Exam 21: Partnerships

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.

Which one of the following is not shown on the partnership's Schedule K on Page 4 of Form 1065?

The JIH Partnership distributed the following assets to partner James in a proportionate liquidating distribution in which the partnership also liquidated: $25,000 cash, land parcel A (basis of $5,000, fair market value of $30,000) and land parcel B (basis of $5,000, fair market value of $15,000). James's basis in his partnership interest was $85,000 immediately before the distribution. James will allocate bases of $40,000 to parcel A and $20,000 to parcel B, and he will have no remaining basis in his partnership interest.

Which one of the following statements regarding partnership taxation is incorrect?

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

Which of the following statements is always correct regarding assets acquired by a newly formed partnership? If a partner contributes:

Paul sells one parcel of land (basis of $100,000) for its fair market value of $160,000 to a partnership in which he owns a 60% capital interest.Paul held the land for investment purposes.The partnership is in the real estate development business, and will build residential housing (for sale to customers) on the land.Paul will recognize:

An example of the "entity concept" underlying partnership taxation is the fact that the partners (rather than the partnership) pay tax on partnership income.

Molly is a 40% partner in the MAP Partnership.During the current tax year, the partnership reported ordinary income of $210,000 before payment of guaranteed payments and distributions to partners.The partnership made an ordinary cash distribution of $30,000 to Molly, and paid guaranteed payments to partners Molly, Amber, and Pat of $30,000 each ($90,000 total).How much will Molly's adjusted gross income increase as a result of the above items?

Which of the following partnership owners is personally liable for the entity's debts to general creditors?

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?

In a proportionate liquidating distribution in which the partnership is also liquidated, Ralph received cash of $30,000, accounts receivable (basis of $0, fair market value of $20,000), and equipment (basis of $0, fair market value of $10,000).Immediately before the distribution, Ralph's basis in the partnership interest was $40,000.Ralph realizes and recognizes a loss of $10,000, and his basis is $0 in both the accounts receivable and the equipment.

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, 2012 and 2013.The partnership paid guaranteed payments to Stephanie of $2,000 and $3,000 per month during the fiscal years ended September 30, 2012 and 2013.How much will Stephanie's adjusted gross income be increased by these partnership items for her tax year ended December 31, 2012?

Which of the following statements is correct regarding the manner in which partnership liabilities are reflected in the partners' bases in their partnership interests?

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.

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.

Nicholas is a 25% owner in the DDBN LLC (a calendar year entity).At the end of the last tax year, Nicholas's basis in his interest was $50,000, including his $20,000 share of LLC liabilities.On July 1 of the current tax year, Nicholas sells his LLC interest to Anna for $80,000 cash.In addition, Anna assumes Nicholas's share of LLC liabilities, which, at that date, was $15,000.During the current tax year, DDBN's taxable income is $120,000 (earned evenly during the year).Nicholas's share of the LLC's unrealized receivables is valued at $6,000 ($0 basis).At the sale date, what is Nicholas's basis in his LLC interest, how much gain or loss must he recognize, and what is the character of the gain or loss?

Randi owns a 40% interest in the capital and profits of the RAY Partnership.Immediately before she receives a proportionate nonliquidating distribution from RAY, the basis for her partnership interest is $60,000.The distribution consists of $45,000 in cash and land with a fair market value of $72,000.RAY's adjusted basis in the land immediately before the distribution is $36,000.As a result of the distribution, Randi recognizes a gain of $21,000.

Allison is a 40% partner in the BAM Partnership.At the beginning of the tax year, Allison's basis in the partnership interest was $100,000, including her share of partnership liabilities.During the current year, BAM reported an ordinary loss of $60,000.In addition, BAM distributed $8,000 to Allison and paid partner Brian a $20,000 consulting fee (neither of these amounts was deducted in determining the $60,000 loss from operations).At the end of the year, Allison's share of partnership liabilities decreased by $10,000.Assuming loss limitation rules do not apply, Allison's basis in the partnership interest at the end of the year is:

A partnership's allocations of income and deductions to the partners are required to be proportionate to the partners' percentage ownership of partnership capital in order to meet the substantial economic effect tests.