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Exam 21: Partnerships

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Question 71

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A partnership is an association formed by two or more taxpayers (who must be individuals) to carry on a trade or business.

A) True
B) False

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Question 72

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Harry's basis in his partnership interest was $10,000 at the beginning of the tax year.For the year, his share of the partnership's loss was $8,000, and he also received a distribution of $4,000.Harry can deduct an $8,000 loss, and he recognizes a gain of $2,000 on the distribution of cash in excess of his remaining basis.

A) True
B) False

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Question 73

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In a proportionate liquidating distribution, UVW Partnership distributes to partner William cash of $25,000, accounts receivable (basis of $10,000, fair market value of $8,000), and land (basis of $50,000, fair market value of $60,000).William's basis was $75,000 before the distribution.On the liquidation, William recognizes no gain or loss, and he takes a basis of $10,000 in the accounts receivable, and $50,000 in the land.

For Federal income tax purposes, a distribution from a partnership to a partner is treated the same as a distribution from a C corporation to its shareholders.

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 the land to the partnership for $75,000.The partnership immediately started using the land as a parking lot for its employees.Maria's recognized gain of $15,000 on the sale is capital-not ordinary.

Nicole's basis in her partnership interest was $160,000, including her $50,000 share of partnership liabilities.The partnership decides to liquidate, and after repaying all liabilities, distributes all remaining assets proportionately to the partners.Nicole receives $30,000 cash and accounts receivable with a $50,000 basis and a $52,000 fair market value to the partnership.What gain or loss does Nicole recognize, and what is her basis in the accounts receivable?

Matt, a partner in the MB Partnership, receives a proportionate, nonliquidating distribution of property having a fair market value of $16,000 and a partnership basis of $23,000.Matt's basis in the partnership is $10,000 before the distribution.In this situation, Matt will recognize a $6,000 gain, take a $16,000 basis in the property, and his basis in the partnership interest is reduced to zero.

A limited liability company offers all "members" protection from claims by the LLC's creditors.

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?

On January 1 of the current year, Jenna and Rob form an equal partnership.Jenna makes a cash contribution of $80,000 and a property contribution (adjusted basis of $120,000; fair market value of $160,000) in exchange for her interest in the partnership.Rob contributes property (adjusted basis of $190,000; fair market value of $240,000) in exchange for his partnership interest.Which of the following statements is true concerning the income tax results of this partnership formation?

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

In a proportionate liquidating distribution, Scott receives a distribution of $20,000 cash, accounts receivable (basis of $0, fair market value of $40,000) , and land (basis of $30,000, fair market value of $60,000) .In addition, the partnership repays all liabilities, of which Scott's share was $20,000.Scott's basis in the entity immediately before the distribution was $100,000.As a result of the distribution, what is Scott's basis in the accounts receivable and land, and how much gain or loss does he recognize?

Your client has operated a sole proprietorship for several years, and is now interested in raising capital for expansion.He is considering forming either a C corporation or an LLC.

The LN partnership reported the following items of income and deduction during the current tax year: revenues, $300,000; cost of goods sold, $180,000; tax-exempt interest income, $2,000; salaries to employees, $80,000; and long-term capital gain, $10,000.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?

In a proportionate liquidating distribution in which the partnership is also liquidated, Ralph received cash of $30,000, accounts receivable (basis of $0, fair market value of $20,000), and equipment (basis of $0, fair market value of $10,000).Immediately before the distribution, Ralph's basis in the partnership interest was $40,000.Ralph realizes and recognizes a loss of $10,000, and his basis is $0 in both the accounts receivable and the equipment.

The JIH Partnership distributed the following assets to partner James in a proportionate liquidating distribution in which the partnership also liquidated: $25,000 cash, land parcel A (basis of $5,000, fair market value of $30,000) and land parcel B (basis of $5,000, fair market value of $15,000). James's basis in his partnership interest was $85,000 immediately before the distribution. James will allocate bases of $40,000 to parcel A and $20,000 to parcel B, and he will have no remaining basis in his partnership interest.

Samuel is the managing general partner of STU, in which he owns a 30% interest.For the year, STU reported income of $260,000 (after deducting all guaranteed payments) .Samuel received a guaranteed payment of $40,000 for capital that he had loaned the partnership, and he received a guaranteed payment of $120,000 for services he performed for STU.How much income from self-employment did Samuel earn from STU?

Molly is a 40% partner in the MAP Partnership.During the current tax year, the partnership reported ordinary income of $210,000 before payment of guaranteed payments and distributions to partners.The partnership made an ordinary cash distribution of $30,000 to Molly, and paid guaranteed payments to partners Molly, Amber, and Pat of $30,000 each ($90,000 total) .How much will Molly's adjusted gross income increase as a result of the above items?

Michelle receives a proportionate liquidating distribution when the basis of her partnership interest is $50,000.The distribution consists of $58,000 cash and noninventory property (adjusted basis to the partnership of $10,000 and fair market value of $12,000) .The partnership has no hot assets.How much gain or loss does Michelle recognize, and what is her basis in the distributed property?

Michelle and Jacob formed the MJ Partnership.Michelle contributed $20,000 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 $10,000; Michelle received a distribution of $8,000 cash from the partnership; and Michelle had a 50% share in the partnership's $16,000 of recourse liabilities on the last day of the partnership year.Michelle's adjusted basis for her partnership interest at year end is: