Exam 15: Forming and Operating Partnerships

Which of the following does not represent a tax election available to either partners or partnerships?

J&J, LLC, was in its third year of operations when J&J decided to expand the number of members from two, A and B, with equal profits and capital interests, to three members, A, B, and C.The third member, C, will contribute her financial expertise to the LLC in exchange for a one-third capital interest in J&J.Given the balance sheet below reflecting the financial position of J&J on the date member C is admitted, what are the tax consequences to members A, B, and C, and to J&J, when C receives her capital interest? If, instead, member C receives a one-third profits interest, what would be the tax consequences to members A, B, and C, and to J&J? $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ J&J Lumrited Luability Compary $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Balance Sheet Basis FMV Basis FMV Cash \ 20,000 \ 20,000 Account Payable \ 7,000 \ 7,000 Inventory 5,000 5,000 Mortgage Payable 20,000 20,000 Equipment 10,000 17,000 Building A-Capital 22,000 30,000 B-Capital Total Assets \ 65,000 \ 87,000 Total Liab. and OE \ 65,000 \ 87,000

A partner's self-employment earnings (loss)may be affected by her share of ordinary business income (loss)and any guaranteed payments she receives.The impact of these amounts typically depends on the status of the partner.Which of the following statements correctly describes the effect these items have on the partner's self-employment earnings (loss)?

An additional allocation of partnership debt or relief of partnership debt is considered to be a deemed cash contribution or cash distribution, respectively.

Jerry, a partner with 30 percent capital and profits interest, received his Schedule K-1 from Plush Pillows, LP.At the beginning of the year, Jerry's tax basis in his partnership interest was $50,000.His current-year Schedule K-1 reported an ordinary loss of $15,000, long-term capital gain of $3,000, qualified dividends of $2,000, $500 of non-deductible expenses, a $10,000 cash contribution, and a reduction of $4,000 in his share of partnership debt.What is Jerry's adjusted basis in his partnership interest at the end of the year?

For partnership tax years ending after December 31, 2015, when must a partnership file its return?

In X1, Adam and Jason formed ABC, LLC, a car dealership in Kansas City.In X2, Adam and Jason realized they needed an advertising expert to assist in their business.Thus, the two members offered Cory, a marketing expert, a one-third capital interest in their partnership for contributing his expert services.Cory agreed to this arrangement and received his capital interest in X2.If the value of the LLC's capital equals $180,000 when Cory receives his one-third capital interest, which of the following tax consequences does not occur in X2?

Greg, a 40 percent partner in GSS Partnership, contributed land to the partnership in exchange for his partnership interest when the partnership was formed.At the time, his basis in the land was $30,000 and its FMV was $133,000.Three years after the partnership was formed, GSS Partnership decided to sell the land to an unrelated party for $150,000.When the land is sold, how much of the gain should be allocated to each partner of GSS Partnership if Sam and Steve are each 30 percent partners?

Income earned by flow-through entities is usually taxed only once at the entity level.

If a partner participates in partnership activities on a regular, continuous, and substantial basis, then the partnership's activities with respect to this individual partner are not considered passive.

Actual or deemed cash distributions in excess of a partner's outside basis are generally taxable as capital gains.

Which of the following does not adjust a partner's basis?

In what order should the tests to determine a partnership's year-end be applied?

Which of the following items is subject to the net investment income tax when an individual partner is a material participant in the partnership?

This year, Reggie's distributive share from Almonte Partnership includes $8,000 of interest income, $4,000 of dividend income, and $60,000 of ordinary business income. A.Assume that Reggie materially participates in the partnership.How much of his distributive share from Almonte Partnership is potentially subject to the net investment income tax? B.Assume that Reggie does not materially participate in the partnership.How much of his distributive share from Almonte Partnership is potentially subject to the net investment income tax?

Kim received a one-third profits and capital interest in Bright Line, LLC, in exchange for legal services she provided.In addition to her share of partnership profits or losses, she receives a $30,000 guaranteed payment each year for ongoing services she provides to the LLC.For X4, Bright Line reported the following revenues and expenses: sales-$150,000, cost of goods sold-$90,000, depreciation expense-$45,000, long-term capital gains-$15,000, qualified dividends-$6,000, and municipal bond interest-$3,000.How much ordinary business income (loss)will Bright Line allocate to Kim on her Schedule K-1 for X4?

Why are guaranteed payments deducted in calculating the ordinary business income (loss)of partnerships and treated as a separately stated item for the partners that receive the payment?

Which of the following items will affect a partner's tax basis?

Fred has a 45 percent profits interest and 30 percent capital interest in the SAP Partnership, and his tax basis before considering his share of SAP's current-year loss is $11,000.Included in his tax basis is a $2,600 share of recourse debt and a $5,300 share of nonrecourse debt.Fred is a limited partner in SAP.He is not involved in any other activities.If SAP has a $15,000 ordinary loss for the year, how much of the loss can be deducted currently, and how much of the loss is suspended because of the tax basis, at-risk, and passive activity loss limitations?

At the end of Year 1, Tony had a tax basis of $40,000 in Tall Ladders, Limited Partnership.Tony has a 20 percent profits interest in Tall Ladders.For Year 2, Tall Ladders will pay Tony a $10,000 guaranteed payment for extra services he provides to the partnership.Given the following income statement and balance sheet from Tall Ladders, what is Tony's adjusted tax basis at the end of Year 2? Sales \ 65,000 COGS Gross Profit \ 18,000 Interest Income \ 3,000 Dividends \ 5,000 Long-Term Capital Gain \ 10,000 Other Income Total Other Income \ 33,000 MACRS Depreciation \ (20,000) Guaranteed Payments \ (10,000) Charitable Contribution \ (10,000) Fines and Penalties \ (4,500) Other Expenses Total Other Expenses Net Income (Loss) \ (2,000) $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text {TALL, IADDERS, LP}$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text {Balarnce Sheet}$ Year 1 Year 2 Assets \ 120,000 \ 70,000 Nonrecourse Liabilities \ 50,000 \ 180,000 Partrer's Capital \ 70,000 \ 90,000