Question 1

What is the difference between a partner's tax basis and at-risk amount?

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Question 2

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?

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Question 3

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 30^th 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?

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Question 4

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? $$\begin{array} { | l | r | } 
\hline \text { Cost of Goods Sold } & \$ 85,000 \
\hline \text { Cash Distribution to Harry } & \$ 15,000 \
\hline \text { Municipal Bond Interest } & \$ 1,500 \
\hline \text { Short-Term Capital Gains } & \$ 4,500 \
\hline \text { Employee Wages } & \$ 40,000 \
\hline \text { Rent } & \$ 10,000 \
\hline \text { Charitable Contributions } & \$ 25,000 \
\hline \text { Sales } & \$ 175,000 \
\hline \text { Repairs and Maintenance } & \$ 5,000 \
\hline \text { Long-Term Capital Gains } & \$ 12,000 \
\hline \text { Fines and Penalties } & \$ 5,000 \
\hline \text { Guaranteed Pay ment to Lloyd } & \$ 25,000 \
\hline
\end{array}$$

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Question 5

Peter, Matt, Priscilla, and Mary began the year in the PMPM General Partnership sharing profits, losses, and capital equally. They each had a tax basis at the beginning of the year of $3,000, $10,000, $8,000, and $11,000 respectively. Early in the year, Mary provided general consulting services to the partnership and received an additional 15 percent profits, losses, and capital interest in the partnership. The liquidation value of her additional interest was $45,000. Later the same year, the partnership received cash contributions of $25,000 from Peter and Matt that it used to repay the partnership's $35,000 recourse debt. According to state law, the partners shared responsibility for this debt in accordance with their loss sharing ratios. What is each partner's tax basis after adjustment for these transactions?

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Question 6

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?

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Question 7

Bob is a general partner in Fresh Foods Partnership and is trying to determine if the income reported on his K-1 should be classified as passive or active trade or business income. List three different criteria that, if met, would allow Bob to treat the income from Fresh Foods as active trade or business income.

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Question 8

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. $\begin{array}{|l|r|r|r|r|r|r|r|}
\hline&& \text { Jane } & 25 \% & \text { Joe } & 45 \% & \text { Jack } & 30 \% \
\hline\text { Initial Basis}&&& 5,000&& 10,000 && 2,000 \
\hline \text { Ordinary Inc. } & 100,000 & & 25,000 & & 45,000 & & 30,000 \
\hline 1231 \text { gain } & 15,000 & & 3,750 & & 6,750 & & 4,500 \
\hline \text { Tax-exempt income } & 3,000 & & 750 & & 1,350 & & 900 \
\hline \text { Additional Debt } & 12,000 & & 3,000 & & 5,400 & & 3,600 \
\hline \text { Charitable contribution } & (25,000) & & (6,250) & & (11,250) & & (7,500) \
\hline \text { Total } & 105,000 & & 31,250 & & 57,250 & & 33,500 \
\hline
\end{array}$ The $3,000 of interest was paid on a $60,000 loan made to B&G by Key Bank on June 30, 20X9. B&G repaid $10,000 of the loan on December 15, 20X9. Neither of the partners received a cash distribution from B&G in 20X9.
Complete the following table related to Mr. Blue's interest in B&G partnership: $$\begin{array}{l}
\text { PARTNERS' OUTSIDE BASIS }\
\begin{array} { | l | r | l | r | l | r | } 
\hline  { \text { Troy } } && { \text { Peter } } & &{ \text { Sarah } } \
\hline \text { Cash } & 3,000 & \text { Cash } & 5,000 & \text { Cash } & 2,000 \
\hline \text { Inventory } & 5,000 & \text { Land } & 20,000 & \text { Equipment } & 3,500 \
\hline \text { Building } & 10,000 & \text { Relief of Debt } & ( 12,000 ) & \text { AR } & 1,000 \
\hline \text { Relief of Debt } & ( 10,000 ) & \text { Debt } & 8,500 & \text { Reliet of Debt } & ( 23,000 ) \
\hline \text { Debt } & 8,500 & & & \text { Debt } & 28,000 \
\hline \text { Preliminary Basis } & 16,500 & \text { Preliminary Basis } & 21,500 & \text { Preliminary Basis } & 11,500 \
\hline \text { Gain(Loss) } & - & \text { Gain(Loss) } & & \text { Gain(Loss) } &- \
\hline \text { Outside Basis } & 16,500 & \text { Outside Basis } & 21,500 & \text { Outside Basis } & 11,500 \
\hline
\end{array}
\end{array}$$

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Question 9

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

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Question 10

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

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Question 11

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: $\begin{array}{l}
\text { TALL LADDERS, LP }\
\text { Balance Sheet }\
\begin{array}{|l|r|r|}
\hline & \text { Yea 1 } & \text { Year 2 } \
\hline \text { Assets } & 120,000 & 270,000 \
\hline \text { Nonrecourse } \
\text { Liabilities } & 50,000 & 180,000 \
\hline \text { Partner's Capital } & 70,000 & 90,000 \
\hline
\end{array}
\end{array}$ Determine what amounts related to these items Ruby will report on her tax return assuming her tax basis and at risk amount are equal and that she is a material participant in the partnership's activities.

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Question 12

Illuminating Light Partnership had the following revenues, expenses, gains, losses, and distributions: TALL LADDERS, LP 
Income Statement Year 2
$\begin{array}{|l|r|}
\hline \text { Sales } & 65,000 \
\hline \text { CoGs } & (47,000) \
\hline \text { Gross Profit } & 18,000 \
\hline \text { Interest Inc ome } & 3,000 \
\hline \text { Dividends } & 5,000 \
\hline \text { Long Term Capital Gain } & 10,000 \
\hline \text { Other Income } & 15,000 \
\hline \text { Total Other Inc ome } & 33,000 \
\hline \text { MACRS Depreciation } & (20,000) \
\hline \text { Guaranteed Payments } & (10,000) \
\hline \text { Charitable Contribution } & (10,000) \
\hline \text { Fines and Penalties } & (4,500) \
\hline \text { Other Expenses } & (8,500) \
\hline \text { Total other Expenses } & (53,000) \
\hline \text { Net Income (Loss) } & (2,000) \
\hline
\end{array}$ Given these items, what is Illuminating Light's ordinary business income (loss) for the year?

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Question 13

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?

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Question 14

Fred has a 45% profits interest and 30% capital interest in the SAP Partnership and his tax basis before considering his share of SAP's current year loss is $11,000. Included in his tax basis is a $2,600 share of recourse debt and $5,300 share of nonrecourse debt. Fred is a limited partner in SAP. He is not involved in any other activities. If SAP has a $15,000 ordinary loss for the year, how much of the loss can be deducted currently, and how much of the loss is suspended because of the tax basis, the at-risk, and the passive activity loss limitations?

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Question 15

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? $$\begin{array} { | l | r | } 
\hline \text { Sales } & \$ 60,000 \
\hline \text { Long-Term Capital Gain } & \$ 8,000 \
\hline \text { Qualified Dwidends } & \$ 5,000 \
\hline \text { Cost of Goods Sold } & \$ 40,000 \
\hline \text { Employee Wages } & \$ 15,000 \
\hline \text { Guaranteed Pay ment to Managing Partner } & \$ 25,000 \
\hline \text { Municipal Bond Interest } & \$ 5,000 \
\hline \text { Section 179 Expense } & \$ 10,000 \
\hline \text { MACRS Depreciation } & \$ 8,000 \
\hline \text { Section 1231 Gains } & \$ 3,000 \
\hline \text { Fines and Penalties } & \$ 1,500
\end{array}$$

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Question 16

Clint noticed that the Schedule K-1 he just received from ABC Partnership included a $20,000 ordinary business loss allocation. His tax basis in ABC at the beginning of ABC's most recent tax year was $10,000. Comparing the Schedule K-1 he recently received from ABC with the Schedule K-1 he received from ABC last year, Clint noted that his share of ABC partnership debt changed as follows: recourse debt increased from $0 to $2,000, qualified nonrecourse debt increased from $0 to $3,000, and nonrecourse debt increased from $0 to $3,000. Finally, the Schedule K-1 Clint recently received from ABC reflected a $1,000 cash contribution he made to ABC during the year.
Clint is not a material participant in ABC partnership, and he received $10,000 of passive income from another investment during the same year he received the loss allocation from ABC. How much of the $20,000 loss from ABC can Clint deduct currently, and how much of the loss is suspended because of the tax basis, the at-risk, and the passive activity loss limitations?

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Question 17

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.

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Question 18

Jordan, Inc., Bird, Inc., Ewing, Inc., and Barkley, Inc. formed Nothing-But-Net Partnership on June 1^st, 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? $$\begin{array} { | l | r | } \hline \text { Gain on Sale of Land } & \$ 4,000 \ \hline \text { MACRS Depreciation } & \$ 7,500 \ \hline \text { Charitable Contributions } & \$ 12,500 \ \hline \text { Sales } & \$ 40,000 \ \hline \text { Interest Income } & \$ 500 \ \hline \text { Cost of Goods Sold } & \$ 32,000 \ \hline 179 \text { Expense } & \$ 7,000 \ \hline \text { Tax-Exempt Income } & \$ 2,000 \ \hline \text { Other Income } & \$ 5,000 \end{array}$$

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Question 19

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?
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?

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Question 20

Alfred, a one-third 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. LEAST AGGREGATE DEFERRAL TEST
$\begin{array}{|l|r|r|r|r|r|r|r|r|r|rr|r|}
\hline &31-Jan&&&31-may&&&31-Jul&&&31-Oct\
\hline &\text { Profits }&\text {Deferral }&&\text {Profits  }&\text {Deferral }&&\text { Profits }&\text {Deferral }&&\text { Profits }&\text {Deferral }\
&\text {Interest  }&\text {Months }&\text { Total}&\text {Interest  }&\text {Months }&\text { Total}&\text {Interest  }&\text {Months }&\text { Total}&\text {Interest  }&\text {Months }&\text { Total}\
\hline \text { Inc. } & 30 \% & 0 & 0 & 30 \% & 8 & 2.4 & 30 \% & 6 & 1.8 & 30 \% & 3 & 0.9 \
\hline \text { P } & 30 \% & 4 & 1.2 & 30 \% & 0 & 0 & 30 \% & 10 & 3 & 30 \% & 7 & 2.1 \
\text { Inc. }\
\hline \text L  &30\%&6&1.8&30\%&2&0.6&30\%&0&0&30\%&9&2.7 \
\text { Inc. } \
\hline \text C&10\%&9&0.9&10\%&5&0.5&10\%&3&0.3&10\%&0&0 \
\text { Inc. }\
\hline \text {Total}&100\%&&3.9&100\%&&3.5&100\%&&5.1&100\%&&5.7\\hline
\end{array}$

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Quiz 15: Forming and Operating Partnerships

What is the difference between a partner's tax basis and at-risk amount?

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?

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

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?