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Exam 21: Partnerships

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Question 121

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Carlos receives a proportionate liquidating distribution consisting of $8,000 cash and inventory with a basis to the partnership of $5,000 and a fair market value of $6,000. His basis in his partnership interest was $15,000 immediately before the distribution. Carlos assigns a basis of $7,000 to the inventory, and recognizes no gain or loss.

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B) False

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Question 122

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Match each of the following statements with the terms below that provide the best definition. 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. -Required taxable year

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Question 123

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Nicholas, a 1/3 partner, received a guaranteed payment in the current year of $50,000. Partnership income before consideration of the guaranteed payment was $20,000. Assuming no loss limitation rules apply, Nicholas reports a $10,000 ordinary loss from partnership operations, and the $50,000 guaranteed payment as ordinary income.

DDP Partnership reported gross income from operations of $125,000, a long-term capital gain of $5,000, a short-term capital loss of $2,000, and a charitable contribution of $5,000. On its Schedule K, the partnership reports ordinary business income of $120,000, a long-term capital gain of $5,000 and a short-term capital loss of $2,000.

Harry and Sally are considering forming a partnership. Both taxpayers use the calendar year and are cash basis taxpayers. The partnership will not be a tax shelter. The partners are uncertain as to whether the partnership should use the cash or accrual method of accounting. Moreover, the idea of a tax deferral in the first year of operations has led them to consider using a June 30 fiscal year-end for the partnership. As their tax adviser, identify the issues that must be considered in selecting an accounting method and tax year for the partnership.

Match each of the following statements with the terms below that provide the best definition. 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 only liable for torts and malpractice. e. Expense 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. -Separately stated item

In a liquidating distribution that liquidates the partnership, each partner recognizes gain or loss equal to the difference between the value of assets received less the partner's basis in the partnership interest.

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?

Which of the following is an election or calculation made by the partner rather than the partnership?

Nick sells his 25% interest in the LMNO Partnership to new partner Katrina for $67,500. The partnership's assets consist of cash ($100,000), land (basis of $90,000, fair market value of $110,000), and inventory (basis of $40,000, fair market value of $60,000). Nick's basis in his partnership interest was $57,500. On the sale, Nick will recognize ordinary income of $5,000 and a capital gain of $5,000.

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?

An examination of the RB Partnership's tax books provides the following information for the current year. Rachel is a 30% general partner in partnership capital, profits, and losses. Assume the adjusted basis of her partnership interest is $60,000 at the beginning of the year, and she shares in 30% of the partnership's liabilities for basis purposes. a. What is Rachel's adjusted basis for the partnership interest at the end of the year? b. How much income must Rachel report on her tax return for the current year? What is the character of the income and what types of tax might apply to it?

Ken and Lars formed the equal KL Partnership during the current year, with Ken contributing $100,000 in cash and Lars contributing land (basis of $60,000, fair market value of $40,000) and equipment (basis of $0, fair market value of $60,000). Lars recognizes a $40,000 gain on the contribution and his basis in his partnership interest is $100,000.

Kristie is a 25% member in the KLM LLC. At the end of the year, KLM has accounts payable of $60,000 (recourse to the LLC but not guaranteed by the LLC members) , and a nonrecourse debt related to real estate of $300,000 (meets the at risk limitation requirements) . In addition, Kristie personally guaranteed a $50,000 liability for KLM's equipment purchases. Which one of the following shows the information that should be reported on Kristie's Schedule K-1 for the year?

Section 721 provides that no gain or loss is recognized on a contribution of property to a partnership in exchange for an interest in the partnership. An exception might apply if the taxpayer receives a cash distribution from the partnership soon after the property contribution is made.

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

Match each of the following statements with the terms below that provide the best definition. 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. -§ 179 deduction

In a limited liability company, all members may participate in management (the operating agreement cannot limit participation) and all entity debts are treated as nonrecourse liabilities for purposes of allocating the LLC's liabilities to basis.

At the beginning of the tax year, Zach's basis for his partnership interest and his amount at risk in the partnership was $30,000. His share of partnership items for the year consisted of tax-exempt interest income of $2,000 and an ordinary loss of $44,000. He also received a distribution from the partnership of $20,000 cash during the year. Zach is an active general partner and has no passive income or business losses from other sources. For the tax year, Zach will report:

Anthony's basis in the WAM Partnership interest was $200,000 just before he received a proportionate liquidating distribution consisting of investment land (basis of $90,000, fair market value of $100,000) , and inventory (basis of $30,000, fair market value of $70,000) . After the distribution, Anthony's recognized gain or loss and his basis in the land and inventory are: