Exam 21: Partnerships

Susan is a one-fourth limited partner in the SJ Partnership in which capital is not a material income-producing factor. Partnership assets consist of land (fair market value of $100,000, basis of $80,000), accounts receivable (fair market value of $100,000, basis of $0) and cash of $200,000. SJ distributes $100,000 of the cash to Susan in liquidation of her interest. Susan's basis in the partnership interest was $70,000 immediately before the distribution. How much gain or loss does she recognize and what is its character? How much can the partnership deduct?

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

Syndication costs arise when partnership interests are being marketed to investors. These costs cannot be amortized or deducted on income tax returns.

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

At the beginning of the year, Ryan's capital account balance in the RUS Partnership (in which he owned a 40% interest) was $200,000. During the year, Ryan contributed cash ($40,000) and property (basis = $20,000, fair market value = $30,000). RUS reported ordinary income of $100,000 and tax-exempt income of $6,000. At the end of the year, the partnership distributed $6,000 of cash to Ryan. On the Schedule K-1, the partnership shows that Ryan had 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?

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 fair market value of $120,000). John received a 60% interest in partnership capital and profits in exchange for contributing $180,000 of 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?

An examination of the RB Partnership's tax books provides the following information for the current year. Operating (ordinary) income before guaranteed payments $300,000 Long-term capital gain 6,000 Guaranteed payment to Rachel for services 30,000 Cash distributions to Rachel (20,000) Interest on Colorado state bonds (exempt interest income) 2,000 Charitable contributions made by partnership (10,000) Decrease in partnership liabilities from 1/1-12/31 (20,000) Rachel is a 30% general partner in partnership capital, profits, and losses. Assume that the adjusted basis of her partnership interest is $60,000 at the beginning of the year, and she shares in 30% of the partnership's liabilities for basis purposes. a. What is Rachel's adjusted basis for the partnership interest at the end of the year? How much income must Rachel report on her tax return for the current year? What deductions b. might be available? What is the character of the income and what types of tax might apply to it?

Match each of the following statements with the terms below that provide the best definition. -Precontribution gain

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 $200,000; 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?

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?

Match each of the following statements with the terms below that provide the best definition. -Inside basis

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

Match each of the following statements with the numbered terms below that provide the best definition. -Aggregate concept

A partnership cannot use the cash method of accounting if one of the partners is a C corporation.

Match each of the following statements with the numbered terms below that provide the best definition. -Carryover

Greene Partnership had average annual gross receipts for the past three years of $24.8 million and never has reported average annual gross receipts above $25 million. One of the partners is Jackson, Inc., a 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 C corporation.

A distribution can be proportionate even if only one partner receives assets from the partnership.

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

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 September 30 taxable year-ends. Each of the other LLC members (42% total) owns interests of 4% or less and use the calendar year (December 31). Which of the following statements is true regarding the LLC's required taxable year end?

George received a fully 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 fair market value of the profits interest, but the capital interest will not be currently taxed to him.