Question 1

A partnership terminates for tax purposes

Accepted Answer

A)  when at least 50% of the total interest in partnership capital and profits changes hands by sale or exchange within twelve consecutive months. 
B)  only when it terminates under local partnership law. 
C)  when a partnership tax return (Form 1065) ceases to be filed by the partnership. 
D)  when the sale of partnership assets is made only to an outsider(s) and not to an existing partner(s).

Question 2

A partner's holding period for property distributed as a current distribution begins on the date of distribution.

Accepted Answer

A) True 
 B)False

Question 3

The AB, BC, and CD Partnerships merge into the ABCD Partnership. AB (owned by Austin and Ben) contributes assets worth $100,000. BC (owned by Ben and Charlie) contributes assets worth $200,000. CD (owned by Charlie and Dennis) contributes assets worth $300,000. The capital and profits interest in ABCD is owned by: Austin, 10%; Ben, 30%; Charlie, 25%; and Dennis, 35%. ABCD Partnership is a continuation of

Accepted Answer

A)  CD. 
B)  BC. 
C)  AB. 
D)  none of the partnerships.

Question 4

When a retiring partner receives payments that exceed the value of that partner's partnership property, the excess payment is a guaranteed payment.

Accepted Answer

A) True 
 B)False

Question 5

Brown Company recently has been formed as a limited liability company (LLC). Brown Company is owned equally by three individuals-Gene, Susan, and Sandra-all of whom have substantial income from other sources. Brown is a manufacturing firm and expects to earn approximately $130,000 of ordinary income and
$30,000 of long- term capital gain each year for the next several years. Gene will be a full- time manager and will receive a salary of $60,000 each year. What tax issues should the owners consider regarding the LLC's initial year of operations?

Accepted Answer

The answer of Brown Company recently has been formed as...

Question 6

Marc is a calendar- year taxpayer who owns a 30% capital and profits interest in the MN Partnership. Nancy sells the remaining 70% capital and profits interest to Henry on October 31. The partnership year- end is March 31 as permitted by the IRS for business purpose reasons. The MN Partnership

Accepted Answer

A)  terminates on October 31. 
B)  terminates on December 31. 
C)  does not terminate. 
D)  terminates on March 31.

Question 7

A partner can recognize gain, but not loss, on a liquidating distribution.

Accepted Answer

A) True 
 B)False

Question 8

Sally is a calendar- year taxpayer who owns a 30% capital and profits interest in the SEM Partnership. Eric sells the remaining 70% capital and profits interest to Michelle on October 3. The partnership year- end is March 31 as permitted by the IRS for business purposes. Which of the following statements is correct?

Accepted Answer

A)  Sally must conform her tax year with the partnership tax year. 
B)  The new partnership is a continuation of the old partnership. 
C)  Sally's tax return will include partnership distributive shares for periods ending March 31 and October 3. 
D)  Sally's tax return will include a partnership distributive share only for the period ending March 31.

Question 9

A partner's holding period for a partnership interest is never considered when determining the holding period for property distributed in a liquidating distribution.

Accepted Answer

A) True 
 B)False

Question 10

Two years ago, Tom contributed investment land with a basis of $50,000 and an FMV of $62,000 to the RST Partnership. This year, Tom has a basis in his partnership interest of $53,000 when he receives a current distribution of $14,000 cash and inventory with a basis of $35,000 and an FMV of $52,000. (There is no Sec. 751 exchange in connection with the inventory distribution.) The partnership continues to hold the land Tom contributed. How much gain (if any) must Tom recognize as a result of this distribution?

Accepted Answer

The answer of Two years ago, Tom contributed investment land...

Question 11

A partnership terminates for federal income tax purposes if

Accepted Answer

A)  within a 12- month period, there is a sale or exchange of at least 50% of the total interest in partnership capital and profits. 
B)  a general partner who owns a majority interest dies. 
C)  state partnership law terminates the partnership. 
D)  a partnership interest of more than 50% is gifted.

Question 12

The HMS Partnership, a cash method of accounting entity, has the following balance sheet at December 31 of last year: $$\begin{array} { | l | r | c | } 
\hline  { \text { Assets } } & \text { Basis } & \text { Fair Market Value } \
\hline \text { Cash } & \$ 51,000 & \$ 51,000 \
\text { Accounts receivable } & { 0 }& { 210,000 } \
 \text { Total } & \underline { \$ 51,000 } & \$ 261,000 \
\hline
\end{array}$$ 
 $\begin{array}{|l|l|l|}
\hline\text { Equities } & \text { Basis } & \text { Fair Market Value } \
\hline \text { Notes payable } & \$ 30,000 & \$ 30,000 \
\text { Henry, capital } & 7,000 & 77,000 \
\text { Mark, capital } & 7,000 & 77,000 \
\text { Sam, capital } & \underline{\mathbf{7 , 0 0 0}} & \underline{\mathbf{7 7 , 0 0 0}} \
\text { Total } &\$ 51,000 & \underline{\$ 261,000}\\hline
\end{array}$ Sam, who has a one- third interest in profits, losses, and liabilities, sells his partnership interest to Beverly, for
$77,000 cash on January 1 of this year. Sam's basis in his partnership interest (which, of course, includes a share of partnership liabilities) at the time of the sale was $17,000. In addition, Beverly assumes Sam's share of the partnership liabilities. What is the amount and character of the gain that Sam will recognize from this sale?

Accepted Answer

The answer of The HMS Partnership, a cash method of...

Question 13

David sells his one- third partnership interest to Diana for $60,000 when his basis in the partnership interest is
$48,000. On the date of sale, the partnership has no liabilities and the following assets: $\begin{array}{lcc}
\text { Assets } & \text { Basis } & \text { FMV } \
\text { Cash } & \$ 40,000 & \$ 40,000\
\text { Inventory } & 18,000 & 27,000 \
\text { Building } & 75,000 & 102,000 \
\text { Land } & 11,000 & 11,000
\end{array}$ The building is depreciated on a straight- line basis. What tax issues should David and Diana consider with resp to the sale transaction?

Accepted Answer

The answer of David sells his one- third partnership interest...

Question 14

Rod owns a 65% interest in the RRR Partnership, a general partnership, which he sells to the two remaining partners - Roger and Regis. The three partners have agreed that Rod will receive $160,000 in cash from the sale. Rod's basis in the partnership interest before the sale is $125,000, which includes his $35,000 share of partnership recourse liabilities. The partnership has assets with a $310,000 FMV and a $210,000 adjusted basis. What issues should Rod, Roger, and Regis consider before this sale takes place?

Accepted Answer

The answer of Rod owns a 65% interest in the...

Question 15

What is the character of the gain/loss on the sale of a partnership interest?

Accepted Answer

The answer of What is the character of the gain/loss...

Question 16

If a partnership asset with a deferred precontribution gain is distributed within seven years of acquisition in a nonliquidating distribution to a partner who did not contribute the asset, the precontribution gain must be recognized by the contributing partner.

Accepted Answer

A) True 
 B)False

Question 17

Bart has a partnership interest with a $32,000 basis. He receives a current distribution of $6,000 cash, unrealized receivables (FMV $9,000, basis $10,000), inventory (FMV $8,000, basis $4,000), investment land (FMV $7,000, basis $4,000), and building (FMV $20,000, basis $8,000). No depreciation recapture applies with respect to the building. The partners' relative interests in the Sec. 751 assets do not change as a result of the current distribution. Bart's basis in the building is

Accepted Answer

A)  $4,000. 
B)  $3,000. 
C)  $8,000. 
D)  $6,000.

Question 18

Sean, Penelope, and Juan formed the SPJ partnership by each contributing assets with a basis and fair market value of $200,000. In the following year, Penelope sold her one- third interest to Pedro for $225,000. At the time o the sale, the SPJ partnership had the following balance sheet: $$\begin{array} { c c c } 
& \text { Basis } & \text { FMV } \
\text { Cash } & \$ 200,000 & \$ 200,000 \
\text { Land } & \$ 400,000 & \$ 475,000 \
& \$ 600,000 & \$ 675,000
\end{array}$$ Shortly after Pedro became a partner, SPJ sold the land for $475,000. What are the tax consequences of the sale to and the partnership (1) assuming there is no Section 754 election in place, and (2) assuming the partnership has a Section 754 election?

Accepted Answer

The answer of Sean, Penelope, and Juan formed the SPJ...

Question 19

Han purchases a 25% interest in the CHOP Partnership from Huang for $600,000. The partnership has assets with a basis of $1,600,000. What is the amount of the basis adjustment, if the partnership has a 754 election in place?

Accepted Answer

A)  $200,000 increase in Han's share of the basis in partnership assets 
B)  $150,000 increase in Han's basis in his partnership interest 
C)  $1,000,000 increase in partnership assets 
D)  $0

Question 20

The AB Partnership has a machine with an FMV of $25,000 and a basis of $20,000. The partnership has taken an $8,000 depreciation on the machine. The unrealized receivable related to the machine is

Accepted Answer

A)  $20,000. 
B)  $0. 
C)  $5,000. 
D)  $8,000.

Exam 10: Special Partnership Issues

A partnership terminates for tax purposes

A partner's holding period for property distributed as a current distribution begins on the date of distribution.

When a retiring partner receives payments that exceed the value of that partner's partnership property, the excess payment is a guaranteed payment.

Marc is a calendar- year taxpayer who owns a 30% capital and profits interest in the MN Partnership. Nancy sells the remaining 70% capital and profits interest to Henry on October 31. The partnership year- end is March 31 as permitted by the IRS for business purpose reasons. The MN Partnership

A partner can recognize gain, but not loss, on a liquidating distribution.

A partner's holding period for a partnership interest is never considered when determining the holding period for property distributed in a liquidating distribution.

A partnership terminates for federal income tax purposes if

What is the character of the gain/loss on the sale of a partnership interest?

If a partnership asset with a deferred precontribution gain is distributed within seven years of acquisition in a nonliquidating distribution to a partner who did not contribute the asset, the precontribution gain must be recognized by the contributing partner.

Han purchases a 25% interest in the CHOP Partnership from Huang for $600,000. The partnership has assets with a basis of $1,600,000. What is the amount of the basis adjustment, if the partnership has a 754 election in place?

The AB Partnership has a machine with an FMV of $25,000 and a basis of $20,000. The partnership has taken an $8,000 depreciation on the machine. The unrealized receivable related to the machine is