Question 1

Partners must generally treat the value of profits interests they receive in exchange for services as ordinary income.
Partners must treat the value of capital interests they receive in exchange for services as ordinary income. Because there is no immediate liquidation value associated with a profits interest, the partner providing the services will not recognize income.

Accepted Answer

Partners must generally treat the value of profits interests they receive in exchange for services as ordinary income. However, they may be able to defer recognition of the income until the profits from the partnership are actually distributed to them. Partners must also generally treat the value of capital interests they receive for services as ordinary income.

Question 2

Guaranteed payments are included in the calculation of a partnership's ordinary business income (loss) and are also treated as separately-stated items.

Accepted Answer

Guaranteed payments to partners are payments for services rendered or the use of capital, and are treated as ordinary income for the partnership. They are also separately-stated items on the partnership's tax return, which means they are reported separately from other partnership items like income or losses that are allocated to the partners.

Question 3

A partner's outside basis must first be decreased by any negative basis adjustments and then increased by any positive basis adjustments.

Accepted Answer

A partner's outside basis is first increased by any positive basis adjustments and then decreased by any negative basis adjustments. Positive adjustments include contributions and share of income, while negative adjustments include distributions and share of losses.

Question 4

A partnership can elect to amortize organization and startup costs; however, syndication costs are not deductible.

Accepted Answer

Partnership can elect to amortize organization and startup costs under section 709(b) of the Internal Revenue Code. However, syndication costs incurred in connection with the issuance of interests in the partnership are considered as capital expenditures and are not deductible.

Question 5

The term "outside basis" refers to the partnership's basis in its assets; whereas, the term "inside basis" refers an individual partner's basis in her partnership interest.

Accepted Answer

The term "outside basis" actually refers to a partner's basis in her partnership interest, and the term "inside basis" refers to the partnership's basis in its assets.

Question 6

Partners adjust their outside basis by adding non-deductible expenses and subtracting any tax-exempt income to avoid being double taxed.
Non-deductible expenses decrease basis and tax-exempt income increases basis.

Accepted Answer

Non-deductible expenses decrease a partner's outside basis, while tax-exempt income increases it.

Question 7

A general partner's share of ordinary business income is similar to investment income; thus, a general partner only includes their guaranteed payments as self-employment income.
General partners report guaranteed payments and their share of ordinary business income as self-employment income because they are actively involved in managing the partnership.

Accepted Answer

General partners report both guaranteed payments and their share of ordinary business income as self-employment income, not just guaranteed payments, because they are actively involved in managing the partnership.

Question 8

The least aggregate deferral test uses the profit percentage of each partner to determine the minimum amount of tax deferral for the partner group as a whole in determining the permissible tax year-end of a partnership.

Accepted Answer

This statement is true. The least aggregate deferral test is one of the tax tests used to determine the permissible tax year-end of a partnership. It involves calculating the profit percentage of each partner and using those percentages to determine the minimum amount of tax deferral for the partnership as a whole.

Question 9

Partnerships tax rules incorporate both the entity and aggregate approaches.

Accepted Answer

Partnerships are treated as pass-through entities for tax purposes, meaning that the partnership itself does not pay income taxes. Instead, each partner reports his or her share of the partnership's income or losses on his or her individual tax return. This reflects the aggregate approach to taxation. However, partnerships are also required to file a tax return on Form 1065, which reflects the entity approach to taxation. Therefore, partnerships tax rules incorporate both the entity and aggregate approaches.

Question 10

A partnership with a C corporation partner must always use the accrual method as its accounting method.
An exception applies to partnerships with annual gross receipts for the three prior tax years of $5 million or less.

Accepted Answer

The statement is false. While partnerships with C corporation partners are generally required to use the accrual method, there are exceptions. One such exception is for partnerships with annual gross receipts of $5 million or less in each of the prior three years, which may use the cash method.

Question 11

Adjustments to a partner's outside basis are made annually to prevent double taxation on the sale of a partnership interest or at the time of a partnership distribution.

Accepted Answer

Adjustments to a partner's outside basis in a partnership are made annually to reflect the partner's share of partnership income, gains, losses, and deductions, as well as any contributions or distributions made by the partner. These adjustments help ensure that the partner's outside basis accurately reflects their investment in the partnership and can prevent double taxation when a partner sells their partnership interest or receives a partnership distribution.

Question 12

Nonrecourse debt is generally allocated according to the profit-sharing ratios of the partnership.

Accepted Answer

Nonrecourse debt is allocated based on the partners' profit-sharing ratios because it is a debt that is secured solely by the partnership's assets, and not by the personal assets of the partners. Therefore, each partner's share of the partnership's profits and losses determines their share of the nonrecourse debt.

Question 13

The character of each separately-stated item is determined at the partner level.
The partnership reports the amount and character of items of income and loss flowing through the partnership.

Accepted Answer

The character of each separately-stated item is determined at the partnership level, not the partner level. The partnership reports the amount and character of items of income and loss, which then flow through to the partners.

Question 14

For partnership tax years ending after December 31, 2015, partnerships can request up to a six-month extension by filing IRS Form 7004 prior to the original due date of the partnership return.

Accepted Answer

This statement is true. The IRS allows partnerships to request an extension of up to six months by filing Form 7004 before the original due date of the partnership return.

Question 15

A purchased partnership interest has a holding period beginning on the date of purchase regardless of the type of property held by the partnership.

Accepted Answer

According to the Internal Revenue Service (IRS), the holding period for a purchased partnership interest begins on the date of purchase and is not affected by the type of property held by the partnership.

Question 16

Tax elections are rarely made at the partnership level.
In formulating partnership tax law, Congress adopted an entity and aggregate approach. Most tax elections for a partnership are made at the partnership level. The requirement that partnerships make most tax elections represents the entity concept.

Accepted Answer

The second line of the given text states that "Most tax elections for a partnership are made at the partnership level." This means that tax elections are not rarely made at the partnership level, but rather are typically made at that level.

Question 17

Actual or deemed cash distributions in excess of a partner's outside basis are generally taxable as capital gains.

Accepted Answer

This statement is true as per the rules of taxation for partnerships. If a partner receives cash distributions from the partnership that exceed their outside basis, it is considered a capital gain and is subject to taxation.

Question 18

Partnerships can use special allocations to shift built-in gains and built-in losses on contributed property from a partner who contributed the property to other partners.

Accepted Answer

The answer of Partnerships can use special allocations to shift...

Question 19

An additional allocation of partnership debt or relief of partnership debt is considered to be a deemed cash contribution or cash distribution respectively.

Accepted Answer

This statement is true. An additional allocation of partnership debt is considered to be a deemed cash contribution, while relief of partnership debt is considered to be a deemed cash distribution.

Question 20

Income earned by flow-through entities is usually taxed only once at the entity level.
Income is taxed only once at the owner level.

Accepted Answer

Flow-through entities, such as partnerships, LLCs, and S-corporations, do not pay taxes at the entity level but instead, the income passes through to the owners and is taxed at their individual tax rates. Therefore, the income is taxed at both the entity level and owner level.

Quiz 9: Forming and Operating Partnerships