Exam 21: Partnerships

Morgan is a 50% managing member in the calendar year,cash basis MKK LLC.The LLC received $150,000 income from services and paid the following other amounts: Rent expense $10,000 Salary expense to employees 40,000 Payment to Morgan for services,per the operating agreement 40,000 Distributions to partners,Kristin and Katie 12,000 Payment to 30% cash basis partner Katie for tax and accounting services 10,000 ​ How much will Morgan's adjusted gross income increase as a result of the above items? What amount will be included in Morgan's self-employment tax calculation?

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 fair market value of the property is $12,000 at the contribution date.After three years,the partnership sells the land for $10,000.The partnership will recognize a $5,000 ordinary loss on sale of the property.

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

Match each of the following statements with the terms below that provide the best definition. a.Organizational choice of many large accounting firms.b.Partner's percentage allocation of current operating income.c.Might affect any two partners' tax liabilities in different ways.d.Brokerage and registration fees incurred for promoting and marketing partnership interests.e.Transfer of asset to partnership followed by immediate distribution of cash to partner.f.Must have at least one general and one limited partner.g.All partners are jointly and severally liable for entity debts.h.Theory treating the partner and partnership as separate economic units.i.Partner's basis in partnership interest after tax-free contribution of asset to partnership.j.Partnership's basis in asset after tax-free contribution of asset to partnership.k.Owners are "members." l.Theory treating the partnership as a collection of taxpayers joined in an agency relationship.m.Allows many unincorporated entities to select their Federal tax status.n.No correct match provided. -Substituted

Which of the following statements is true regarding the sale of a partnership interest?

Sarah contributed fully depreciated ($0 basis) property valued at $50,000 to the RSTU Partnership in exchange for a 25% interest in partnership capital and profits.During the first year of partnership operations,RSTU had net taxable income of $200,000 and tax-exempt income of $4,000.The partnership distributed $10,000 cash to Sarah.Her share of partnership recourse liabilities on the last day of the partnership year was $20,000.What is Sarah's adjusted basis (outside basis) for her partnership interest at the end of the tax year?

Match each of the following statements with the terms below that provide the best definition. a.Organizational choice of many large accounting firms.b.Partner's percentage allocation of current operating income.c.Might affect any two partners' tax liabilities in different ways.d.Brokerage and registration fees incurred for promoting and marketing partnership interests.e.Transfer of asset to partnership followed by immediate distribution of cash to partner.f.Must have at least one general and one limited partner.g.All partners are jointly and severally liable for entity debts.h.Theory treating the partner and partnership as separate economic units.i.Partner's basis in partnership interest after tax-free contribution of asset to partnership.j.Partnership's basis in asset after tax-free contribution of asset to partnership.k.Owners are "members." l.Theory treating the partnership as a collection of taxpayers joined in an agency relationship.m.Allows many unincorporated entities to select their Federal tax status.n.No correct match provided. -Limited partnership

Suzy owns a 30% interest in the JSD LLC.In liquidation of the entity,Suzy receives a proportionate distribution of $30,000 cash,inventory (basis of $16,000,fair market value of $18,000),and land (basis of $25,000,fair market value of $30,000).Suzy's basis in the entity immediately before the distribution was $80,000.As a result of the distribution,what is Suzy's basis in the inventory and land,and how much gain or loss does she recognize?

The MOG Partnership reports ordinary income of $60,000,long-term capital gain of $12,000,and tax-exempt income of $12,000.The partnership agreement provides that Molly will receive all long-term capital gains and George will receive all tax-exempt interest income.Their allocation of ordinary income will be reduced accordingly,and Olivia will be allocated a proportionately greater share of ordinary income.(In other words,each partner will receive allocations totaling 1/3 of the total $84,000 of partnership income. ) This allocation was agreed upon because Molly and George are in a high marginal tax bracket and Olivia is in a low marginal tax bracket. a.Describe the elements that must be included in a partnership agreement in order for an allocation to have "economic effect." b.Discuss whether or not the MOG allocation would be permitted and provide your reasoning.

Frank receives a proportionate nonliquidating distribution from the AEF Partnership.The distribution consists of $10,000 cash and property (adjusted basis to the partnership of $54,000 and fair market value of $60,000).Immediately before the distribution,Frank's adjusted basis in the partnership interest was $50,000.His basis in the noncash property received is:

In a proportionate liquidating distribution in which the partnership is liquidated,Bill received cash of $120,000,inventory (basis of $6,000,fair market value of $8,000),and a capital asset (basis and fair market value of $16,000).Immediately before the distribution,Bill's basis in the partnership interest was $90,000. a.How much gain or loss will Bill recognize on the distribution? b.What is Bill's basis in the inventory and the capital asset?

Match each of the following statements with the terms below that provide the best definition. a.Adjusted basis of each partnership asset.b.Operating expenses incurred after entity is formed but before it begins doing business.c.Each partner's basis in the partnership.d.Reconciles book income to "taxable income." e.Tax accounting election made by partnership.f.Tax accounting calculation made by partner.g.Tax accounting election made by partner.h.Does not include liabilities.i.Designed to prevent excessive deferral of taxation of partnership income.j.Amount that may be received by partner for performance of services for the partnership.k.Computation that determines the way recourse debt is shared.l.Will eventually be allocated to partner making tax-free property contribution to partnership.m.Partner's share of partnership items.n.Must generally be satisfied by any allocation to the partners.o.Justification for a tax year other than the required taxable year.p.No correct match is provided. -Foreign tax credit vs.deduction

In the current year,Derek formed an equal partnership with Cody.Derek contributed land with an adjusted basis of $110,000 and a fair market value of $200,000.Derek also contributed $50,000 cash to the partnership.Cody contributed land with an adjusted basis of $80,000 and a fair market value of $230,000.The land contributed by Derek was encumbered by a $60,000 nonrecourse debt.The land contributed by Cody was encumbered by $40,000 of nonrecourse debt.Assume the partners share debt equally.Immediately after the formation,what is the basis of Cody's partnership interest?

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?

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 30,2014 and 2015.The partnership paid guaranteed payments to Stephanie of $2,000 and $3,000 per month during the fiscal years ended September 30,2014 and 2015.How much will Stephanie's adjusted gross income be increased by these partnership items for her tax year ended December 31,2014?

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

On a corporate Form 1120,Schedule M-1 (or M-3) is used to reconcile book and tax income,and Schedule M-2 reconciles retained earnings to the amounts shown on Schedule L.How are these reconciliations accomplished on a partnership return? What additional information must be provided?

Harry's basis in his partnership interest was $10,000 at the beginning 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.

The partnership reports each partner's share of income to the partner on a Form 1099-MISC.

Match each of the following statements with the terms below that provide the best definition. a.Organizational choice of many large accounting firms.b.Partner's percentage allocation of current operating income.c.Might affect any two partners' tax liabilities in different ways.d.Brokerage and registration fees incurred for promoting and marketing partnership interests.e.Transfer of asset to partnership followed by immediate distribution of cash to partner.f.Must have at least one general and one limited partner.g.All partners are jointly and severally liable for entity debts.h.Theory treating the partner and partnership as separate economic units.i.Partner's basis in partnership interest after tax-free contribution of asset to partnership.j.Partnership's basis in asset after tax-free contribution of asset to partnership.k.Owners are "members." l.Theory treating the partnership as a collection of taxpayers joined in an agency relationship.m.Allows many unincorporated entities to select their Federal tax status.n.No correct match provided. -Syndication costs