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Your client owns a parcel of land that has depreciated in value. He wants to know if there is a way he can contribute the property to his partnership, have the partnership sell the property, and convert the existing capital loss into an ordinary loss. He also wants to know if part of the loss would be allocated to his other partners. What is your reaction?

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In the short run, it would not be possible to convert the capital loss into an ordinary loss. If the client can wait more than five years for the partnership to sell the property, the character of the loss would be determined by reference to the partnership's use of the land. The built-in precontribution) loss would be allocated to the client and any loss arising after the contribution date would be allocated according to the provisions in the partnership agreement. Section 724 provides that when property is sold by a partnership at a loss within five years of the date the property is contributed, any built-in capital loss at the contribution date remains a capital loss, regardless of the partnership's use of the property. For example, even if the land was considered inventory by the partnership rather than a capital asset, sale of that land within five years would result in a capital loss to the extent of the built-in loss at the contribution date. When a partner contributes property to a partnership, any built-in gain or loss must be tracked and allocated to the contributing partner under § 704c). Therefore, the built-in loss whether capital or ordinary) would be allocated to the client when the property is eventually sold.

BRW Partnership reported gross income from operations of $60,000, interest income of $3,000, utilities expense of $20,000, and a charitable contribution of $6,000. On its Schedule K, the partnership reports ordinary business income of $40,000, separately stated interest income $3,000), and charitable contributions $6,000).

A) True
B) False

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Which of the following statements is correct regarding partnership or C corporation tax rates?


A) Partners pay tax on their distributive shares of income at 37%.
B) Partners pay a single tax on their distributive shares of income at the tax rate that applies to the partner's situation.
C) C corporations pay a single level of tax on corporate income at rates up to 35%.
D) C corporations pay tax at 21% and the shareholders pay a second tax of 37% when dividends are distributed.

E) None of the above
F) B) and D)

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On January 1 of the current year, Anna and Jason form an equal partnership. Anna contributes $50,000 cash and a parcel of land adjusted basis of $200,000; fair market value of $150,000) in exchange for her interest in the partnership. Jason contributes property adjusted basis of $180,000; fair market value of $200,000) in exchange for his partnership interest. Which of the following statements is true concerning the income tax results of this partnership formation?


A) Jason recognizes a $20,000 gain on his property transfer.
B) Jason has a $200,000 tax basis for his partnership interest.
C) Anna has a $250,000 tax basis for her partnership interest.
D) Anna realizes and recognizes a $50,000 loss.
E) The partnership has a $150,000 adjusted basis in the land contributed by Anna.

F) C) and D)
G) B) and E)

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C

In the current year, the CAR Partnership received revenues of $400,000 and paid the following amounts: $160,000 in rent, utilities, and salaries; a $40,000 guaranteed payment to partner Ryan; $20,000 to partner Amy for consulting services; and a $40,000 distribution to 25% partner Cameron. In addition, the partnership realized a $12,000 net long- term capital gain. Cameron's basis in his partnership interest was $60,000 at the beginning of the year and included his $25,000 share of partnership liabilities. At the end of the year, his share of partnership liabilities was $15,000. a. How much income must Cameron report for the tax year? b. What is Cameron's basis in the partnership interest at the end of the year?

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a. $45,000 ordinary income and...

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Items that are not required to be shown on the partners' Schedules K-1 include AMT adjustments and preferences and taxes paid to foreign countries, because AMT and the foreign tax credit are calculated by the partnership.

A) True
B) False

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Greene Partnership had average annual gross receipts for the past three years of $24.8 million and never has reported average annual gross receipts above $25 million. One of the partners is Jackson, Inc., a C corporation. Because Greene meets the average annual gross receipts test, it may use the cash method of accounting even though it has a partner that is a C corporation.

A) True
B) False

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The amount of a partnership's income and loss from operating activities is combined with separately stated income and expenses to determine the partnership's equivalent of taxable income. This amount is reconciled to book income on the partnership's Schedule M-1 or Schedule M-3.

A) True
B) False

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


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) Theory under which a partnership's recourse debt is shared among the partners.
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 H)
R) E) and N)

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Matching Match each of the following statements with the numbered terms below that provide the best definition. -Publicly traded partnership


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) Partnership in which partners are liable only for any partner's malpractice.
E) Amount that might be reported on either form 1065, page 1 or, on Schedule K.
F) Transfer of asset to partnership followed by immediate distribution of cash to partner.
G) Must have at least one general and one limited partner.
H) Long-term capital gain might be recharacterized as ordinary income.
I) All partners are jointly and severally liable for entity debts.
J) Theory treating the partner and partnership as separate economic units.
K) Partner's basis in partnership interest after tax-free contribution of asset to partnership.
L) Partnership's basis in asset after tax-free contribution of asset to partnership.
M) One way to calculate a partner's economic interest in the partnership.
N) Owners are members.
O) Theory treating the partnership as a collection of taxpayers joined in an agency relationship.
P) Participates in management.
Q) Not liable for entity debts.
R) No correct match provided.

S) G) and N)
T) G) and P)

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R

In a limited liability partnership, all members may participate in management and have personal liability for entity debts except for malpractice committed by the other partners.

A) True
B) False

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During the current year, MAC Partnership reported the following items of receipts and expenditures: $600,000 sales, $80,000 utilities and rent, $200,000 salaries to employees, $20,000 guaranteed payment to partner Antonio for services to the partnership, investment interest income of $4,000, a charitable contribution of $8,000, and a distribution of $30,000 to partner Carl. Antonio is a 25% general partner. Based on this information, what information will be shown on Antonio's Schedule K-1? What income and deductions will Antonio report? What taxes and other calculations might Antonio need to report?

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blured image blured image The distribution to Carl is not deduct...

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Match each of the following statements with the terms below that provide the best definition. -Outside 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) Theory under which a partnership's recourse debt is shared among the partners.
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) L) and P)
R) C) and H)

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At the beginning of the year, Heather's tax basis capital account balance in the HEP Partnership was $85,000. During the tax year, Heather contributed property with a basis of $6,000 and a fair market value of $10,000. Her share of the partnership's ordinary income and separately stated income and deduction items was $40,000. At the end of the year, the partnership distributed $15,000 of cash to Heather. In addition, the partnership allocated $12,000 of recourse debt and $10,000 of nonrecourse debt to Heather. What is Heather's ending capital account balance determined using the tax basis method?


A) $116,000
B) $120,000
C) $126,000
D) $128,000
E) $138,000

F) B) and E)
G) B) and D)

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Syndication costs arise when partnership interests are being marketed to investors. These costs cannot be amortized or deducted on income tax returns.

A) True
B) False

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Which of the following is not a specific adjustment to the partners' basis in the partnership interest?


A) Increased by contributions the partner made to the partnership.
B) Decreased by the amount of guaranteed payments shown on the partner's Schedule K-1.
C) Increased by the partner's share of tax-exempt income.
D) Decreased by any decrease in the partner's share of partnership liabilities.
E) Increased by the partner's share of separately stated income items.

F) None of the above
G) A) and B)

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William is a general partner in the WST partnership. During the current year, he receives a guaranteed payment of $10,000 for services he provides to the partnership, and his distributive share of partnership income is $30,000. William is required to pay self-employment tax on the $10,000 guaranteed payment but not on his distributive share of partnership income.

A) True
B) False

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A limited partnership LP) offers all partners protection from claims by the LP's creditors.

A) True
B) False

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Cassandra is a 10% limited partner in C&C, Ltd. Her basis in the interest is $60,000 before loss allocations, including her $30,000 share of the partnership's nonrecourse debt. This debt is not qualified nonrecourse financing.) Cassandra is also a 10% limited partner in MNOP in which her basis is $30,000. Cassandra is allocated an $80,000 loss from C&C and $20,000 of income from MNOP. How much of the loss from C&C may Cassandra deduct? Under what Code provisions are the remaining losses suspended? Assume that Cassandra has no business losses from other sources.

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Cassandra's $80,000 loss from C&C is fir...

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Which of the following statements is correct regarding the manner in which partnership liabilities are reflected in the partners' bases in their partnership interests?


A) Nonrecourse debt is allocated to the partners based on the partners' economic risk of loss.
B) Recourse debt is allocated to the partners according to their profit-sharing ratios.
C) An increase in partnership debts results in a decrease in the partners' bases in the partnership interest.
D) A decrease in partnership debt is treated as a distribution from the partnership to the partner and reduces the partner's basis in the partnership interest.
E) Partnership debt is not reflected in the partners' bases in their partnership interests.

F) A) and E)
G) A) and C)

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