. What would the taxable income be for Owen and what is the partnership's basis in the machine?

Accepted Answer

Since Owen owns 60% of the partnership, he effectively sold 60% of the machine to the partnership.

60% of Owen's basis is $27,000 ($45,000 x 0.6).

The partnership's basis in the machine is the amount it paid for it, which is $70,000.

To calculate Owen's taxable income from the sale, we need to compare the amount he received ($70,000) to his basis in the portion he sold ($27,000).

So, Owen has a taxable gain of $43,000 ($70,000 - $27,000) and his taxable income would be 60% of that amount or $25,800 ($43,000 x 0.6).

Therefore, the correct answer is C: $25,000; $70,000.

Question 2

The "at-risk" rule acts to prevent tax shelters from generating large losses for their investors while exposing them to little personal risk.

Accepted Answer

The at-risk rule was put in place to prevent taxpayers from claiming losses from investments in tax shelters in excess of the amount of their personal financial risk involved in the investment. This helps prevent the abuse of tax shelters for the purpose of generating large losses and reducing tax liability.

Question 3

Which of the following is a disadvantage of an LLC?

Accepted Answer

The lack of uniform treatment across states can create complications for LLC owners who operate in multiple states or have members in multiple states. This can result in additional legal and administrative costs.

Question 4

The "at-risk" rule does not apply to activities involving real estate.

Accepted Answer

The "at-risk" rule does apply to activities involving real estate, limiting the amount of loss a taxpayer can deduct to the amount for which they are considered "at risk" in the activity.

Question 5

Losses on transactions between a partnership and its partners are always disallowed.

Accepted Answer

Losses on transactions between a partnership and its partners may be allowed or disallowed depending on the specific circumstances and the tax rules in place. For example, losses on transactions between a partner and a partnership may be disallowed if they are not considered to be made at arm's length or if they have been structured in a way to avoid tax. However, if the transactions are made on an arm's length basis and are considered to be genuine business transactions, the losses may be allowed.

Question 6

Barry owns a 50 percent interest in B&B Interests, a partnership. His brother, Benny, owns a 35 percent interest in that same partnership, and the remaining 15 percent is owned by an unrelated individual. During the current year, Barry sells a rental property with a basis of $60,000 to B&B Interests for $100,000. The partnership intends to hold the rental as inventory for resale. What is the amount and nature of Barry's gain or loss on this transaction?

Accepted Answer

When Barry sells the rental property to the partnership, it is considered a transaction between two related parties. Therefore, any gain or loss on the sale is not recognized for tax purposes. However, since the partnership will hold the rental as inventory for resale, when the partnership ultimately sells the property in the future, any gain or loss will be recognized and allocated to the partners based on their ownership percentage. So, Barry's basis in the partnership will be increased by the $40,000 gain on the sale, and he will need to take this into account when determining his gain or loss on his share of any future sales. The $40,000 gain will also be treated as ordinary income for tax purposes.

Question 7

The "at-risk" rule applies, with limited exceptions, to all taxable activities.

Accepted Answer

The "at-risk" rule applies, with limited exceptions, to all taxable activities.

Question 8

There is no general partner required in a limited liability company (LLC).

Accepted Answer

In an LLC, the owners are called members, and there is no requirement for a general partner. Members can manage the company themselves or hire a manager to handle the day-to-day operations, but there is no need for a designated general partner.

Question 9

Kitty is a 60 percent partner of Tabby Associates. Kitty sells a building to the partnership for $75,000. If the building had an adjusted basis to Kitty of $95,000, how much gain or loss does Kitty recognize on this transaction?

Accepted Answer

The answer of Kitty is a 60 percent partner of...

Question 10

Which of the following is true about an LLC (Limited Liability Company)?

Accepted Answer

An LLC's limited liability is similar to a corporation's. Unlike a partnership, the owners of an LLC are not personally responsible for the company's debts and liabilities. However, an LLC can choose to be taxed like a partnership, corporation, or sole proprietorship, depending on the number of members and their preferences. Additionally, an LLC can have a single member or multiple members.

Question 11

At the beginning of the year, Joe's basis in his partnership interest was $5,000. During the year, Joe contributed $10,000 in cash to the partnership and signed a bank loan to be personally liable for the partnership's debt of $25,000. For the current year, the partnership allocated a loss of $60,000 to Joe. In the following year, Joe's portion of the partnership income is $30,000. Which of the following is accurate?

Accepted Answer

The answer of At the beginning of the year, Joe's...

Question 12

Limited liability companies may operate in more than one state.

Accepted Answer

Limited liability companies, or LLCs, can choose to register and operate in multiple states, either by registering as a foreign LLC in those states or by forming separate LLCs in each state.

Question 13

Michael invests in Buxus Interests, a partnership. Michael's capital contribution to the partnership consists of $10,000 cash and equipment with an adjusted basis of $120,000 (fair market value of $150,000) subject to a nonrecourse liability of $60,000.
a.Calculate the amount that Michael is at-risk in the activity after making the above contribution?
b.If Michael's share of the partnership loss in the year after he makes the contribution is $150,000, how much of the loss may be deducted in that year (before considering the limitations on passive losses)? Assume the partnership had no other transactions.
c.If Michael has any nondeductible loss in part b, what may Michael do with the nondeductible loss?

Accepted Answer

The answer of Michael invests in Buxus Interests, a partnership....

Question 14

Mario and Luigi are brothers and they are equal partners in Pipes of Your Dreams Plumbing. Mario sells his fancy sports car to the business for $40,000. Mario's basis in the car is $45,000.
a.What is the amount of Mario's recognized gain or loss on this transaction, and what is the nature of the gain or loss?
b.If the partnership later sells the sports car for $55,000, how much of the gain is recognized?

Accepted Answer

The answer of Mario and Luigi are brothers and they...

Question 15

Rochelle owns 40 percent of a partnership and her brother owns the remaining 60 percent interest. During the current tax year, Rochelle sold a building to the partnership for $180,000, to be used for the partnership's office. She had held the building for 3 years at the time of the sale.
a.Assuming Rochelle's basis in the building was $200,000, what is the amount and nature of her gain or loss?
b.Assuming Rochelle's basis in the building was $150,000, what is the amount and nature of her gain or loss?

Accepted Answer

The answer of Rochelle owns 40 percent of a partnership...

Question 16

If a partner has a more than 50 percent interest in a partnership, a capital gain resulting from the sale of property to the partnership will be taxed as ordinary income to the partner, provided the property is not a capital asset to the partnership.

Accepted Answer

If a partner has a more than 50 percent interest in a partnership, a capital gain resulting from the sale of property to the partnership will be taxed as ordinary income to the partner, provided the property is not a capital asset to the partnership.

Question 17

Which of the following liabilities would be considered nonrecourse?

Accepted Answer

A nonrecourse liability is a debt for which the borrower is not personally liable. If the borrower defaults on the loan, the lender can only seize the collateral securing the loan and cannot go after the borrower's other assets. Option A and B both involve the borrower being personally liable for the debt, making them recourse liabilities. Option C is nonrecourse because the bank can only seize the real estate securing the loan, and cannot go after the borrower's other assets.

Question 18

Losses are disallowed for transactions between a partnership and a partner who has a 50 percent interest in the partnership.

Accepted Answer

Losses are actually allowed for transactions between a partnership and a partner who has a 50 percent interest in the partnership. However, there may be limitations on how much of the loss can be claimed on the partner's individual tax return.

Question 19

Wallace and Pedersen have equal interests in the capital and profits of the partnership of Wallace and Pedersen, but are otherwise unrelated. On August 1, 2016, Wallace sold 100 shares of Kalmia Mining Corporation to the partnership for its fair market value of $7,000. Wallace had bought the stock in 2007 at a cost of $10,000. What is Wallace's deductible loss for 2016 as a result of the sale of this stock?

Accepted Answer

Since Wallace sold the stock for $7,000 and had originally bought it for $10,000, he incurred a long-term capital loss of $3,000 ($10,000 - $7,000). This loss can be used to offset any capital gains for the year, with up to $3,000 of the loss being deductible against ordinary income. However, since Wallace sold the stock to his partnership, which he has an equal interest in, the loss may be subject to special rules regarding related party transactions.

Question 20

During the current year, Jay is a partner in an automobile dealership. Jay's amount at risk at the beginning of the year is $90,000, and during the current year Jay's share of the dealership's ordinary loss is $120,000.
a.What is the amount of the loss from the automobile dealership that Jay may deduct in the current year?
b.If the dealership has a profit of $63,000 in the subsequent year, how much of the subsequent year income is taxable to Jay?

Accepted Answer

The answer of During the current year, Jay is a...

Quiz 10: Partnership Taxation

Owen owns 60 percent of the Big Time partnership. He sells to the partnership a machine for $70,000 that has a $45,000 basis. What would the taxable income be for Owen and what is the partnership's basis in the machine?

The "at-risk" rule acts to prevent tax shelters from generating large losses for their investors while exposing them to little personal risk.

Which of the following is a disadvantage of an LLC?

The "at-risk" rule does not apply to activities involving real estate.

Losses on transactions between a partnership and its partners are always disallowed.

The "at-risk" rule applies, with limited exceptions, to all taxable activities.

There is no general partner required in a limited liability company (LLC).

Kitty is a 60 percent partner of Tabby Associates. Kitty sells a building to the partnership for $75,000. If the building had an adjusted basis to Kitty of $95,000, how much gain or loss does Kitty recognize on this transaction?

Which of the following is true about an LLC (Limited Liability Company) ?

Limited liability companies may operate in more than one state.

If a partner has a more than 50 percent interest in a partnership, a capital gain resulting from the sale of property to the partnership will be taxed as ordinary income to the partner, provided the property is not a capital asset to the partnership.

Which of the following liabilities would be considered nonrecourse?

Losses are disallowed for transactions between a partnership and a partner who has a 50 percent interest in the partnership.