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Exam 10: Partnerships Formation Operation and Basis

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Question 21

Multiple Choice

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Match each of the following statements with the terms below that provide the best definition. -Disguised sale

A) Organizational choice of many large accounting firms.
B) Partner's percentage allocation of current operating income.
C) Might affect any two partners' tax liabilities in different ways.
D) Brokerage and registration fees incurred for promoting and marketing partnership interests.
E) Transfer of asset to partnership followed by immediate distribution of cash to partner.
F) Must have at least one general and one limited partner.
G) All partners are jointly and severally liable for entity debts.
H) Theory treating the partner and partnership as separate economic units.
I) Partner's basis in partnership interest after tax-free contribution of asset to partnership.
J) Partnership's basis in asset after tax-free contribution of asset to partnership.
K) Owners are "members."
L) Theory treating the partnership as a collection of taxpayers joined in an agency relationship.
M) Allows many unincorporated entities to select their Federal tax status.
N) No correct match provided.

O) D) and I)
P) C) and M)

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Question 22

Multiple Choice

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Match each of the following statements with the terms below that provide the best definition. -Inside basis

A) Adjusted basis of each partnership asset.
B) Operating expenses incurred after entity is formed but before it begins doing business.
C) Each partner's basis in the partnership.
D) Reconciles book income to "taxable income."
E) Tax accounting election made by partnership.
F) Tax accounting calculation made by partner.
G) Tax accounting election made by partner.
H) Does not include liabilities.
I) Designed to prevent excessive deferral of taxation of partnership income.
J) Amount that may be received by partner for performance of services for the partnership.
K) Computation that determines the way recourse debt is shared.
L) Will eventually be allocated to partner making tax-free property contribution to partnership.
M) Partner's share of partnership items.
N) Must generally be satisfied by any allocation to the partners.
O) Justification for a tax year other than the required taxable year.
P) No correct match is provided.

Q) A) and B)
R) None of the above

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Question 23

Multiple Choice

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Mark and Addison formed a partnership. Mark received a 25% interest in partnership capital and profits in exchange for land with a basis of $40,000 and a fair market value of $60,000. Addison received a 75% interest in partnership capital and profits in exchange for $180,000 of cash. Three years after the contribution date, the land contributed by Mark is sold by the partnership to a third party for $76,000. How much taxable gain will Mark recognize from the sale?

If a partnership allocates losses to the partners, the partners must first apply the passive loss limitations, then the basis limitation, and finally the at-risk limitations. If all three hurdles are met, the partner may deduct the loss.

Katherine invested $80,000 this year to purchase a 30% interest in the KLM Partnership. The partnership reported $200,000 of net income from operations, a $2,000 short-term capital loss, and a $10,000 charitable contribution. In addition, the partnership distributed $20,000 to Katherine and $10,000 each to partners Lauren and Missy. Assuming the partnership has no beginning or ending liabilities, what is Katherine's basis in her partnership interest at the end of the year?

Jeordie and Kendis created the JK Partnership by contributing $100,000 each. The $200,000 cash was used by the partnership to acquire a depreciable asset. The partnership agreement provides that the partners' capital accounts will be maintained in accordance with Reg. § 1.704-1(b) (the "economic effect" Regulations) and that any partner with a deficit capital account will be required to restore that capital account when the partner's interest is liquidated. The partnership agreement provides that MACRS will be allocated 20% to Jeordie and 80% to Kendis. All other items of partnership income, gain, loss, deduction, and credit will be allocated equally between the partners. In the first year, MACRS is $40,000 and no other operating transactions occur. The property is sold at the end of the year for $160,000 and the partnership is liquidated immediately thereafter. To satisfy the economic effect test, how much of the $160,000 cash (from the sale) is allocated each to Jeordie and Kendis?

Match each of the following statements with the terms below that provide the best definition. -Carryover

Match each of the following statements with the terms below that provide the best definition. -Business purpose

Which of the following statements is not a requirement of the substantial economic effect test?

Seven years ago, Paul purchased residential rental estate that he has been depreciating as MACRS property over 27.5 years. This year, when his adjusted basis in the property was $250,000, Paul transferred the property to the newly formed PLA LLC in exchange for a one-third interest in the LLC. PLA incurred $10,000 of transfer taxes and fees related to the property. PLA must treat the $260,000 basis in the property, fees, and expenses, as new MACRS property depreciable over 27.5 years.

Misty and John formed the MJ Partnership. Misty contributed $50,000 of cash in exchange for her 50% interest in the partnership capital and profits. During the first year of partnership operations, the following events occurred: the partnership had a net taxable income of $20,000; Misty received a distribution of $12,000 cash from the partnership; and Misty had a 50% share in the partnership's $60,000 of recourse liabilities on the last day of the partnership year. Misty's adjusted basis for her partnership interest at year end is:

An example of the "aggregate concept" underlying partnership taxation is the fact that the partners (rather than the partnership) pay tax on partnership income.

Morgan is a 50% managing member in the calendar year, cash basis MKK LLC. The LLC received $150,000 income from services and paid the following other amounts: $\begin{array}{l}\begin{array}{lr}\text { Rent expense } & \$ 10,000 \\\text { Salary expense to employees } & 40,000 \\\text { Payment to Morgan for services, per the operating agreement } & 40,000 \\\text { Distributions to partners, Kristin and Katie } & 12,000 \\\text { Payment to 30\% cash basis partner Katie for tax and accounting } & 10,000\end{array}\\\text { services }\end{array}$ ​ How much will Morgan's adjusted gross income increase as a result of the above items? What amount will be included in Morgan's self-employment tax calculation?

Brooke and John formed a partnership. Brooke received a 40% interest in partnership capital and profits in exchange for contributing land (basis of $30,000 and fair market value of $120,000) . John received a 60% interest in partnership capital and profits in exchange for contributing $180,000 of cash. Three years after the contribution date, the land contributed by Brooke is sold by the partnership to a third party for $150,000. How much taxable gain will Brooke recognize from the sale?

If the partnership properly makes an election for treatment of a specific tax item, the partner is bound by that treatment.

Morgan and Kristen formed an equal partnership on August 1 of the current year. Morgan contributed $60,000 cash and land with a basis of $18,000 and a fair market value of $40,000. Kristen contributed equipment with a basis of $42,000 and a value of $100,000. Kristen and Morgan each have a basis of $100,000 in their partnership interests.

ABC LLC reported the following items on the LLC's Schedule K: ordinary income, $100,000; interest income, $3,000; long-term capital loss, ($4,000) ; charitable contributions, $1,000; post-1986 depreciation adjustment, $10,000; and cash distributions to partners, $50,000. How much will ABC show as net income (loss) on its Analysis of Income (Loss) ?

The partnership reports each partner's share of income to the partner on a Form 1099-MISC.

Which of the following is a correct definition of a concept related to partnership taxation?

Ashley purchased her partnership interest from Lindsey on the first day of the current year for $40,000 cash. She received a $10,000 cash distribution from the partnership during the year, and her share of partnership income is $15,000. Her share of partnership liabilities on the last day of the partnership year is $20,000. Ashley's outside basis for her partnership interest at the end of the year is $45,000.