Exam 21: Partnerships

The December 31 balance sheet of the calendar-year BCD LLP reads as follows. Each partner shares in 1/3 of the partnership capital, income, gain, loss, deduction, and credit. Capital is not a material income-producing factor to the partnership. On December 31, Christina (treated as a general partner) receives a distribution of $140,000 cash in liquidation of her partnership interest under § 736. Nothing is stated in the partnership agreement about goodwill. Christina's outside basis for the partnership interest immediately before the distribution is $84,000. How much is Christina's recognized gain from the distribution and what is the character of the gain? How much, if anything, can the partnership deduct? If a § 754 election is in effect, what (if any) adjustment is made? Show your calculations.

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. Theory under which a partnership's recourse debt is shared among the partners. 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. -Schedules M-1

Cassandra is a 10% limited partner in C&C, Ltd. Her basis in the interest is $60,000 before loss allocations, including her $30,000 share of the partnership's nonrecourse debt. (This debt is not qualified nonrecourse financing.) Cassandra is also a 10% limited partner in MNOP, in which her basis is $30,000. Cassandra is allocated an $80,000 loss from C&C, and $20,000 of income from MNOP. How much of the loss from C&C may Cassandra deduct? Under what Code provisions are the remaining losses suspended? Assume Cassandra has no business losses from other sources.

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?

Which of the following entity owners cannot participate in management of the entity?

Which of the following statements is not a requirement of the substantial economic effect test?

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

Micah's beginning capital account on his Schedule K-1 is $60,000. During the year, he is allocated $20,000 of partnership income, $8,000 of nondeductible expenses, and a $12,000 share of tax-exempt income. His Schedule K-1s show allocations of nonrecourse debt of $20,000 (last year) and $30,000 (this year). Micah's ending capital account is $94,000.

A distribution can be "proportionate" (as defined for purposes of Subchapter K) even if only one partner receives assets from the partnership.

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. Partnership in which partners are only liable for torts and malpractice. e. Expense might be reported on either form 1065, page 1 or on Schedule K. f. Transfer of asset to partnership followed by immediate distribution of cash to partner. g. Must have at least one general and one limited partner. h. Long-term capital gain might be recharacterized as ordinary income. i. All partners are jointly and severally liable for entity debts. j. Theory treating the partner and partnership as separate economic units. k. Partner's basis in partnership interest after tax-free contribution of asset to partnership. l. Partnership's basis in asset after tax-free contribution of asset to partnership. m. One way to calculate a partner's economic interest in the partnership. n. Owners are "members." o. Theory treating the partnership as a collection of taxpayers joined in an agency relationship. p. Participates in management. q. Not liable for entity debts. r. No correct match provided. -Limited liability partnership

Carl's basis in his LLC interest is $10,000. In a current (nonliquidating) distribution, Carl receives land (basis = $10,000? fair market value = $12,000)? and inventory (basis = $6,000? fair market value = $8,000). Carl takes a $10,000 basis in the land and a $0 basis in the inventory, and has a $0 basis in the LLC 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?

For Federal income tax purposes, a distribution from a partnership to a partner is treated the same as a distribution from a C corporation to its shareholders.

Which of the following is not a correct statement regarding the advantage of the partnership entity form over the C corporation form?

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. The other LLC members (42% total) each own interests of 4% or less and use the calendar year (December 31). Which one of the following statements is true regarding the LLC's required taxable year end?

One of the disadvantages of the partnership form is that the partner's share of the partnership's taxable income is taxed to the partner, even if it is not distributed.

Jonathon owns a one-third interest in a liquidating partnership. Immediately before the liquidation, Jonathon's basis in the partnership interest is $60,000. The partnership distributes cash of $32,000 and two parcels of land (each with a fair market value of $10,000). Parcel A has a basis of $2,000 to the partnership and Parcel B has a basis of $6,000. Jonathon's basis in the two parcels of land is:

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. 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?

Michelle receives a proportionate liquidating distribution when the basis of her partnership interest is $50,000. The distribution consists of $58,000 cash and noninventory property (adjusted basis to the partnership of $10,000 and fair market value of $12,000). The partnership has no hot assets. How much gain or loss does Michelle recognize, and what is her basis in the distributed property?

ACME Partnership has had the following gross receipts since its formation: $21.8 million in 2018, $24.6 million in 2019, $28.8 million in 2020, $21.6 million in 2021, and $32 million in 2022. Partner Meile, Inc. is a C corporation. In what tax years must ACME use the accrual method?