Exam 10: Partnerships: Formation, operation, and Basis

Tina and Randy formed the TR Partnership four years ago.Because they decided the company needed some expertise in multimedia presentations,they offered Susan a 1/3 interest in partnership capital and profits if she would come to work for the partnership.On July 1 of the current year,the unrestricted partnership interest (fair market value of $25,000)was transferred to Susan.How should Susan treat the receipt of the partnership interest in the current year?

In the current year,the DOE Partnership received revenues of $100,000 and paid the following amounts: $20,000 in rent and utilities,a $30,000 guaranteed payment to 50% partner Don,$6,000 to partner Eugene for consulting services,and $10,000 as a distribution to partner Olivia.In addition,the partnership earned $4,000 of qualifying dividend income during the year.Don's basis in his partnership interest was $35,000 at the beginning of the year,and includes a $10,000 share of partnership liabilities.At the end of the year,his share of partnership liabilities was $20,000.How much income must Don report for the tax year,and what is his basis in his partnership interest at the end of the 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 results. 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 partner. g.Theory treating the partner and partnership as separate economic units. h.Partner's basis in partnership interest after tax-free contribution of asset to partnership. i.Partnership's basis in asset after tax-free contribution of asset to partnership. j.Owners are "members." k.Theory treating the partnership as a collection of taxpayers joined in an agency relationship. l.Allows many unincorporated entities to select their Federal tax status. m.No correct match provided. -Profits interest

Match each of the following statements with the terms below that provide the best definition. a.Operating expenses incurred after entity is formed but before it begins doing business. b.Each partner's basis in the partnership. c.Tax accounting election made by partnership. d.Tax accounting calculation made by partner e.Tax accounting election made by partner. f.Designed to prevent excessive deferral of taxation of partnership income. g.Amount that may be received by partner for performance of services for the partnership. h.Adjusted basis of each partnership asset. i.Computation that determines the way recourse debt is shared. j.Will eventually be allocated to partner making tax-free property contribution to partnership. k.Must be satisfied if a loss item is to be specially allocated to a partner. l.Justification for a tax year other than the required taxable year. m.No correct match is provided. -Outside basis

Section 721 provides that no gain or loss is recognized on contribution of property to a partnership in exchange for an interest in the partnership.An exception might apply if the taxpayer receives a cash distribution from the partnership soon after the property contribution.

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 results. 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 partner. g.Theory treating the partner and partnership as separate economic units. h.Partner's basis in partnership interest after tax-free contribution of asset to partnership. i.Partnership's basis in asset after tax-free contribution of asset to partnership. j.Owners are "members." k.Theory treating the partnership as a collection of taxpayers joined in an agency relationship. l.Allows many unincorporated entities to select their Federal tax status. m.No correct match provided. -Qualified nonrecourse debt

Hardy's basis in his partnership interest was $5,000 at the beginning of the tax year.For the year,his share of the partnership's loss was $6,000,and he also received a distribution of $3,000.Hardy can deduct a $2,000 loss,and the remaining $4,000 loss is suspended until a year in which he has adequate basis.

On the first day of the current tax year,Melanie's basis in her partnership interest was $85,000.Her Schedule K-1 from the partnership reflected the following items for the current year: share of partnership ordinary loss,$95,000; interest income from money market accounts,$6,000.On her personal tax return,Melanie will report a loss from the partnership of $91,000,and interest income of $6,000.

Partner Tom transferred property (basis of $20,000; fair market value of $50,000)to the TUV Partnership in exchange for a partnership interest.At a later date,when Tom's outside basis for his partnership interest was $70,000,Tom received a $50,000 cash distribution from the partnership.Which one of the following statements is not true?

When property is contributed to a partnership for a capital and profits interest,the holding period of the contributing partner's interest:

Jamie contributed fully depreciated ($0 basis)property valued at $30,000 to the JKLM Partnership in exchange for a 40% interest in partnership capital and profits.During the first year of partnership operations,JKLM had net taxable income of $80,000 and tax-exempt income of $10,000.The partnership distributed $20,000 cash to Jamie.Her share of partnership recourse liabilities on the last day of the partnership year was $13,000.Jamie's adjusted basis (outside basis)for her partnership interest at year-end is:

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 results. 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 partner. g.Theory treating the partner and partnership as separate economic units. h.Partner's basis in partnership interest after tax-free contribution of asset to partnership. i.Partnership's basis in asset after tax-free contribution of asset to partnership. j.Owners are "members." k.Theory treating the partnership as a collection of taxpayers joined in an agency relationship. l.Allows many unincorporated entities to select their Federal tax status. m.No correct match provided. -Entity concept

Match each of the following statements with the terms below that provide the best definition. a.Operating expenses incurred after entity is formed but before it begins doing business. b.Each partner's basis in the partnership. c.Tax accounting election made by partnership. d.Tax accounting calculation made by partner e.Tax accounting election made by partner. f.Designed to prevent excessive deferral of taxation of partnership income. g.Amount that may be received by partner for performance of services for the partnership. h.Adjusted basis of each partnership asset. i.Computation that determines the way recourse debt is shared. j.Will eventually be allocated to partner making tax-free property contribution to partnership. k.Must be satisfied if a loss item is to be specially allocated to a partner. l.Justification for a tax year other than the required taxable year. m.No correct match is provided. -Economic effect test

Eric contributes property with a fair market value of $5,000,000 and an adjusted basis of $2,000,000 to EK Partnership.Eric shares in $2,500,000 of partnership debt under the liability sharing rules,giving him an initial adjusted basis for his partnership interest of $4,500,000.One month after the contribution,Eric receives a cash distribution from the partnership of $2,500,000.Eric would not have contributed the property if the partnership had not contractually obligated itself to make the distribution.Assume Eric's share of partnership liabilities will not change as a result of this distribution. a.Under the IRS's likely treatment of this transaction, what is the amount of gain or loss that Eric will recognize because of the $2,500,000 cash distribution? b.What is the partnership's basis for the property after the distribution? c.If Eric is unhappy with this result, can you suggest a possible alternative that may provide him with a better answer?

John and Ken formed the equal JK Partnership during the current year,with John contributing $50,000 in cash and Ken contributing land (basis of $30,000,fair market value of $20,000)and equipment (basis of $0,fair market value of $30,000).Ken recognizes no gain or loss on the contribution and his basis in his partnership interest is $30,000.

At the beginning of the tax year,Wick's basis for his partnership interest and his amount at risk in the partnership was $30,000. His share of partnership items for the year consisted of tax-exempt interest income of $2,000 and an ordinary loss of $44,000. He also received a distribution from the partnership of $20,000 cash during the year. For the tax year,Wick will report:

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 results. 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 partner. g.Theory treating the partner and partnership as separate economic units. h.Partner's basis in partnership interest after tax-free contribution of asset to partnership. i.Partnership's basis in asset after tax-free contribution of asset to partnership. j.Owners are "members." k.Theory treating the partnership as a collection of taxpayers joined in an agency relationship. l.Allows many unincorporated entities to select their Federal tax status. m.No correct match provided. -Disguised sale

Match each of the following statements with the terms below that provide the best definition. a.Operating expenses incurred after entity is formed but before it begins doing business. b.Each partner's basis in the partnership. c.Tax accounting election made by partnership. d.Tax accounting calculation made by partner e.Tax accounting election made by partner. f.Designed to prevent excessive deferral of taxation of partnership income. g.Amount that may be received by partner for performance of services for the partnership. h.Adjusted basis of each partnership asset. i.Computation that determines the way recourse debt is shared. j.Will eventually be allocated to partner making tax-free property contribution to partnership. k.Must be satisfied if a loss item is to be specially allocated to a partner. l.Justification for a tax year other than the required taxable year. m.No correct match is provided. -Start-up costs

Rachel uses a June 30 fiscal year.She owns a 50% profit and loss interest in a calendar year partnership.For the 2008 calendar year,the partnership's taxable income (after guaranteed payments)was $40,000,and for the 2009 calendar year it was $50,000.During the 2008 calendar year,the partnership paid Rachel a guaranteed payment of $100 per month.During the 2009 calendar year,it paid Rachel a guaranteed payment of $200 per month.Rachel must report the following total amount of income from the partnership for her June 30,2009,tax year.

Mark and Jodi formed an equal partnership on August 1 of the current year.Mark contributed $25,000 cash and land with a basis of $5,000 and a fair market value of $10,000.Jodi contributed equipment with a basis of $23,000 and a value of $35,000.Jodi's tax basis in her interest is $23,000; Mark's tax basis is $30,000.