Chapter 10 Tax Corp - Important 1

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Tax Quizzes & Trivia

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Questions and Answers
  • 1. 

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

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    A partnership is indeed an association formed by two or more taxpayers, regardless of the type of entity, with the purpose of conducting a trade or business together. In a partnership, the partners share the profits, losses, and responsibilities of the business. This arrangement allows for a pooling of resources, expertise, and capital, making it a common choice for small businesses and professional practices. Therefore, the statement "A partnership is an association by two or more taxpayers (which may be any type of entity) to carry on a trade or business" is true.

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  • 2. 

    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. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    In a limited liability company, all members may not participate in management as it can be limited by the operating agreement. Additionally, entity debts are not always treated as nonrecourse liabilities for purposes of allocating the LLC's liabilities to basis. Therefore, the correct answer is False.

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  • 3. 

    In a limited liability company, all members are protected from all debts of the partnership unless they personally guaranteed the debt. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    In a limited liability company, the members are protected from the debts of the partnership. This means that the personal assets of the members cannot be used to satisfy the debts of the company. However, if a member personally guarantees the debt, they become personally liable for it and can be held responsible for repayment. Therefore, the statement is true.

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  • 4. 

    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. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    In a limited liability partnership, all members have the ability to participate in the management of the entity. Additionally, they have personal liability for the debts of the partnership. However, the exception to this personal liability is in cases of malpractice committed by the other partners. Therefore, the statement is true as it accurately reflects the characteristics of a limited liability partnership.

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  • 5. 

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

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - A LP must have at least one general partner that is liable for the entity's debts.

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  • 6. 

    The primary purpose of the partnership agreement is to document the various tax elections made by the partners regarding depreciation methods, treatment of research and experimental costs, calculation of the § 199 deduction, and the § 754 election. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - The partnership agreement documents the arrangement among the partners regarding formation, operation, and liquidation of the partnership; allocations of profits, losses, and distributions; and other matters.

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  • 7. 

    The taxable income of a partnership flows through to the partners, who report the income on their tax returns. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The statement is true because in a partnership, the income earned by the partnership is not taxed at the entity level. Instead, the income is "passed through" to the individual partners, who then report their share of the partnership's income on their personal tax returns. This allows the partnership to avoid double taxation, as the income is only taxed once at the individual partner level.

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  • 8. 

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

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The statement is true because in partnership taxation, the partners are considered to be the owners of the partnership and therefore, they are responsible for paying taxes on the partnership income. This is in contrast to other forms of business entities, such as corporations, where the entity itself pays taxes on its income. In a partnership, the income and losses "flow through" to the partners, who report them on their individual tax returns and pay taxes accordingly. This concept of the partners being responsible for the taxes reflects the aggregate nature of partnership taxation.

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  • 9. 

    An example of the aggregate concept of partnership taxation is that the partnership makes elections related to depreciation, tax credit calculations (except the foreign tax credit), and whether or not to claim § 179 deduction. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - This is an example of the entity concept.

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  • 10. 

    The partnership agreement might provide, for example, that all interest income is allocated to Partner A. Allocating income in this manner is an example of a separately stated item. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - This is an example of a special allocation of income

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  • 11. 

    A partner will have the same profit-sharing, and capital-sharing ownership percentages. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - Each partner's profit-sharing, loss-sharing, and capital-sharing ratios are reported on that partner's Schedule K-1. In many cases, the three ratios are the same. However, if the partner agreement provides for special allocations or if capital contributions or distributions differed at some point from the profit-or loss-sharing %, these ratios may differ fro a given partner.

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  • 12. 

    The "inside basis" is defined as a partner's basis in the partnership interest. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - The "outside basis" is defined as the partners basis in the partnership interest.

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  • 13. 

    The partnership reports each partner's share of income to the partner on a Form 1099-Misc. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - The partners will receive a Schedule K-1 from the partnership that includes the partner's share of partnership income and each separately stated item.

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  • 14. 

    Section 721 provides that, in general, no gain or loss is recognized by the partnership or the partner on contribution of appreciated or depreciated property to a partnership in exchange for an interest in the partnership. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Section 721 of the tax code states that no gain or loss is recognized when a partner contributes appreciated or depreciated property to a partnership in exchange for an interest in the partnership. This means that the partner does not have to pay taxes on any gain or loss from the contribution. Therefore, the correct answer is True.

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  • 15. 

    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, FMV of $40,000) and equipment (basis of $0, and FMV of $60,000). Lars recognizes a $40,000 gain on the contribution and his basis in his partnership interest is $100,000. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - Under § 721, neither the partnership nor a partner will generally recognize gain or loss on contribution of property to a partnership. Lar's basis in his partnership interest is the $60,000 basis in the assets contributed ($60,000 basis in land plus $0 basis in equipment)

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  • 16. 

    When Kevin and Marshall formed the equal KM LLC, the FMV of their interests were each $100,000. Kevin contributed $60,000 cash, equipment with a basis of $0 and a FMV of $10,000, and a small parcel of land in which he had a basis of $50,000 and which was valued at $30,000. Marshall contributed an account receivable that was valued at $100,000 and which his basis was $0. Kevin has a basis in his partnership of $110,000 and Marshall's basis is $0. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True - Kevin's $110,000 basis is substituted basis equal to the sum of the bases in the properties he contributed: $60,000 cash, $0 equipment, $50,000 land. Marshall's substituted basis of $0 equals his basis in the contributed account receivable.

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  • 17. 

    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 FMV 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 interest. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - Morgan's basis includes the $18,000 substituted basis for the contributed land plus $60,000 cash, for a total of $78,000. Kristen's basis is $42,000, a substituted basis from the contributed equipment.

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  • 18. 

    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 cash distribution from the partnership soon after the property contribution is made. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Section 721 of the tax code states that no gain or loss is recognized when a taxpayer contributes property to a partnership in exchange for an interest in the partnership. This means that the taxpayer does not have to pay taxes on any potential gains or losses resulting from the contribution. However, if the taxpayer receives a cash distribution from the partnership shortly after making the contribution, an exception may apply and the gain or loss could be recognized. Therefore, the statement "True" is the correct answer.

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  • 19. 

    George received a full-vested 10% interest in partnership capital and a 20% interest in future partnership profits in exchange for services rendered to the GHP, LLC (not a publicly traded partnership interest). The future profits of the partnership are subject to normal operating risks. George will report ordinary income equal to the FMV of the profits interest, but the capital interest will not be currently taxed to him. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - George will recognize ordinary income equal to the FMV of the capital interest. The FMV of the profits interest is not reasonably assured and is, therefore, indeterminable.

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  • 20. 

    Laura is a real estate developer and owns property that is treated as inventory (not a capital asset) in her business. She contributes a parcel of this land (basis of $15,000) to a partnership, also to be held as inventory. The FMV of the property is $12,000 at the contribution date. After 3 years, the partnership sells the land for $10,000. The partnership will recognize a $5,000 ordinary loss on sale of the property. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True - the property is not a capital asset in Laura's hands, the partnership is not subject to the requirement that pre-contribution losses realized and recognized by the partnership within 5 years of contribution be treated as capital losses.

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  • 21. 

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

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    When a partnership makes an election for the treatment of a specific tax item, it means that they have made a deliberate choice on how to handle that particular item for tax purposes. Once this election has been made, the partner is legally obligated to adhere to that chosen treatment. Therefore, the statement that the partner is bound by that treatment is true.

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  • 22. 

    JLK Partnership incurred $6,000 of organizational costs and $50,000 of startup costs in 2016. JKL may deduct $5,000 each of organizational and startup costs, and the remaining costs (1,000 of organizational costs and $45,000 of startup costs) may be amortized over 60 months. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - For organizational and startup costs, the first $5,000 may be deduction, provided total expenses in that category do no exceed $50,000. If costs in the category exceed $50,000 the deduction is phased out, dollar-for-dollar. Any amount that may be deducted is amortized over 180 months.

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  • 23. 

    Syndication costs arise when partnership interests are being marketed to investors. These costs cannot be amortized or deducted. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Syndication costs refer to the expenses incurred when partnership interests are being marketed to potential investors. These costs cannot be amortized or deducted, meaning they cannot be spread out over time or subtracted from taxable income. Therefore, the statement that syndication costs cannot be amortized or deducted is true.

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  • 24. 

    The BMR, LLC conducted activities that were eligible for a $20,000 credit for increasing research activities. In addition, the LLC paid foreign taxes of $1,200. On the partners' schedules K-1, BMR will allocate the $20,000 credit, and it will provide the necessary information so the partners can calculate the foreign tax credit if they so choose. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The statement is true because it states that BMR, LLC conducted activities that were eligible for a $20,000 credit for increasing research activities. It also mentions that the LLC paid foreign taxes of $1,200. On the partners' schedules K-1, BMR will allocate the $20,000 credit, and it will provide the necessary information for the partners to calculate the foreign tax credit if they choose to do so. Therefore, the statement is true.

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  • 25. 

    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. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - PLA "steps into Paul's shoes" with respect to the $250,000 basis in the original property and depreciated the property over the remaining 20-year recovery period. It treats the $10,000 of fees and taxes as a new depreciable property with a 27.5. year recovery period.

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  • 26. 

    A partnership cannot use the cash method of account if one of the partners is a C corporation. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - A partnership may be able to use the cash method of accounting if the partnership has never had "average annual gross receipts" in excess of $5 million in any prior 3-year period, if the C corporation partner is a qualified personal service corporation, or if the partnership is engaged in the farming business.

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  • 27. 

    The Greene Partnership had average annual gross receipts for the past 3 years of 4.8 million, and has never had average annual gross receipts above $5 million. One of the partners is Jackson, Inc., a Subchapter 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 Subchapter C corporation. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The explanation for the correct answer is that the average annual gross receipts for the past 3 years of The Greene Partnership is 4.8 million, which is below the threshold of $5 million. This means that The Greene Partnership meets the average annual gross receipts test and is eligible to use the cash method of accounting. The fact that one of the partners is a Subchapter C corporation does not affect this eligibility. Therefore, the statement "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 Subchapter C corporation" is true.

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  • 28. 

    ABC LLC is equally-owned by 3 corporations. Two corporation have June 30 fiscal year ends, the third is a calendar-year taxpayer. ABC will use the least aggregate deferral method to determine its taxable year-end. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - The partnership year end is determined by reference to the first of 3 tests that is met by the partnership. The majority taxpayers test: If more than 50% of the partnership's capital and profits interests are owned by partners with the same tax year, that year is required under the majority partner tax year rule.

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  • 29. 

    Paul Co., David Co., and Sean form a partnership with cash contributions of $80,000, $50,000, and $30,000, respectively, and agree to share profits and losses in the ratio of their original cash contributions. Paul Co. uses a January 31 fiscal year-end, while David Co. and Sean use a November 30 and December 31 year-end, respectively. The partnership must use the least aggregate deferral method to determine its year end. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The partnership must use the least aggregate deferral method to determine its year-end because each partner has a different fiscal year-end. This method ensures that the partnership's financial statements are prepared at a time that is most convenient for all partners, minimizing the deferral of income or expenses. Therefore, the statement "True" is correct.

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  • 30. 

    MNO Partnership has 3 equal partners. Moon, Inc. and Neptune, Inc. each have a fiscal years ending March 31. Omega uses the calendar year. MNO's taxable year end must be determined using the least aggregate deferral method, and is December 31. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - The partnership's taxable year is determined by reference to the first of three tests that is met by the partnership. The first test is the majority partner's tax year test. If more than 50% of the partnership's capital and profits interests are owned by one or more partners with the same tax year, that year is required.

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  • 31. 

    A partnership must provide information to the partners that the partners would need to calculate deductions not permitted at the partnership level, such as for oil and gas depletion or the corporate dividends received deduction. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Partnerships are required to provide information to partners that they would need to calculate deductions that are not allowed at the partnership level, such as oil and gas depletion or the corporate dividends received deduction. This is because these deductions are claimed by individual partners on their personal tax returns, rather than at the partnership level. Therefore, it is true that a partnership must provide this information to its partners.

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  • 32. 

    Items not required to be shown on the partner's Schedules K-1 include AMT adjustments and preferences and taxes paid to foreign countries, as AMT and the foreign tax credit are calculated by the partnership. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - Partnership income and loss items must be separately stated if they could differently affect the tax liabilities of two or more partners.

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  • 33. 

    The JPM Partnership is a US based manufacturing company. JPM calculated the domestic production activities deduction and deducts that amount on its Form 1065. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - The partnership typically calculates QPAI and W-2 wages and allocates those amount to the partners.

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  • 34. 

    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. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Partnerships combine their income and loss from operating activities with separately stated income and expenses to determine their taxable income. This taxable income is then reconciled to book income on the partnership's Schedule M-1 or Schedule M-3. Therefore, the statement is true.

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  • 35. 

    BRW Partnership reported gross income from operations of $60,000, interest income of $3,000, rental expense of $20,000, and a charitable contribution of $6,000. On its Schedule K-1, the partnership reports ordinary business income of $40,000, and separately started interest income, $3,000, and charitable contributions, $6,000. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The given answer is true because the partnership reported ordinary business income of $40,000, which includes the gross income from operations of $60,000. The separately stated interest income of $3,000 and charitable contributions of $6,000 are also reported separately on the Schedule K-1. Therefore, the statement is true as all the income and expenses are correctly reported.

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  • 36. 

    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-1, 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. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - The partnership combines all amounts that would be considered ordinary business income on Form 1065, page 1.

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  • 37. 

    Partner's capital accounts should be determined using the same method on Form 1065 Schedule L, Form 1065 Schedule M-2, and the Schedules K-1 prepared for the partners. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - One Schedule L, partner's capital should generally be determined using financial reporting methods. One Schedule M-2 and the partner's Schedules K-1, the same methods should be used, and that method may differ from the methods used for Schedule L.

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  • 38. 

    A partnership's allocations of income and deductions to the partners are required to be proportionate to the partner's percentage ownership of partnership capital in order to meet the substantial economic effect tests. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - A partnership may allocate items of partnership income, gain, loss, deduction, or credit in any manner agreed upon by the partners, provided the allocation meets the substantial economic effect tests or certain alternate tests for economic performance.

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  • 39. 

    Tom and William are equal partners in the TW Partnership. Just before TW liquidated, Tom's capital account balance was $50,000 and William's capital account balance was $30,000. To meet the substantial economic effect requirements, any liquidating cash distribution must be allocated in proportion to those ending capital account balances. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The statement is true because in a partnership, the capital account balances represent each partner's ownership interest in the business. In order to meet the substantial economic effect requirements, any liquidating cash distribution must be allocated in proportion to the ending capital account balances. Therefore, Tom and William's capital account balances of $50,000 and $30,000 respectively would determine the proportion in which the cash distribution should be allocated.

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  • 40. 

    Blaine contributes property valued at $50,000 (basis of $40,000) in exchange for a 25% interest in the BIKE partnership. If the property is later sold for $70,000, gain of $15,000 will be allocated to Blaine. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True - 70,000-50,000 = 20,000 * .25 = 5,000 + 10,000 (pre-contribution gain) = $15,000

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  • 41. 

    The RGBY LLC operating agreement provides that 50% of depreciation expense is allocated to Red, and all remaining income (including the remaining 50% of depreciation) is allocated equally among the 4 partners. Before guaranteed payments and depreciation, RGBY's net income is $120,000 for the year. RGBY's depreciation expense if $20,000, and it paid a guaranteed payment to Yellow of $8,000. Assume all allocations and payments meet the substantial economic effect rules. After all deductions and special allocations are taken into account, Red is allocated a net of $15,500 from the partnership. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True - The partnership can deduct $10,000 of the depreciation expense and the $8,000 guaranteed payment, resulting in $102,000 of net income that is allocated equally amoung the partners, $25,500 each. In addition, Red is specifically allocated a $10,000 depreciation deduction. Red's net deduction is $15,500 (25,500 proportionate allocation-$10,000 special deduction allocation)

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  • 42. 

    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. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True - 20,000-50,000 = (30,000) * 1/3 = (10,000)

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  • 43. 

    Emma's basis in her BBDE LLC interest is $60,000 at the beginning of the tax year. Her allocable share of LLC items are as follows: $20,000 of ordinary income, $2,000 tax-exempt interest income, and a $6,000 long-term capital gain. In addition, the LLC distributed $12,000 of cash to Emma during the year. Assuming the LLC has no liabilities at the beginning or end of the year, Emma's ending basis in her LLC interest is $76,000. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True - 60,000 initial basis + 20,000 ordinary income + 2,000 tax-exempt interest income + 6,000 long-term capital gain - 12,000 distribution = 76,000

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  • 44. 

    Steve's basis in SAW Partnership interest is $200,000 at the beginning of the tax year, including all adjustments. His allocable share of partnership items are as follows: ($120,000) of ordinary loss, $6,000 tax-exempt interest income, and a $14,000 long-term capital gain. In addition, the LLC distributed $20,000 of cash to Steve during the year. During the year, Steve's share of partnership debt increases by $10,000. Steve's ending basis in his LLC interest is $80,000. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True - $200,000 + 10,000 increase in share of liabilities + 6,000 tax-exempt interest income + 14,000 long-term gain - 20,000 distribution - 120,000 loss = 90,000

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  • 45. 

    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. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - 40,000 + 20,000 increase in share of liabilities + 15,000 ordinary income - 10,000 distribution = 65,000

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  • 46. 

    Julie and Kate form an equal partnership during the current year. Julie contributes cash of $160,000 and Kate contributes property (basis $90,000, FMV - $260,000) subject to a nonrecourse liability of $100,000. As a result of these transactions, Kate has a basis in her partnership interest of $90,000. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - Kate is allocated the first $10,000 of debt (100,000 liability - 90,000 basis) plus 1/2 of the remaining debt. 90,000 basis - 100,000 liability + 10,000 allocation of debt = $0 + $45,000 remaining debt allocation (90,000/2) = $45,000 Kate's basis

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  • 47. 

    Debt of a limited liability company is allocated among LLC members using the nonrecourse debt allocation rules unless an LLC member has personally guaranteed the debt. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The explanation for the correct answer is that in a limited liability company (LLC), the debt is typically allocated among the members using the nonrecourse debt allocation rules. This means that the members are not personally liable for the debts of the company. However, if a member has personally guaranteed the debt, they would be personally responsible for it. Therefore, the statement that debt of an LLC is allocated using the nonrecourse debt allocation rules unless a member has personally guaranteed the debt is true.

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  • 48. 

    Belinda owns a 30% profit and loss interest in BOW LLC and her basis in the interest is $30,000, excluding her share of the LLC's liabilities. Belinda guaranteed a $40,000 LLC debt. Remaining liabilities are $100,000. Belinda's basis in the LLC is $100,000. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True - Belinda's basis of $30,000 is increased by her share of the LLCs liabilities. $40,000 liability that she guaranteed plus $30,000 allocated to her by the remaining debt (100,000 * 1/3).

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  • 49. 

    The sum of the partner's ending basis amounts on all Schedules K-1 equals the partner's ending capital account balance shown on the partnership's Schedule L. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - The partner's basis is not shown on Schedule K-1 or anywhere else on the tax return.

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  • 50. 

    Micah's beginning capital account on his Schedule K-1 is $60,000. During the year, he is allocated $20,000 of partnership income, $8,000 of nondeductible expenses, and a $12,000 share of tax-exempt income. His Schedule K-1 show allocations of nonrecourse debt of $20,000 (last year) and $30,000 (this year). Micah's ending capital account is $94,000. True/False

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    False - Partnership debt is not included in either beginning or ending capital account balances. 60,000 beginning balance + 20,000 share of taxable income + 12,000 share of tax-exempt income - 8,000 share of nondeductible expenses = $84,000

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  • Current Version
  • Mar 21, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Nov 20, 2019
    Quiz Created by
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