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Exam 10: Partnerships: Formation, Operations, and Basis

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Question 21

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The LN partnership reported the following items of income and deduction during the current tax year: revenues, $300,000; cost of goods sold, $160,000; tax-exempt interest income, $2,000; salaries to employees, $80,000; and long- term capital gain, $10,000. It paid business interest expense of $18,000 and investment interest expense of $2,000. In addition, the partnership distributed $20,000 of cash to 50% partner Nina and $10,000 of cash to 50% partner Len. What is Nina's share of ordinary partnership income and separately stated items?

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The distributions to the part...

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Question 22

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The MOG Partnership reports ordinary income of $60,000, long-term capital gain of $12,000, and tax-exempt income of $12,000. The partnership agreement provides that Molly will receive all long-term capital gains and George will receive all tax-exempt interest income. Their allocation of ordinary income will be reduced accordingly, and Olivia will be allocated a proportionately greater share of ordinary income. In other words, each partner will receive allocations totaling one-third of the total $84,000 of partnership income.) This allocation was agreed upon because Molly and George are in a high marginal tax bracket and Olivia is in a low marginal tax bracket. a. Describe the elements that must be included in a partnership agreement in order for an allocation to have economic effect. b. Discuss whether or not the MOG allocation would be permitted and provide your reasoning.

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a. For partnership allocations to meet t...

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Question 23

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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:

A partnership is an association formed by two or more taxpayers which may be any type of entity) to carry on a trade or business.

Fern, Inc., Ivy, Inc., and Jeremy formed a general partnership. Fern owns a 50% interest, and Ivy and Jeremy both own 25% interests. Fern, Inc. files its tax return on an October 31 year-end; Ivy, Inc., files with a May 31 year-end, and Jeremy is a calendar year taxpayer. Which of the following statements is true regarding the taxable year the partnership can choose?

In the current year, the POD Partnership received revenues of $200,000 and paid the following amounts: $50,000 in rent and utilities and $20,000 as a distribution to partner Olivia. In addition, the partnership earned $6,000 of long- term capital gains during the year. Partner Donald owns a 50% interest in the partnership. How much income must Donald report for the tax year?

The total tax burden on entity income is greater for a partner in a partnership up to 37% for an individual partner) than on a shareholder in a corporation 21% for an individual shareholder), so partnerships are used only in special situations.

Which of the following statements is always correct regarding assets acquired by a newly formed partnership? If a partner contributes:

SQRLY LLC has about 25 LLC members. SwanCo 30% owner) and QuinnCo 16% owner both have June 30 tax year-ends. Royce, Inc.; Larry, Inc.; and Yolanda, Inc. each own 4% 12% total) and have September 30 taxable year-ends. Each of the other LLC members 42% total) owns interests of 4% or less and use the calendar year December 31) . Which of the following statements is true regarding the LLC's required taxable year end?

Which of the following is not shown on the partnership's Schedule K of Form 1065?

Maria owns a 60% interest in the KLM Partnership. Four years ago, her father gave her a parcel of land. The gift basis of the land to Maria is $60,000. In the current year, Maria had still not figured out how to use the land for her own personal or business use; consequently, she sold it to the partnership for $50,000. The partnership immediately started using the land as a parking lot for its employees. Maria may recognize her $10,000 loss on the sale.

The MOP Partnership is involved in construction activities. On January 1 of the current year, Patricia has an adjusted basis of $600,000 for her partnership interest consisting of the following. $\begin{array}{lr}\text { Capital account } & \$ 350,000 \\\text { Share of partnership recourse debt } & 50,000 \\\text { Share of partnership nonrecourse debt } & \underline{200,000} \\& \underline{\$ 600,000} \\\end{array}$ During the year, the partnership has an operating loss of $1.2 million and distributes $60,000 of cash to Patricia. Partnership liabilities were the same at the end of the tax year, and the nonrecourse debt is not qualified nonrecourse debt. If she owns a 60% share of partnership profits, capital, and losses, and is an active material) participant in the partnership, how much of her share of the operating loss can Patricia deduct? Assume that Patricia is a single taxpayer and has no business losses from other sources.) What Code provisions could cause a suspension of the loss? How would your answer change if MOP were an LLC and Patricia had not personally guaranteed any of the debt?

Allison is a 40% partner in the BAM Partnership. At the beginning of the tax year, her basis in the partnership interest was $100,000, including her share of partnership liabilities. During the current year, BAM reported an ordinary loss of $60,000 before the following payments to the partners) . In addition, BAM made an ordinary distribution of $8,000 to Allison and paid partner Brian a $20,000 consulting fee. At the end of the year, Allison's share of partnership liabilities decreased by $10,000. Assuming loss limitation rules do not apply, Allison's basis in the partnership interest at the end of the year is:

In the current year, Derek formed an equal partnership with Cody. Derek contributed land with an adjusted basis of $110,000 and a fair market value of $200,000. Derek also contributed $50,000 cash to the partnership. Cody contributed land with an adjusted basis of $80,000 and a fair market value of $230,000. The land contributed by Derek was encumbered by a $60,000 nonrecourse debt. The land contributed by Cody was encumbered by $40,000 of nonrecourse debt. Assume that the partners share debt equally. Immediately after the formation, what is the basis of Cody's partnership interest?

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

The partner rather than the partnership) will make which of the following elections?

Which of the following is not a correct statement regarding the advantage of the partnership entity form over the C corporation form?

Patricia is a 25% owner and an active member in the PBK LLC, which operates a qualified trade or business for purposes of the deduction under § 199A. Patricia's distributive share of qualified income from the LLC is $250,000 for the year the LLC's income is $1,000,000) . Her share of the LLC's W-2 wages is $40,000, and she received a guaranteed payment for services of $30,000. Her share of the LLC's unadjusted basis immediately after acquisition of qualified property is $1,200,000. How much is her qualified business income for this separate trade or business?

Match each of the following statements with the terms below that provide the best definition. -Economic effect test

Ashley purchased her partnership interest from Lindsey on the first day of the current year for $40,000 cash. Ashley 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.