Chapter 10 Tax Corp - Important 1

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  • 1/112 Questions

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

    • True
    • False
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Chapter 10 Tax Corp - Important 1 - Quiz
About This Quiz

This quiz, titled 'Chapter 10 Tax Corp - important 1,' assesses knowledge on corporate structures such as partnerships, LLCs, LLPs, and LPs. It focuses on management roles, liability, and debt protection in these entities, crucial for understanding business and tax implications.

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  • 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

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

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  • 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

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

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  • 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

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

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  • 5. 

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

    • True

    • False

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

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  • 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

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

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  • 7. 

    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

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

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  • 8. 

    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

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

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  • 9. 

    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

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

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  • 10. 

    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

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

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  • 11. 

    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

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

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  • 12. 

    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

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

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  • 13. 

    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

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

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  • 14. 

    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

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

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  • 15. 

    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

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

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  • 16. 

    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

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

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  • 17. 

    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

    Correct Answer
    A. 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.

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  • 18. 

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

    • True

    • False

    Correct Answer
    A. 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.

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  • 19. 

    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

    Correct Answer
    A. $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

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  • 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

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

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  • 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.

    Correct Answer
    A. B. 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.

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  • 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.

    Correct Answer
    A. B. $38,000.
    Explanation
    $38,000
    30,000 + 10,000 = 40,000 * .2 = 8,000
    40,000 + 8,000 - 10,000 = 38,000

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  • 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

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

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  • 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

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

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  • 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

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

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  • 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.

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

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  • 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.

    Correct Answer
    A. B. $40,000 land, $0 equipment, $30,000 inventory; $90,000 partnership interest.
    Explanation
    Partnership - 40,000 in land, $0 in equipment, $30,000 in inventory
    Xena's basis - $20,000 + $40,000 + 30,000 = $90,000

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  • 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

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

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  • 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

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

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  • 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

    Correct Answer
    A. True
    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.

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  • 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

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

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  • 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

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

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  • 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.

    • B. Recourse debt is allocated to the partners to the extent of the partnership's liabiliates in excess of basis in the property.

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

    • D. 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.

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

    Correct Answer
    A. D. 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.

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  • 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)".

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

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  • 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

    Correct Answer
    A. A. $116,000
    Explanation
    $116,000
    85,000 + 6,000 + 40,000 -15,000 = 116,000

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  • 36. 

    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.

    • C. Inventory (in the partner's hand): the partnership reports ordinary income if the property is held as a capital asset and sold within 5 years of the contribution date.

    • d. Land valued at less than its basis: the partnership reports a § 1231 loss if the property is sold at a loss.

    Correct Answer
    A. C. Inventory (in the partner's hand): the partnership reports ordinary income if the property is held as a capital asset and sold within 5 years of the contribution date.
  • 37. 

    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

    Correct Answer
    A. d. The partnership's net operating loss carryforward
    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.

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  • 38. 

    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

    Correct Answer
    A. 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

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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.

    Correct Answer
    A. C. Anna has a $150,000 tax basis for her partnership interest.
    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.

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  • 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

    • 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

    Correct Answer
    A. e. Either (or both) c. and d. may be true, depending upon the types of propert
    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.

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  • 41. 

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

    • A. Abigail contributes property with a basis of $20,000 and a fair market value of $50,000 to the HAT Partnership in exchange for a 20% interest therein. The partnership agrees to distribute $20,000 to Abigail in fifteen months, if partnership cash flows from operations exceed $100,000 at that time. The partnership does not expect to produce operating cash flows of over $100,000 for at least five years.

    • B. Partner Carl contributes appreciated property to the NICE Partnership, and three years later NICE distributes $100,000 proportionately to all the partners.

    • C. Terrence contributes appreciated property to the TOM Partnership. Thirty months later, he receives a distribution from the partnership of $15,000 cash. None of the other partners received a distribution. There was no agreement that TOM would make the distribution, and Terrence would have made the contribution whether or not the partnership made the distribution.

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

    • E. "Partner Carl contributes appreciated property to the NICE Partnership, and three years later NICE distributes $100,000 proportionately to all the partners", "Abigail contributes property with a basis of $20,000 and a fair market value of $50,000 to the HAT Partnership in exchange for a 20% interest therein. The partnership agrees to distribute $20,000 to Abigail in fifteen months, if partnership cash flows from operations exceed $100,000 at that time. The partnership does not expect to produce operating cash flows of over $100,000 for at least five years", and "Terrence contributes appreciated property to the TOM Partnership. Thirty months later, he receives a distribution from the partnership of $15,000 cash. None of the other partners received a distribution. There was no agreement that TOM would make the distribution, and Terrence would have made the contribution whether or not the partnership made the distribution" are all treated as disguised sales.

    Correct Answer
    A. D. None of these transactions will be treated as a disguised sale.
  • 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?

    • A. TEC treats the contrbuted property as a new MACRS asset placed in service on the date the property title is transferred.

    • 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.

    • D. TEC must capitalize the transfer tax and treat it as a new asset placed in service on the date the property is contributed.

    • e. None of the above statements are true.

    Correct Answer
    A. D. TEC must capitalize the transfer tax and treat it as a new asset placed in service on the date the property is contributed.
    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.

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  • 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

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

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  • 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.

    Correct Answer
    A. B. $30,000.
    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.

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  • 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

    Correct Answer
    A. A. $25,000
    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.

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  • 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.

    Correct Answer
    A. C. $220,000
    Explanation
    $220,000
    400,000 * .25 = 100,000
    100,000 + $120,000 guaranteed payments = $220,000

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  • 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

    Correct Answer
    A. e. All of the above should be documented
    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.

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  • 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

    Correct Answer
    A. C. $84,000
    Explanation
    $84,000
    120,000 * .5 = 60,000 ordinary income and 24,000 guaranteed payments
    60,000 + 24,000 = 84,000

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  • 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.

    Correct Answer
    A. C. $115,000.
    Explanation
    $115,000
    100,000 - 40,000 = 60,000 * .25 = 15,000 + 10,000 = 25,000
    90,000 + 25,000 = 115,000

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  • Mar 21, 2023
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