Exam 20: Forming and Operating Partnerships

Peter, Matt, Priscilla, and Mary began the year in the PMPM General Partnership sharing profits, losses, and capital equally. They each had a tax basis at the beginning of the year of $3,000, $10,000, $8,000, and $11,000 respectively. Early in the year, Mary provided general consulting services to the partnership and received an additional 15 percent profits, losses, and capital interest in the partnership. The liquidation value of her additional interest was $45,000. Later the same year, the partnership received cash contributions of $25,000 from Peter and Matt that it used to repay the partnership's $35,000 recourse debt. According to state law, the partners shared responsibility for this debt in accordance with their loss sharing ratios. What is each partner's tax basis after adjustment for these transactions?

Erica and Brett decide to form their new motorcycle business as a LLC. Each will receive an equal profits (loss) interest by contributing cash, property, or both. In addition to the members' contributions, their LLC will obtain a $50,000 nonrecourse loan from First Bank at the time it is formed. Brett contributes cash of $5,000 and a building he bought as a storefront for the motorcycles. The building has a FMV of $45,000, an adjusted basis of $30,000, and is secured by a $35,000 nonrecourse mortgage that the LLC will assume. What is Brett's outside tax basis in his LLC interest?

How does additional debt or relief of debt affect a partner's basis?

Tim, a real estate investor, Ken, a dealer in securities, and Hardware, Inc., a retail lumber store form a partnership called HKT, LP. HKT is in the home building business. Tim recently purchased his interest in HKT while the other partners purchased their interest several years ago. During X3, HKT reports a $12,000 gain from the sale of a stock in a wholesale lumber company it purchased in X1 for investment purposes. Which of the following statements best represents how their portion of the gain should be reported to the partner?

Lloyd and Harry, equal partners, form the Ant World Partnership. During the year, Ant World had the following revenue, expenses, gains, losses, and distributions: Cost of Goods Sold Cash Distribution to Harry Municipal Bond Interest Short-Term Capital Gains Employee Wages Rent Charitable Contributions Sales Repairs and Maintenance Long-term Capital Gains Fines and Penalties Guaranteed Payment to Lloyd Given these items, what amount of ordinary business income (loss) and what separately-stated items should be allocated to each partner for the year?

A partnership may use the cash method despite having a corporate partner when the partnership's average gross receipts for the prior three taxable years don't exceed _________.

Which of the following items are subject to the Medicare contribution tax when a partner is a not a material participant in the partnership?

XYZ, LLC has several individual and corporate members. Abe and Joe, individuals with 4/30 year-ends, each have a 23% profits and capital interest. RST, Inc., a corporation with a 6/30 year end, owns a 4% profits and capital interest while DEF, Inc., a corporation with an 8/30 year end, owns a 4.9% profits and capital interest. Finally, thirty other calendar year-end individual partners (each with less than a 2% profits and capital interest) own the remaining 45% of the profits and capital interests in XYZ. What tax year-end should XYZ use and which test or rule requires this year-end?

John, a limited partner of Candy Apple, LP, is allocated $30,000 of ordinary business loss from the partnership. Before the loss allocation, his tax basis is $20,000 and at-risk amount is $10,000. John also has ordinary business income of $20,000 from Sweet Pea, LP as a general partner and ordinary business income of $5,000 from Red Tomato, as a limited partner. How much of the $30,000 loss from Candy Apple can John deduct currently?

Which of the following statements regarding capital and profit interests received for services contributed to a partnership is false?

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

Partnerships tax rules incorporate both the entity and aggregate approaches.

The character of each separately-stated item is determined at the partner level.

Tom is talking to his friend Bob, who has an interest in Freedom, LLC, about purchasing his LLC interest. Bob's outside basis in Freedom, LLC is $10,000. This includes his $2,500 one-fourth share of the LLC's debt. Bob's 704(b) capital account is $17,000. If Tom bought Bob's LLC interest for $17,000, what would Tom's outside basis be in Freedom, LLC?

Which of the following entities is not considered a flow-through entity?

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)?

This year, Reggie's distributive share from Almonte Partnership includes $8,000 of interest income, $4,000 of dividend income, and $60,000 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 Medicare contribution tax? A. If Reggie materially participates in the business, the ordinary income is not passive to him and should not be subject to the Medicare contribution tax. The $8,000 of interest income and the $4,000 of dividend income are potentially subject to the Medicare contribution 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 Medicare contribution tax? B. If Reggie is not a material participant in the partnership the $8,000 of interest income, the $4,000 of dividend income, and the $60,000 of ordinary business income are potentially subject to the Medicare contribution tax.

If a taxpayer sells a passive activity with suspended passive activity losses from prior years, what type of income can be offset by the suspended passive losses in the year of sale?

Greg, a 40% 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% partners?

Which requirement must be satisfied in order to specially allocate partnership income or losses to partners?