Chapter 10 Tax Corp - Important 1

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

True

False

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.

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.

2. 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

True

False

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.

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.

3. 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

True

False

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.

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.

4. 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

True

False

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.

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.

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

True

False

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.

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.

6. 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

True

False

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.

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.

7. At the beginning of the year, Ryan's capital account balance in the RUS Partnership - 40% interest - was $200,000. During the year Ryan contributed cash of $40,000 and property basis of $20,000, FMV of $30,000. RUS reported ordinary income of $100,000 and tax exempt income of $6,000. At the end of the y ear, the partnership distributed $6,000 cash to Ryan. On the schedule K-1, the partnership shows that Ryan has a $50,000 share of nonrecourse LLC debt at the end of the year. Using the tax basis method, how much is Ryan's ending capital account balance?

$296,400

Option 2

Option 3

Option 4

$296,400
200,000 + 40,000 (cash) + 20,000 (property basis)+ 40,000 (income .4) + 2,400 (income .4) - 6,000 (distribution) = 296,400

Explanation

$296,400
200,000 + 40,000 (cash) + 20,000 (property basis)+ 40,000 (income .4) + 2,400 (income .4) - 6,000 (distribution) = 296,400

8. 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

True

False

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.

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.

9. 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

True

False

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.

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.

10. 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

True

False

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.

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.

11. 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

True

False

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.

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.

12. 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

True

False

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.

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.

13. 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

True

False

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

Explanation

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

14. 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

True

False

True - 20,000-50,000 = (30,000) * 1/3 = (10,000)

Explanation

True - 20,000-50,000 = (30,000) * 1/3 = (10,000)

15. 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

True

False

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

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

16. 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

True

False

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.

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.

17. 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

True

False

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).

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).

18. One of the disadvantages of the partnership form is that the partner's share of the partnership's taxable income is taxed to the partner, regardless of whether or not it is distributed. True/False

True

False

In a partnership, the partners are responsible for paying taxes on their share of the partnership's taxable income, regardless of whether or not they actually receive the income as a distribution. This means that even if a partner does not receive any money from the partnership, they still have to pay taxes on their share of the income. This can be seen as a disadvantage because partners may have to pay taxes on income they did not actually receive in cash. Therefore, the statement "the partner's share of the partnership's taxable income is taxed to the partner, regardless of whether or not it is distributed" is true.

Explanation

In a partnership, the partners are responsible for paying taxes on their share of the partnership's taxable income, regardless of whether or not they actually receive the income as a distribution. This means that even if a partner does not receive any money from the partnership, they still have to pay taxes on their share of the income. This can be seen as a disadvantage because partners may have to pay taxes on income they did not actually receive in cash. Therefore, the statement "the partner's share of the partnership's taxable income is taxed to the partner, regardless of whether or not it is distributed" is true.

19. When it liquidates, a partnership is not generally subject to tax on the appreciation of its assets. True/False

True

False

When a partnership liquidates, it is not generally subject to tax on the appreciation of its assets. This means that the partnership does not have to pay taxes on any increase in the value of its assets during the liquidation process. This is because the partnership is considered to be distributing its assets to its partners, who will then be responsible for paying taxes on any gains when they sell or dispose of the assets. Therefore, the statement "When it liquidates, a partnership is not generally subject to tax on the appreciation of its assets" is true.

Explanation

When a partnership liquidates, it is not generally subject to tax on the appreciation of its assets. This means that the partnership does not have to pay taxes on any increase in the value of its assets during the liquidation process. This is because the partnership is considered to be distributing its assets to its partners, who will then be responsible for paying taxes on any gains when they sell or dispose of the assets. Therefore, the statement "When it liquidates, a partnership is not generally subject to tax on the appreciation of its assets" is true.

20. 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

True

False

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.

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.

21. 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.

Decreased by the amount of guaranteed payments shown on the partner's Schedule K-1.

Explanation

Decreased by the amount of guaranteed payments shown on the partner's Schedule K-1.

22. Binita contributed property with a basis of $40,000 and a value of $50,000 to the BE Partnership in exchange for a 20% interest in partnership capital and profits. During the first year of partnership operations, BE had a net taxable income of $30,000 and a tax-exempt interest income of $10,000. The partnership distributed $10,000 cash to Binita. Binita's adjusted basis (outside basis) for her partnership interest at year-end is:

A. $36,000.

B. $38,000.

C. $60,000.

D. $70,000.

e. None of the above.

$38,000
30,000 + 10,000 = 40,000 * .2 = 8,000
40,000 + 8,000 - 10,000 = 38,000

Explanation

$38,000
30,000 + 10,000 = 40,000 * .2 = 8,000
40,000 + 8,000 - 10,000 = 38,000

23. 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

True

False

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.

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.

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

True

False

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.

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.

25. 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

True

False

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.

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.

26. A partnership will take a carryover basis in an asset it acquires when:

A. A partner owning 25% of partnership capital and profits sells the asset to the partnership.

B. The partnership leases the asset from a partner on a one-year lease.

C. The partnership acquires the asset from a partner as a contribution to partnership capital under § 721(a).

D. The partnership acquires the asset through a § 1031 like-kind exchange.

e. None of these choices are correct.

When a partnership acquires an asset from a partner as a contribution to partnership capital under § 721(a), it will take a carryover basis in the asset. This means that the partnership will assume the same basis in the asset as the contributing partner had. This is because the contribution of the asset to the partnership is not considered a taxable event, and therefore the basis does not get adjusted. The other options do not involve a contribution to partnership capital and therefore would not result in a carryover basis.

Explanation

When a partnership acquires an asset from a partner as a contribution to partnership capital under § 721(a), it will take a carryover basis in the asset. This means that the partnership will assume the same basis in the asset as the contributing partner had. This is because the contribution of the asset to the partnership is not considered a taxable event, and therefore the basis does not get adjusted. The other options do not involve a contribution to partnership capital and therefore would not result in a carryover basis.

27. Xena and Xavier form the XX LLC. Xena contributes cash of $20,000, land (basis-$40,000; FMV-$25,000), equipment (basis - $0, FMV$35,000, and inventory (basis-$30,000, FMV-$40,000). Xavier contributed $100,000 cash. How much is the partnership's basis in the land, equipment, and inventory, and how much is Xena's basis in the partnership interest?

A. $25,000 land, $0 equipment, $30,000 inventory; $55,000 partnership interest.

B. $40,000 land, $0 equipment, $30,000 inventory; $90,000 partnership interest.

C. $25,000 land, $35,000 equipment, $30,000 inventory; $105,000 partnership interest.

d. $40,000 land, $35,000 equipment, $40,000 inventory; $135,000 partnership interest.

Partnership - 40,000 in land, $0 in equipment, $30,000 in inventory
Xena's basis - $20,000 + $40,000 + 30,000 = $90,000

Explanation

Partnership - 40,000 in land, $0 in equipment, $30,000 in inventory
Xena's basis - $20,000 + $40,000 + 30,000 = $90,000

28. 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

True

False

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.

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.

29. 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

True

False

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)

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)

30. Gina is a single taxpayer and an active partner in the GMA LLC. Gina's Schedule K-1 reflects a $20,000 ordinary income share, $2,000 of interest income, and a $10,000 guaranteed payment for services. Gina's self-employment income from other sources and modified adjusted gross income is about $300,000. With respect to the income from the LLC, Gina will be subject to the .9% additional Medicare tax on $30,000 and the 3.8% net investment income tax of $2,000. True/False

True

False

True - A single taxpayer is subject to the .9% additional Medicare tax on earned income in excess of $200,000, and a 3.8% net investment income tax if modified adjusted gross income exceeds $200,000.

Explanation

True - A single taxpayer is subject to the .9% additional Medicare tax on earned income in excess of $200,000, and a 3.8% net investment income tax if modified adjusted gross income exceeds $200,000.

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

True

False

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.

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.

32. 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

True

False

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.

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.

33. Which of the following statements is correct regarding the manner in which partnership liabilities are refleted in the partner's bases in their partnership interests?

A. Nonrecourse debt is allocated to the partners according to their lodd-sharing ratios.

C. An increase in partnership debts results in a decrease from the partnership to the partnership interest.

e. Partnership debt is not reflected in the partner's basis in their partnership interests.

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.

Explanation

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.

34. On the partnership's form 1065, which of the following statements is not true?

A. The partnership reconciles its net "taxable" income to book income on Schedule M-1 or M-3.

B. The partnership balance sheet on Schedule L is generally presented on a financial (book) basis.

C. All partnership income and expense items are reported on Form 1065, Page 1.

D. The partnership's equivalent of taxable income is reported in the "Analysis of Income (Loss)".

All partnership income and expense items are reported on Form 1065, Page 1. - The partnership reports ordinary income from operations on Form 1065, page. It reports all other types of income and expenses on form 1065, Schedule K.

Explanation

All partnership income and expense items are reported on Form 1065, Page 1. - The partnership reports ordinary income from operations on Form 1065, page. It reports all other types of income and expenses on form 1065, Schedule K.

35. 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 FMV 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

$116,000
85,000 + 6,000 + 40,000 -15,000 = 116,000

Explanation

$116,000
85,000 + 6,000 + 40,000 -15,000 = 116,000

36. Which one of the following is not shown on the partnership's Schedule K on Page 4 of Form 1065?

A. The partnership's self-employment income

B. The partnership's separately stated income and deductions.

C. The partnership's tax preference and adjustment items

d. The partnership's net operating loss carryforward

The partnership's net operating loss carryforward - any partnership losses flow through to the partners in the year incurred. They are not carried back or forward at the partnership level.

Explanation

The partnership's net operating loss carryforward - any partnership losses flow through to the partners in the year incurred. They are not carried back or forward at the partnership level.

37. ABC LLC reported the following items on the LLCs Schedule K: ordinary income $100,000, interest income $3,000, long-term capital loss ($4,000), charitable contributions $1,000, post-1986 depreciation amount $10,000, and cash distributions to partners $50,000. How much will ABC show as net income (loss) on its Analysis of Income (Loss)?

98,000

Option 2

Option 3

Option 4

$98,000
100,000 ordinary income + 3,000 interest income - 4,000 long-term capital loss - 1,000 charitable contribution = $98,000

Explanation

$98,000
100,000 ordinary income + 3,000 interest income - 4,000 long-term capital loss - 1,000 charitable contribution = $98,000

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

A. Depreciable property: the partnership treats the property as newly acquired depreciable property, and may claim a § 179 deduction

B. Unrealized (cash basis) receivables: the partnership will report a capital gain when the receivable is collected.

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Explanation

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39. 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 $100,000; 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 $150,000 tax basis for her partnership interest.

D. The partnership has a $150,000 adjusted basis in the land contributed by Anna.

e. None of the statements is true.

ANSWER: c
RATIONALE: The contributions are tax-free and the carryover and substituted basis rules of §§ 722 and 723 apply. Jason's basis for his partnership interest will be the same as his $180,000 basis for the property contributed. Anna will have a $150,000 tax basis for her partnership interest; the partnership will have a $100,000 adjusted basis for the land contributed by Anna; and neither Jason nor Anna will recognize a gain or loss on their property contributions.

Explanation

ANSWER: c
RATIONALE: The contributions are tax-free and the carryover and substituted basis rules of §§ 722 and 723 apply. Jason's basis for his partnership interest will be the same as his $180,000 basis for the property contributed. Anna will have a $150,000 tax basis for her partnership interest; the partnership will have a $100,000 adjusted basis for the land contributed by Anna; and neither Jason nor Anna will recognize a gain or loss on their property contributions.

40. When property is contributed to a partnership in exchange for a capital and profits interest, when does the partner's holding period begin for the partnership interest?

A. The day after the contribution date.

B. The day the property was contributed

D. The day the partnership interest was acquired

E. Either (or both) c. and d. may be true, depending upon the types of propert

The partner's holding period for the partnership interest may begin either on the day the property was contributed or on the day the partnership interest was acquired, depending on the types of property involved. This means that if the property contributed is a capital asset, the holding period begins on the day the property was contributed. However, if the property contributed is not a capital asset, the holding period begins on the day the partnership interest was acquired.

Explanation

The partner's holding period for the partnership interest may begin either on the day the property was contributed or on the day the partnership interest was acquired, depending on the types of property involved. This means that if the property contributed is a capital asset, the holding period begins on the day the property was contributed. However, if the property contributed is not a capital asset, the holding period begins on the day the partnership interest was acquired.

41. In which of the following independent situations would the transaction most likely be characterized as a disguised sale?

D. None of these transactions will be treated as a disguised sale.

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Explanation

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42. TEC Partners was formed during the current tax year. It incurred $10,000 of organization expenses, $80,000 startup expenses, and $5,000 of transfer taxes to retitle property contributed by a partner. The property has been held as MACRS property for 10 years by the contributing partner, and had an adjusted basis to the partner of $300,000 and FMV of $40,000. Which of the following statements is correct regarding these items?

B. TEC must amortize the $10,000 organizational expenses over 180 months.

C. TEC deducts the first $5,000 of startup expenses and amortizes the remainder over 180 months.

e. None of the above statements are true.

The correct answer is d. TEC must capitalize the transfer tax and treat it as a new asset placed in service on the date the property is contributed. This means that TEC cannot deduct the transfer tax as an expense, but instead must add it to the basis of the contributed property. This is because transfer taxes are considered part of the cost of acquiring the property and should be capitalized rather than expensed.

Explanation

The correct answer is d. TEC must capitalize the transfer tax and treat it as a new asset placed in service on the date the property is contributed. This means that TEC cannot deduct the transfer tax as an expense, but instead must add it to the basis of the contributed property. This is because transfer taxes are considered part of the cost of acquiring the property and should be capitalized rather than expensed.

43. ACME Partnership has had the following gross receipts since its formation: $1.8 million in 2014, $4.6 million in 2015, $8.8 million in 2016, $1.6 million in 2017, and $10 million in 2018. Partner Meile, Inc. is a Subchapter C corporation. In what tax years must ACME use the accrual method?

A. 2017 and all following years, because average annual gross receipts are more than $5 million in 2016

B. 2014 and all following years, because it has a partner that is a Subchapter C corporation

C. 2016 and all following years, because gross receipts are more than $5 million that year

D. 2016 and 2018 because those are the only years in which gross receipts exceeded $5 million

2017 and all following years, because average annual gross reciepts are more than $5 million in 2016. - Must change to accrual method the year AFTER the first year in which average annual gross receipts exceed $5 million.

Explanation

2017 and all following years, because average annual gross reciepts are more than $5 million in 2016. - Must change to accrual method the year AFTER the first year in which average annual gross receipts exceed $5 million.

44. George is a limited partner in a GLH Partnership. His basis is $40,000 before considering the current year operations, and includes a $20,000 recourse debt share and a $10,000 nonrecourse debt share. The nonrecourse debt is not treated as qualified nonrecourse financing. GLH reported a $200,000 loss for the year, of which George's 40% share is $80,000. George has passive income of $50,000 from another activity (not eligible for the special real estate deduction). How much of the $80,000 loss can George deduct this year?

A. $0.

B. $30,000.

C. $40,000.

D. $50,000.

e. $80,000.

$30,000
George can deduct any losses that meet the basis, § 704(d, at risk § 465, and passive § 469 loss limitations, in that order. George's basis is $40,000, so the remaining $40,000 is suspended under the basis limitation. The $10,000 nonrecourse debt cannot be included in George's amount at risk, so an additional $10,000 suspended under § 465, and George can evaluate the remaining $30,000 under the passive loss limitations.

Explanation

$30,000
George can deduct any losses that meet the basis, § 704(d, at risk § 465, and passive § 469 loss limitations, in that order. George's basis is $40,000, so the remaining $40,000 is suspended under the basis limitation. The $10,000 nonrecourse debt cannot be included in George's amount at risk, so an additional $10,000 suspended under § 465, and George can evaluate the remaining $30,000 under the passive loss limitations.

45. Rebecca is a limited partner in the RST Partnership, wich is not publicly traded. Her allocable share of RST's passive ordinary losses from a nonrealty activity for the current year is $60,000. Rebecca has a $40,000 adjusted basis (outside basis) for her interest in RST (before deduction of any of the passive losses). Her amount "at risk" is $30,000 (before deduction of any of the passive losses). She also has $25,000 of passive income from other sources. How much of her $60,000 allocable loss can Rebec ca deduct on her current year's tax return?

A. $25,000

B. $30,000

C. $40,000

D. $60,000

e. None of the above

$25,000
The $60,000 passive loss must be limited first bby Rebecca's $40,000 outside basis for her partnership interest. The "at-risk" rules further limit her deduction to $30,000, the amount she is "at risk" in RST. She can decuct $25,000 of this loss because that is the amount she has of passive income from other sources.

Explanation

$25,000
The $60,000 passive loss must be limited first bby Rebecca's $40,000 outside basis for her partnership interest. The "at-risk" rules further limit her deduction to $30,000, the amount she is "at risk" in RST. She can decuct $25,000 of this loss because that is the amount she has of passive income from other sources.

46. Samuel is the managing general partner of STU, in which he owns 25% interest. For the year, STU reported ordinary income of $400,000 (after deducting guaranteed payments). In addition, the LLC reported interest income of $12,000. Samuel received a guaranteed payment of $120,000 for services he performed for STU. How much income from self-employment did Samuel earn from STU?

A. $100,000

B. $223,000

C. $220,000

D. $120,000

E. None of these choices are correct.

$220,000
400,000 * .25 = 100,000
100,000 + $120,000 guaranteed payments = $220,000

Explanation

$220,000
400,000 * .25 = 100,000
100,000 + $120,000 guaranteed payments = $220,000

47. Which one of the following is not an item that should be documented in the partnership (or LLC operating) agreement?

A. Allocations of cash flows

B. Allocations of profits and losses

C. Liquidating distributions

D. Partner's rights in managing the partnership

e. All of the above should be documented

All of the items listed in options a, b, c, and d should be documented in the partnership or LLC operating agreement. This agreement serves as a legally binding contract between the partners or members and outlines the terms and conditions of the partnership or LLC. It is important to document the allocations of cash flows, profits and losses, liquidating distributions, and partner's rights in managing the partnership to ensure clarity and avoid disputes or misunderstandings in the future.

Explanation

All of the items listed in options a, b, c, and d should be documented in the partnership or LLC operating agreement. This agreement serves as a legally binding contract between the partners or members and outlines the terms and conditions of the partnership or LLC. It is important to document the allocations of cash flows, profits and losses, liquidating distributions, and partner's rights in managing the partnership to ensure clarity and avoid disputes or misunderstandings in the future.

48. Stephanie is a calendar year cash basis taxpayer. She owns a 50% profit and loss interest in a cash basis partnership with a September 30 year-end. The partnership's operating income (after deducting guaranteed payments) was $120,000 ($10,000 per month) and $144,000 ($12,000 per month), respectively, for the partnership tax years ended September 30, 2016 and 2017. The partnership paid guaranteed payments to Stephanie of $2,000 and $3,000 per month during the fiscal years ended September 30, 2016 and 2017. How much will Stephanie's adjusted gross income be increased by those partnership items for her tax year ended December 31, 2016?

A. $60,000

B. $72,000

C. $84,000

D. $90,000

e. $108,000

$84,000
120,000 * .5 = 60,000 ordinary income and 24,000 guaranteed payments
60,000 + 24,000 = 84,000

Explanation

$84,000
120,000 * .5 = 60,000 ordinary income and 24,000 guaranteed payments
60,000 + 24,000 = 84,000

49. Ryan is a 25% partner in the ROCC Partnership. At the beginning of the tax year, Ryan's basis in the partnership interest was $90,000, including his share of partnership liabilities. During the current year, ROCC reported net ordinary income of $100,000. In addition, ROCC distributed $10,000 cash to each of the partners ($40,000 total). At the end of the year, Ryan's share of partnership liabilities increased by $10,000. Ryan's basis in the partnership interest at the end of the year is:

A. $90,000.

B. $100,000.

C. $115,000.

D. $125,000.

e. None of the above.

$115,000
100,000 - 40,000 = 60,000 * .25 = 15,000 + 10,000 = 25,000
90,000 + 25,000 = 115,000

Explanation

$115,000
100,000 - 40,000 = 60,000 * .25 = 15,000 + 10,000 = 25,000
90,000 + 25,000 = 115,000

50. Brad is a 40% member in the BB LLC. At the beginning of the tax year, Brad's capital account showed a balance of $120,000. In this case, his capital account equals his basis in the LLC interest excluding his share of the LLCs debts. His Schedule K-1 showed recourse debt (guaranteed by Brad) and nonrecourse debt of $10,000 and $20,000 respectively. During the current year, BB reported net ordinary income of $200,000 and non-deductible expenses of $2,000. There were no distributions during the year. At the end of the year, Brad's share of recourse (guaranteed) and nonrecourse liabilities were $20,000 and $30,000, respectively. How much is Brad's basis in the LLC interest at the end of the year?

A. $199,200.

B. $200,000.

C. $220,000.

D. $249,200.

e. $250,000.

$249,200
200,000 ordinary income * .4 = 80,000
2,000 nondeductible expenses * .4 = $800
120,000 beginning balance + 80,000 + 50,000 ending share of liabilities - 800 = 249,200

Explanation

$249,200
200,000 ordinary income * .4 = 80,000
2,000 nondeductible expenses * .4 = $800
120,000 beginning balance + 80,000 + 50,000 ending share of liabilities - 800 = 249,200

51. Kristie is a 25% member of 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 (that debt meets the at risk limitation requirements). In addition, Kristie personally guaranteed a $50,000 liability for KLMs equipment purchases. Which one of the following shows the information that should be reported on Kristie's Schedule K-1 for the year?

$50,000 recourse debt, $15,000 nonrecourse debt, $75,000 qualified nonrecourse debt.

$90,000 nonrecourse debt.

$90,000 nonrecourse debt, $12,500 recourse debt.

$65,000 recourse debt, $75,000 qualified nonrecourse debt.

$15,000 recourse debt, $75,000 qualified nonrecourse debt.

$50,000 recourse debt, $15,000 nonrecourse debt, $75,000 qualified nonrecourse debt.
$50,000 Kristie guaranteed
60,000 * .25 = 15,000
300,000 * 25 = 75,000

Explanation

$50,000 recourse debt, $15,000 nonrecourse debt, $75,000 qualified nonrecourse debt.
$50,000 Kristie guaranteed
60,000 * .25 = 15,000
300,000 * 25 = 75,000

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

True

False

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.

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.

53. 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

True

False

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)

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)

54. 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

True

False

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

Explanation

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

55. 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

True

False

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

Explanation

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

56. 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

True

False

False - 40,000 + 20,000 increase in share of liabilities + 15,000 ordinary income - 10,000 distribution = 65,000

Explanation

False - 40,000 + 20,000 increase in share of liabilities + 15,000 ordinary income - 10,000 distribution = 65,000

57. 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

True

False

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

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

58. 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

True

False

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

Explanation

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

59. 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

True

False

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

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

60. 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 disruptive 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 disruptive share of partnership income. True/False

True

False

False - as a genearl partner, William must report both the guaranteed payment for services and his disruptive share of partnership income as self-employment income.

Explanation

False - as a genearl partner, William must report both the guaranteed payment for services and his disruptive share of partnership income as self-employment income.

61. 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 Maris is $60,000. In the current year, Maris had still not figured out how to use the land for her own personal or business use; consequently, she sold the land to her partnership for $50,000. The partnership immediately started using the land as a parking lot for its employees. Maris may recognize her $10,000 loss on the sale. True/False

True

False

False - Because Maris owns more than 50% interest in the partnership's capital or profits. Maria may not deduct a loss on sale of property to the entity.

Explanation

False - Because Maris owns more than 50% interest in the partnership's capital or profits. Maria may not deduct a loss on sale of property to the entity.

62. Which one of the following statements is TRUE regarding a partner's personal liability for partnership assets?

A. LLC members can never be liable for entity debts.

B. In a limited partnership, all partners have limited liability for patnership debts

C. In a LLP, the partner might be subject to liability for other partner's malpractice.

D. In a general partnership, all partners are liable for entity debts.

In a general partnership, all partners are liable for entity debts. This means that each partner is personally responsible for the debts and obligations of the partnership. If the partnership is unable to pay its debts, creditors can go after the personal assets of each partner to satisfy those debts. This unlimited personal liability is a key characteristic of general partnerships and is different from other types of partnerships, such as limited partnerships or limited liability partnerships, where partners have limited liability for the partnership's debts.

Explanation

In a general partnership, all partners are liable for entity debts. This means that each partner is personally responsible for the debts and obligations of the partnership. If the partnership is unable to pay its debts, creditors can go after the personal assets of each partner to satisfy those debts. This unlimited personal liability is a key characteristic of general partnerships and is different from other types of partnerships, such as limited partnerships or limited liability partnerships, where partners have limited liability for the partnership's debts.

63. Which of the following is an example of a special allocation of partnership income?

A. The partnership's capital gains and losses are shown separately on Schedule K-1

B. Distributions from the partnership to the partner are shown on Schedue K-1 line 20.

C. The partnership agreement provides that Marcus will report all charitable contributions rather than his 20% disributive share.

The partnership agreement provides that Marcus will report all charitble contributions rather than his 20% distributive share. - A special allocation arises when an amount is allocated differently from the partner's normal profit and loss-sharing percentages.

Explanation

The partnership agreement provides that Marcus will report all charitble contributions rather than his 20% distributive share. - A special allocation arises when an amount is allocated differently from the partner's normal profit and loss-sharing percentages.

64. Tara and Robert formed the TR Partnership four years ago. Because they decided the company needed some expertise in multimedia presentations, they offered Katie a 1/3 interest in partnership capital if she would come to work for the partnership. On July 1 of the current year, the unrestricted partnership interest (fair market value of $25,000) was transferred to Katie. How should Katie treat the receipt of the partnership interest in the current year?

A. $25,000 short-term capital gain.

B. $25,000 ordinary income.

C. Nontaxable.

D. $25,000 long-term capital gain.

E. None of these choices are correct.

$25,000 ordinary income - A person who receives an unrestricted partnership capital interest for services rendered recognizes ordinary income when the interest is received. The amount of income recognized is the FMV of the partnership interst on the date it is received.

Explanation

$25,000 ordinary income - A person who receives an unrestricted partnership capital interest for services rendered recognizes ordinary income when the interest is received. The amount of income recognized is the FMV of the partnership interst on the date it is received.

65. Which one of the following allocations is most likely to meet the "substantial" test in the "substantial economic effect" rules?

The ROY LLC specially allocates $20,000 of income each year to partner Red with no offsetting loss allocations in other years. - There is no indication that the allocation is made for tax reasons, and there is no offsetting allocation in future years.

Explanation

The ROY LLC specially allocates $20,000 of income each year to partner Red with no offsetting loss allocations in other years. - There is no indication that the allocation is made for tax reasons, and there is no offsetting allocation in future years.

66. 39. Tim, Al, and Pat contributed assets to form the equal TAP Partnership. Tim contributed cash of $40,000 and land with a basis of $80,000 (fair market value of $60,000). Al contributed cash of $60,000 and land with a basis of $50,000 (fair market value of $40,000). Pat contributed cash of $60,000 and a fully depreciated property ($0 basis) valued at $40,000. Which of the following tax treatments is not correct?

A. Tim's basis in his partnership interest is $120,000.

B. Al realizes and recognizes a loss of $10,000.

C. Pat realizes a gain of $40,000 but recognizes $0 gain.

e. All of these statement are correct.

ANSWER: b
RATIONALE: Al's basis in the partnership interest equals the $60,000 cash plus his $50,000 basis in the property contributed. He cannot recognize his $10,000 realized loss. The other three statements are correct. Tim's basis equals the cash contribution plus the $80,000 basis in the land. Pat's basis equals the $60,000 cash contribution because he had no basis in the property he contributed; he does not recognize his $60,00 realized gain. The partnership takes a carryover basis in the three contributed properties.

Explanation

ANSWER: b
RATIONALE: Al's basis in the partnership interest equals the $60,000 cash plus his $50,000 basis in the property contributed. He cannot recognize his $10,000 realized loss. The other three statements are correct. Tim's basis equals the cash contribution plus the $80,000 basis in the land. Pat's basis equals the $60,000 cash contribution because he had no basis in the property he contributed; he does not recognize his $60,00 realized gain. The partnership takes a carryover basis in the three contributed properties.

67. AmCo and BamCo form the AB General Partnership at the start of the current year with a land contribution by BamCo and a cash contribution by AmCo. BamCo's contribution property is subject to a recourse mortgage assumed by the partnership. BamCo has an 80% interest in ABs profits and losses. The land has been held by BamCo for the past 6 years as an investment. It will be used by AM as an operating asset in its parking lot business. Which of the following statements is correct?

D. Immediately after formation, AmCo's basis in the partnership equals the cash contributed by AmCo.

In a partnership, each partner's basis in the partnership is determined by their contributions to the partnership. In this case, AmCo contributed cash and BamCo contributed land with a recourse mortgage. AmCo's basis in the partnership would be the cash contributed plus their share of the recourse debt contributed by BamCo. This is because the recourse debt is considered a contribution to the partnership and increases AmCo's basis. Therefore, option C is correct.

Explanation

In a partnership, each partner's basis in the partnership is determined by their contributions to the partnership. In this case, AmCo contributed cash and BamCo contributed land with a recourse mortgage. AmCo's basis in the partnership would be the cash contributed plus their share of the recourse debt contributed by BamCo. This is because the recourse debt is considered a contribution to the partnership and increases AmCo's basis. Therefore, option C is correct.

68. Which one of the following is a true statement regarding the allocation of partnership debt among the partners for purposes of calculating basis?

A. No debt is allocated to LLC members because they are not liable for entity debts

B. Nonrecourse debt is not allocated to general partners unless they personally guarantee the debt.

C. In a limited partnership, debt is only allocated to general partners.

D. In a limited liability partnership, debt is allocated among the managing partners, but not the partners with "limited liability"

For basis purposes, partnership debt is allocated among the partners even if no partners is personally liable for the debt. - All partnership debt is allocated among the partners.

Explanation

For basis purposes, partnership debt is allocated among the partners even if no partners is personally liable for the debt. - All partnership debt is allocated among the partners.

69. At the beginning of the tax year, Zach's basis for his partnership interst 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. For the tax year, Zach will report from the partnership of $20,000 cash during the year. For the tax year, Zach will report:

A. A nontaxable distribution of $20,000, an ordinary loss of $10,000, and a suspended loss carryforward of $34,000.

B. An ordinary loss of $32,000, a suspended loss carryforward of $12,000, and a taxable distribution of $20,000.

C. A nontaxable distribution of $20,000, an ordinary loss of $12,000, and a suspended loss carryforward of $32,000.

D. An ordinary loss of $44,000 and a nontaxable distribution of $20,000.

e. None of these choices are correct

c. A nontaxable distribution of $20,000, an ordinary loss of $12,000, and a suspended loss carryforward of $32,000.

The $20,000 distribution and the $2,000 share of partnership tax-exempt income combine to reduce Zack's basis for his partnership interest to $12,000 ($30,000 + $2,000 - $20,000). Zack will then be allocated the $44,000 partnership loss; $12,000 of which is deductible and $32,000 of which is suspended.

Explanation

c. A nontaxable distribution of $20,000, an ordinary loss of $12,000, and a suspended loss carryforward of $32,000.

The $20,000 distribution and the $2,000 share of partnership tax-exempt income combine to reduce Zack's basis for his partnership interest to $12,000 ($30,000 + $2,000 - $20,000). Zack will then be allocated the $44,000 partnership loss; $12,000 of which is deductible and $32,000 of which is suspended.

70. 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

True

False

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.

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.

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

A. Calculation of a § 199 deduction amount

B. Whether to capitalize, amortize, or expense research and experimental costs.

C. The partnerhip's overall accounting method

D. Whether to claim a § 179 deduction related to property acquired by the partnership.

e. All of the above elections are made by the partnership

Calculation of a § 199 deduction amount - The partner determines the amount that can be deducted under § 199 based on information provided by the partnership.

Explanation

Calculation of a § 199 deduction amount - The partner determines the amount that can be deducted under § 199 based on information provided by the partnership.

72. 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 FMV of $60,000. Addison received a 75% interest in partnership capital and profits in exchange for $180,000 of cash. 3 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 form the sale?

A. $0

B. $9,000

C. $24,000

D. $36,000

e. None of the above

$24,000
60,000 - 40,000 = 20,000 precontribution gain
76,000 - 60,000 = 16,000 * .25 = 4,000
20,000 + 4,000 = $24,000

Explanation

$24,000
60,000 - 40,000 = 20,000 precontribution gain
76,000 - 60,000 = 16,000 * .25 = 4,000
20,000 + 4,000 = $24,000

73. Molly is a 30% partner in the MAP Partnership. During the current tax year, the partnership reported ordinary income of $200,000 before payment of guaranteed payments and distributions to partners. The partnership made an ordinary cash distribution of $20,000 to Molly, and paid guaranteed payments to partners Molly, Amber, and Pat of $20,000 each. How much will Molly's adjusted gross income increase as a result of the above items?

A. $42,000

B. $60,000

C. $62,000

D. $80,000

e. None of the above

$62,000
200,000 - 60,000 (guaranteed payments) = 140,000 ordinary income * .3 = 42,000 + 20,000 guaranteed payment = 62,000

Explanation

$62,000
200,000 - 60,000 (guaranteed payments) = 140,000 ordinary income * .3 = 42,000 + 20,000 guaranteed payment = 62,000

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

A. Income, gain, losses, and deductions must be allocated to the partners in accordance with their capital contributions.

e. All of the above statements are requirements of the substantial economic effect test.

Income, gain, losses, and deductions must be allocated to the partners in accordance with their capital contributions. - A partnership is not required to allocate items proportionately to the partners, provided the reporting and record keeping requirements of the substantial economic effect requirements are met.

Explanation

Income, gain, losses, and deductions must be allocated to the partners in accordance with their capital contributions. - A partnership is not required to allocate items proportionately to the partners, provided the reporting and record keeping requirements of the substantial economic effect requirements are met.

75. Which of the following statements regarding partnership taxation is incorrect?

A. A partnership is a tax paying entity for federal income tax purposes.

B. Partnership income is comprised of ordinary partnership income or loss and separately stated items.

C. A partnership is required to file a return with the IRS.

D. A partner's profit-sharing may differ from the partner's loss-sharing percent.

e. All of these statements are correct.

A partnership is a tax paying entity for Federal income tax purposes. - a partnership is not taxed but must file a tax return.

Explanation

A partnership is a tax paying entity for Federal income tax purposes. - a partnership is not taxed but must file a tax return.

76. Which of the following would be currently taxable ordinary income to the service partner if received in exchange for services performed for the partnership?

A. A 10% interest in the capital of the partnership that will vest in 3 years.

C. A 25% interest in the capital of the partnership where there are no restrictions on transferability of the interest.

d. All of the above.

A 25% interest in the capital of the partnership where there are no restrictions on transferability of the interest. - Receipt of an interest in partnership capital in exchange for services is taxable to the service partner if it is not subject to a substantial risk of forfeiture.

Explanation

A 25% interest in the capital of the partnership where there are no restrictions on transferability of the interest. - Receipt of an interest in partnership capital in exchange for services is taxable to the service partner if it is not subject to a substantial risk of forfeiture.

77. 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

True

False

False - This is an example of a special allocation of income

Explanation

False - This is an example of a special allocation of income

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

True

False

False - The "outside basis" is defined as the partners basis in the partnership interest.

Explanation

False - The "outside basis" is defined as the partners basis in the partnership interest.

79. 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

True

False

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.

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.

80. 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

True

False

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.

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.

81. 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

True

False

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.

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.

82. 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

True

False

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.

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.

83. 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

True

False

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.

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.

84. If a partnership allocates losses to the partners, the partners must first apply the passive loss limitations, then the basis limitation, and finally the at-risk limitations. If all three hurdles are met, the partner may deduct the loss. True/False

True

False

False - The overall limitation of § 704(d) must first be met. This means the allocated loss cannot exceed the partner's basis in the partnership interest. Any loss that meets the overall the overall limitation must be tested under the at-risk rules of § 465.

Explanation

False - The overall limitation of § 704(d) must first be met. This means the allocated loss cannot exceed the partner's basis in the partnership interest. Any loss that meets the overall the overall limitation must be tested under the at-risk rules of § 465.

85. Harry's basis in his partnership interest was $10,000 at the begining 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. True/False

True

False

False - Harry's basis is first adjusted for the distribution he received, so it is reducted to $6,000 (10,000-4,000 distribution). The loss is limited under § 704(d) to his basis after the distribution, or $6,000, with the remaining $2,000 being deferred to a future year.

Explanation

False - Harry's basis is first adjusted for the distribution he received, so it is reducted to $6,000 (10,000-4,000 distribution). The loss is limited under § 704(d) to his basis after the distribution, or $6,000, with the remaining $2,000 being deferred to a future year.

86. Before allocations for the current year, Marvin's basis in the MR LLC, in which Marvin is not an active member, is $50,000. His basis includes $10,000 of debt that he guaranteed, and $20,000 of nonrecourse debt that is not qualified nonrecourse financing. Marvin has passive income form other sources of $40,000. The LLC allocates a loss of $60,000 to Marvin. After application of loss limitation rules, Marvin can deduct $40,000. True/False

True

False

False - Loss limitations are applied in the following order: § 704(d) basis limitation, at risk limitation, and passive loss limitation. Marvin's basis includes both liabilities and is $50,000. His amount at risk includes only the recourse (guaranteed debit) but not the $20,000 nonrecourse debt, and so that limitation is $30,000. Marvin is not an active LLC memver so he is also subject to the passive loss limitations. However, because Marvi nhas a $40,000 passive loss from another source he can deduct the full $30,000 as he meets both the basis and risk limitations.

Explanation

False - Loss limitations are applied in the following order: § 704(d) basis limitation, at risk limitation, and passive loss limitation. Marvin's basis includes both liabilities and is $50,000. His amount at risk includes only the recourse (guaranteed debit) but not the $20,000 nonrecourse debt, and so that limitation is $30,000. Marvin is not an active LLC memver so he is also subject to the passive loss limitations. However, because Marvi nhas a $40,000 passive loss from another source he can deduct the full $30,000 as he meets both the basis and risk limitations.

87. Which of the following is a correct definition of a concept related to partnership taxation?

A. The aggregate concept treats partners and partnerships as separate units and gives the partnership its own tax "personality".

C. The partnership's outside basis is defined as the sum of each partner's capital account balance.

not-available-via-ai

Explanation

not-available-via-ai

88. Paul sells one parcel of land (basis of $100,000) for its FMV of $160,000 to a partnership in which he owns 60% capital interest. Paul held the land for investment purposes. The partnership is in the real estate development business, and will build residential housing (for sale to customers) on the land. Paul will recognize:

A. $0 gain or loss.

B. $36,000 ordinary income.

C. $36,000 capital gain.

D. $60,000 ordinary income.

e. $60,000 capital gain.

$60,000 ordinary income
If a partner owns more than 50% interest in a partnership, any property sold to the partnership at a gain results in ordinary income to the selling partner, unless the property was a capital asset both to the partner and the partnership. $160,000 - 100,000 = 60,000

Explanation

$60,000 ordinary income
If a partner owns more than 50% interest in a partnership, any property sold to the partnership at a gain results in ordinary income to the selling partner, unless the property was a capital asset both to the partner and the partnership. $160,000 - 100,000 = 60,000

89. Kristie is a 30% partner in the KKM Partnership. During the current year, KKM reported gross receipts of $280,000 and a charitable contribution of $30,000. The partnership paid office expenses of $80,000. In addition, KKM distributed $20,000 each to partners Kaylyn and Megan, and the partnership paid partner Kaylyn $20,000 for administrative services. Kristie reports the following income from KKM during the current tax year:

A. $54,000 ordinary income; $9,000 charitable contribution.

B. $60,000 ordinary income; $9,000 charitable contribution.

C. $36,000 ordinary income.

D. $54,000 ordinary income.

e. None of the above.

ANSWER: a
RATIONALE: KKM's net ordinary income is $180,000 ($280,000 ordinary income - $80,000 of office expenses - $20,000 payment to Kaylyn). The cash distributions to Kaylyn and Megan are not deductible. Kristie's share of this income is $54,000. In addition, Kristie reports her $9,000 share of the partnership's charitable contribution.

Explanation

ANSWER: a
RATIONALE: KKM's net ordinary income is $180,000 ($280,000 ordinary income - $80,000 of office expenses - $20,000 payment to Kaylyn). The cash distributions to Kaylyn and Megan are not deductible. Kristie's share of this income is $54,000. In addition, Kristie reports her $9,000 share of the partnership's charitable contribution.

90. Brooke and John formed a partnership. Brooke received a 40% interest in partnership capital and profits in exchange for contributing land (basis of $30,000 and FMV of $120,000). John received a 60% interest in partnership capital and profits in exchange for contributing $180,000 cash. Three years after the contribution date, the land contributed by Brooke is sold by the partnership to a third party for $150,000. How much taxable gain will Brooke recognize from the sale?

A. $36,000

B. $0

C. $90,000

D. $102,000

E. $48,000

$102,000
Any precontribution gain must be allocated entirely to Brooke. FMV at time of contribution 120,000 - 30,000 basis at time of contribution = 90,000 precontribution gain.
150,000 sale - 120,000 FMV = 30,000 * .4 = 12,000
90,000 + 12,000 = 102,000

Explanation

$102,000
Any precontribution gain must be allocated entirely to Brooke. FMV at time of contribution 120,000 - 30,000 basis at time of contribution = 90,000 precontribution gain.
150,000 sale - 120,000 FMV = 30,000 * .4 = 12,000
90,000 + 12,000 = 102,000

91. Allison is a 40% partner in the BAM partnership. At the beginning of the tax year, Allison's 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:

A. $2,000.

B. $50,000.

C. $58,000.

D. $70,000.

e. None of the above.

$50,000
(60,000) + (20,000) = ($80,000) * .4 = (32,000).
100,000 - 32,000 - 8,000 distribution - 10,000 decrease in liabilities = 50,000

Explanation

$50,000
(60,000) + (20,000) = ($80,000) * .4 = (32,000).
100,000 - 32,000 - 8,000 distribution - 10,000 decrease in liabilities = 50,000

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

True

False

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

Explanation

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

93. 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 p 199 deduction, and the p 754 election. True/False

True

False

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.

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.

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

True

False

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.

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.

95. 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 event occured: 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 on the last day of the partnership year. Misty's adjusted basis for her partnership interest at the year end is:

A. $48,000.

B. $60,000.

C. $78,000.

D. $88,000.

E. $90,000.

$78,000
50,000 + 10,000 - 12,000 = 48,000 = 30,000 (share of liabilities) = 78,000

Explanation

$78,000
50,000 + 10,000 - 12,000 = 48,000 = 30,000 (share of liabilities) = 78,000

96. Sharon contributed property to the newly formed QRST Partnership. The property had a $100,000 adjusted basis to Sharon and a $160,000 FMV on the contribution date. The property was also encumbered by a $120,000 nonrecourse debt, which was transferred to the partnership on that date. Another partner, Rochelle, shares 30% of the partnership income, gain, loss, deduction, and credit. Under IRS regulations, Rochelle's share of the nonrecourse debt for basis purposes is:

A. $120,000.

B. $30,000.

C. $100,000.

D. $20,000.

e. $36,000.

$120,000 - 100,000 = $20,000 allocated to Sharon
$120,000 - 20,000 = $100,000 allocated to partners
Rochelle's share = 100,000 * .3 = $30,000

Explanation

$120,000 - 100,000 = $20,000 allocated to Sharon
$120,000 - 20,000 = $100,000 allocated to partners
Rochelle's share = 100,000 * .3 = $30,000

97. Which of the following entity owners cannot participate in management of the entity?

A. A general partner in a general partnership

B. A member of a LLC

C. A partner in a LLP

D. A limited partner in a limited partnership

e. None of the Above

A limited partner in a limited partnership - by definition they cannot participate in management of the partnership

Explanation

A limited partner in a limited partnership - by definition they cannot participate in management of the partnership

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

A. A partnership typically has easier administrative and filing requirements than does a C corporation.

B. Partnership income is subject to a single level of taxation; corporate income is double taxed.

D. Partners in a general partnership have less personal liability for entity claims thanshareholders of a C corporation.

e. All of the above are advantages of partnership taxation.

The statement that partners in a general partnership have less personal liability for entity claims than shareholders of a C corporation is not a correct statement regarding the advantage of the partnership entity form over the C corporation form. In fact, one of the advantages of the C corporation form is that it provides limited liability protection to its shareholders, meaning that their personal assets are generally not at risk in the event of business debts or legal claims. In a general partnership, on the other hand, partners have unlimited personal liability for the partnership's debts and obligations.

Explanation

The statement that partners in a general partnership have less personal liability for entity claims than shareholders of a C corporation is not a correct statement regarding the advantage of the partnership entity form over the C corporation form. In fact, one of the advantages of the C corporation form is that it provides limited liability protection to its shareholders, meaning that their personal assets are generally not at risk in the event of business debts or legal claims. In a general partnership, on the other hand, partners have unlimited personal liability for the partnership's debts and obligations.

99. 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 p 179 deduction. True/False

True

False

False - This is an example of the entity concept.

Explanation

False - This is an example of the entity concept.

100. Which of the following statements is always true regarding accounting methods available to a partnership?

A. If a partnership is a tax shelter, it can use the cash method of accounting.

C. If a partnership has a partner that is a personal service corporation, it cannot use the cash method.

D. If a partnership has a partner that is a C corporation, it cannot use the cash method.

e. All of the above statements are false.

The correct answer is b. If a non-tax-shelter partnership had "average annual gross receipts" of less than $5 million in all prior years, it can use the cash method. This statement is always true because the IRS allows non-tax-shelter partnerships with average annual gross receipts of less than $5 million to use the cash method of accounting. This method allows the partnership to recognize income when it is received and deduct expenses when they are paid, providing a simpler and more straightforward approach to accounting for smaller partnerships.

Explanation

The correct answer is b. If a non-tax-shelter partnership had "average annual gross receipts" of less than $5 million in all prior years, it can use the cash method. This statement is always true because the IRS allows non-tax-shelter partnerships with average annual gross receipts of less than $5 million to use the cash method of accounting. This method allows the partnership to recognize income when it is received and deduct expenses when they are paid, providing a simpler and more straightforward approach to accounting for smaller partnerships.

101. 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 a September 31 taxable year ends. The other LLC members (42% total) each own interests of 4% or less and use the calendar year (December 31). Which one of the following statements is true regarding the LLC's taxable year end?

A. The taxable year is determined under the least aggregate deferral rule and is December 31.

B. The taxable year is determined under the least aggregate deferral rule and is June 30.

C. The taxable year is determined under the majority interest rule and is December 31.

D. The taxable year is determined under the principal partner rule and is June 30.

E. The taxable year is determined under the least aggregate deferral rule and is September 30.

The correct answer is d. The taxable year is determined under the principal partner rule and is June 30. This is because SwanCo. and QuinnCo., who together own 46% of the LLC, have a June 30 tax year end. According to the principal partner rule, the taxable year end of the LLC is determined by the tax year end of the partners with the largest interest. In this case, SwanCo. and QuinnCo. have the largest interests, so the LLC's taxable year end is June 30. The other LLC members' tax year ends (December 31 and September 30) do not have a majority interest and therefore do not determine the LLC's taxable year end.

Explanation

The correct answer is d. The taxable year is determined under the principal partner rule and is June 30. This is because SwanCo. and QuinnCo., who together own 46% of the LLC, have a June 30 tax year end. According to the principal partner rule, the taxable year end of the LLC is determined by the tax year end of the partners with the largest interest. In this case, SwanCo. and QuinnCo. have the largest interests, so the LLC's taxable year end is June 30. The other LLC members' tax year ends (December 31 and September 30) do not have a majority interest and therefore do not determine the LLC's taxable year end.

102. 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

True

False

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

Explanation

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

103. 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

True

False

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

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

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

True

False

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.

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.

105. 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

True

False

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.

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.

106. 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

True

False

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.

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.

107. The individual partner rather than the partnership makes which of the following elections?

A. Code Section 179 deductions for tangible personal property.

B. Election to amortize organizational costs.

C. Nonrecognition treatment for involuntary conversion gains.

d. Whether to take a deduction or credit for taxes paid to foreign countries.

Choice "d" is correct. Most elections that affect the calculation of taxable income of a partnership are made by the partnership itself rather than by an individual partner. For example, the elections as to methods of accounting, methods of depreciation and the Section 179 expensing of a limited amount of depreciable property, the election not to use installment method accounting, and similar elections are made by the partnership and apply to all partners. However, individual partners can make the election to take a deduction or a credit for taxes paid to foreign countries.

Explanation

Choice "d" is correct. Most elections that affect the calculation of taxable income of a partnership are made by the partnership itself rather than by an individual partner. For example, the elections as to methods of accounting, methods of depreciation and the Section 179 expensing of a limited amount of depreciable property, the election not to use installment method accounting, and similar elections are made by the partnership and apply to all partners. However, individual partners can make the election to take a deduction or a credit for taxes paid to foreign countries.

108. Fern, Inc, Ivy, Inc, and Jeremy formed a general partnership. Fern owns a 50% interest and Ivy and Jeremy each 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?

A. The partnership must choose the calendar year because it has no principal partners.

B. The partnership must choose an October year-end because Fern, Inc., is a principal partner.

C. The partnership can request permission from the IRS to use a January 31 fiscal year under § 444.

D. The partnership must use the "least aggregate deferral" method to determine its "required" taxable year.

The correct answer is d. The partnership must use the "least aggregate deferral" method to determine its "required" taxable year. This means that the partnership must choose a taxable year that results in the least amount of aggregate deferral of income to the partners. Since Fern, Inc has a year-end of October 31, Ivy, Inc has a year-end of May 31, and Jeremy is a calendar year taxpayer, the partnership would need to choose a taxable year that minimizes the deferral of income for all partners.

Explanation

The correct answer is d. The partnership must use the "least aggregate deferral" method to determine its "required" taxable year. This means that the partnership must choose a taxable year that results in the least amount of aggregate deferral of income to the partners. Since Fern, Inc has a year-end of October 31, Ivy, Inc has a year-end of May 31, and Jeremy is a calendar year taxpayer, the partnership would need to choose a taxable year that minimizes the deferral of income for all partners.

109. DIP LLC reports ordinary income (before guaranteed payments) of $120,000, rent expense of $40,000, and interest income of $4,000 for the year. In additional, DIP paid guaranteed payments to partner Percy of $20,000. If Percy owns a 40% capital and profits interest, how much income will he report for the year and what is its character?

24,000 ordinary income

24,000 ordinary income, 1,600 interest income, 20,0000 guaranteed payment

25,600 ordinary income

32,000 ordinary income , 1,600 interest income

32,000 ordinary income, 1,600 interest income, 20,000 guaranteed payment

120,000-20,000 (guaranteed payment) - 40,000 = 60,000 .4= 24,000 ordinary income, 4,000.4=1,600 interest income and $20,000 guaranteed payment

Explanation

120,000-20,000 (guaranteed payment) - 40,000 = 60,000 .4= 24,000 ordinary income, 4,000.4=1,600 interest income and $20,000 guaranteed payment

110. 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

True

False

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.

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.

111. Meredith is a passive 30% member of the MNO LLC. She is not a managing member and she does not participate in any activities of the LLC. Her interest is more in the nature of an investment. In the current year, Meredith's distributive share of income from the LLC was $50,000. In additional, she received a guaranteed payment of $40,000 for the use of her capital. Assume that her income from other sources exceeds $500,000. How much of Meredith's LLC income will be subject to the self-employment tax and the net investment income tax?

A. $0 SE tax; $0 NII tax.

B. $0 SE tax; $40,000 NII tax.

C. $0 SE tax; $90,000 NII tax.

D. $50,000 SE tax; $40,000 NII tax.

e. $90,000 SE tax; $0 NII tax.

$0 SE tax, $40,000 net investment income tax
Because Meredith is a passive member, none of her distributive share is subject to SE tax. As a passive activity, the distributive share (50,000) is subject to the NII tax.

Explanation

$0 SE tax, $40,000 net investment income tax
Because Meredith is a passive member, none of her distributive share is subject to SE tax. As a passive activity, the distributive share (50,000) is subject to the NII tax.

112. 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?

$68,000 ordinary income.

$78,000 ordinary income.

$65,000 ordinary income; $3,000 of long-term capital gains.

$75,000 ordinary income; $3,000 of long-term capital gains.

None of the above.

200,000 + 6,000 - 50,000 = $156,000 / 2 = $78,000
$75,000 ordinary income and $3,000 long-term capital gain

Explanation

200,000 + 6,000 - 50,000 = $156,000 / 2 = $78,000
$75,000 ordinary income and $3,000 long-term capital gain