Question 1

Which person would generally be treated as a material participant in an activity?

Accepted Answer

A) A participant in a rental activity. 
B) A limited partner. 
C) A LLC member not involved with management of the LLC. 
D) A general partner.

Question 2

Which of the following does not represent a tax election available to either partners or partnerships?

Accepted Answer

A) Electing to change an accounting method. 
B) Electing to amortize organization costs. 
C) Electing to expense a portion of syndication costs. 
D) Electing to immediately expense depreciable property under Section 179.

Question 3

Partnerships tax rules incorporate both the entity and aggregate approaches.

Accepted Answer

A) True 
 B)False

Question 4

Actual or deemed cash distributions in excess of a partner's outside basis are generally taxable as capital gains.

Accepted Answer

A) True 
 B)False

Question 5

Jay has a tax basis of $14,000 in his partnership interest at the beginning of the partnership tax year.The following amounts of partnership debt were allocated to Jay and are included in his beginning of the year tax basis: (1)recourse debt - $3,000,(2)qualified nonrecourse debt - $1,000,and (3)nonrecourse debt - $500.There were no changes to the debt allocated to Jay during the tax year.  If Jay is allocated a $15,000 loss for the current year,how much of the loss will be suspended under the tax basis and at-risk limitations?

Accepted Answer

A) $500,$1,000. 
B) $1,000,$500. 
C) $0,$0. 
D) $14,000,$1,000.

Question 6

The least aggregate deferral test uses the profit percentage of each partner to determine the minimum amount of tax deferral for the partner group as a whole in determining the permissible tax year-end of a partnership.

Accepted Answer

A) True 
 B)False

Question 7

If partnership debt is reduced and a partner is deemed to receive a cash distribution,what impact does the deemed distribution have on the partner if it is in excess of her tax basis?

Accepted Answer

A) The partner will treat the distribution in excess of her basis as ordinary income. 
B) The partner will treat the distribution in excess of her basis as capital gain. 
C) The partner will not ever be taxed on the distribution in excess of her basis. 
D) The partner will not be taxed on the distribution in excess of her basis until she sells her partnership interest.

Question 8

The character of each separately stated item is determined at the partner level.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements is true when property is contributed in exchange for a partnership interest?

Accepted Answer

A) Any contributed property in a partnership has a carryover basis,and the character of the property is determined by the way the contributing partner used the property. 
B) The partnership's inside basis is typically increased by any gain the partner recognizes from the property contribution. 
C) The holding period for a partner's partnership interest depends upon the type of assets a partner contributes. 
D) Services are not allowed to be contributed to a partnership in return for a partnership interest. 
E) All of the choices are true.

Question 10

Tim,a real estate investor,Ken,a dealer in securities,and Hardware,Inc.,a retail lumber store form a partnership called HKT,LP.HKT is in the home building business.Tim recently purchased his interest in HKT while the other partners purchased their interest several years ago.During X3,HKT reports a $12,000 gain from the sale of a stock in a wholesale lumber company it purchased in X1 for investment purposes.Which of the following statements best represents how their portion of the gain should be reported to the partner?

Accepted Answer

A) Tim - Short-term capital gain. 
B) Ken - Ordinary Income. 
C) Hardware,Inc.- Long-term capital gain. 
D) All of the choices accurately report the gain to the partner. 
E) None of the choices accurately report the gain to the partner.

Question 11

Which of the following statements exemplifies the entity theory of partnership taxation?

Accepted Answer

A) Partnerships are taxable entities. 
B) Partnerships determine the character of separately stated items at the partnership level. 
C) Partnerships make the majority of the tax elections. 
D) Both Partnerships are taxable entities and Partnerships make the majority of the tax elections. 
E) Both Partnerships determine the character of separately stated items at the partnership level and Partnerships make the majority of the tax elections.

Question 12

Zinc,LP was formed on August 1,20X9.When the partnership was formed,Al contributed $10,000 in cash and inventory with a FMV and tax basis of $40,000.In addition,Bill contributed equipment with a FMV of $30,000 and adjusted basis of $25,000 along with accounts receivable with a FMV and tax basis of $20,000.Also,Chad contributed land with a FMV of $50,000 and tax basis of $35,000.Finally,Dave contributed a machine,secured by $35,000 of debt,with a FMV of $15,000 and a tax basis of $10,000.What is the total inside basis of all the assets contributed to Zinc,LP?

Accepted Answer

A) $140,000. 
B) $165,000. 
C) $175,000. 
D) $200,000.

Question 13

Sue and Andrew form SA general partnership.Each person receives an equal interest in the newly created partnership.Sue contributes $10,000 of cash and land with a FMV of $55,000.Her basis in the land is $20,000.Andrew contributes equipment with a FMV of $12,000 and a building with a FMV of $33,000.His basis in the equipment is $8,000,and his basis in the building is $20,000.How much gain must the SA general partnership recognize on the transfer of these assets from Sue and Andrew?

Accepted Answer

A) $0. 
B) $4,000. 
C) $48,000. 
D) $52,000.

Question 14

For partnership tax years ending after December 31,2015,when must a partnership file its return?

Accepted Answer

A) By the 15ᵗʰ day of the 3ʳᵈ month after the partnership's tax year end. 
B) By the 5ᵗʰ month after the original due date if an extension is filed. 
C) By the 15ᵗʰ day of the 4ᵗʰ month after the partnership's tax year end. 
D) By the 15ᵗʰ day of the 3ʳᵈ month after the partnership's tax year end and by the 5ᵗʰ month after the original due date if an extension is filed. 
E) By the 5ᵗʰ month after the original due date if an extension is filed and by the 15ᵗʰ day of the 4ᵗʰ month after the partnership's tax year end.

Question 15

A partner's outside basis must first be decreased by any negative basis adjustments and then increased by any positive basis adjustments.

Accepted Answer

A) True 
 B)False

Question 16

Why are guaranteed payments deducted in calculating the ordinary business income (loss)of partnerships and treated as a separately-stated item for the partners that receive the payment?

Accepted Answer

The answer of Why are guaranteed payments deducted in calculating...

Question 17

Does adjusting a partner's basis for tax-exempt income prevent double taxation?

Accepted Answer

A) Yes,if this basis adjustment is not made the partner will be taxed once when the income is allocated to him and a second time when he sells his partnership interest. 
B) Yes,if this basis adjustment is not made the partner will be taxed on the tax-exempt income when he sells his partnership interest and again if the tax-exempt income exceeds $10,000. 
C) No,making this adjustment to the partner's basis prevents the tax-exempt income from being converted to taxable income. 
D) No,the partner should not adjust his tax basis by his share of tax-exempt income.

Question 18

Fred has a 45% profits interest and 30% capital interest in the SAP Partnership and his tax basis before considering his share of SAP's current year loss is $11,000.Included in his tax basis is a $2,600 share of recourse debt and $5,300 share of nonrecourse debt.Fred is a limited partner in SAP.He is not involved in any other activities.If SAP has a $15,000 ordinary loss for the year,how much of the loss can be deducted currently,and how much of the loss is suspended because of the tax basis,the at-risk,and the passive activity loss limitations?

Accepted Answer

The answer of Fred has a 45% profits interest and...

Question 19

Which of the following items are subject to the Net Investment Income tax when an individual partner is a material participant in the partnership?

Accepted Answer

A) Partner's distributive share of dividends. 
B) Partner's distributive share of interest. 
C) Partner's distributive share of ordinary business income. 
D) Both Partner's distributive share of dividends and Partner's distributive share of interest.

Question 20

A partner's self-employment earnings (loss)may be affected by her share of ordinary business income (loss)and any guaranteed payments she receives.The impact of these amounts typically depends on the status of the partner.Which of the following statements correctly describes the effect these items have on the partner's self-employment earnings (loss)?

Accepted Answer

A) General partner - only guaranteed payments affect self-employment earnings (loss). 
B) General partner - ordinary business income (loss)and guaranteed payments affect self-employment earnings (loss). 
C) Limited partner - only guaranteed payments affect self-employment earnings (loss). 
D) Limited partner - only ordinary business income (loss)affects self-employment income (loss). 
E) Both General partner - ordinary business income (loss)and guaranteed payments affect self-employment earnings (loss)and Limited partner - only guaranteed payments affect self-employment earnings (loss).

Exam 14: Forming and Operating Partnerships

Which person would generally be treated as a material participant in an activity?

Which of the following does not represent a tax election available to either partners or partnerships?

Partnerships tax rules incorporate both the entity and aggregate approaches.

Actual or deemed cash distributions in excess of a partner's outside basis are generally taxable as capital gains.

The least aggregate deferral test uses the profit percentage of each partner to determine the minimum amount of tax deferral for the partner group as a whole in determining the permissible tax year-end of a partnership.

If partnership debt is reduced and a partner is deemed to receive a cash distribution,what impact does the deemed distribution have on the partner if it is in excess of her tax basis?

The character of each separately stated item is determined at the partner level.

Which of the following statements is true when property is contributed in exchange for a partnership interest?

Which of the following statements exemplifies the entity theory of partnership taxation?

For partnership tax years ending after December 31,2015,when must a partnership file its return?

A partner's outside basis must first be decreased by any negative basis adjustments and then increased by any positive basis adjustments.

Why are guaranteed payments deducted in calculating the ordinary business income (loss)of partnerships and treated as a separately-stated item for the partners that receive the payment?

Does adjusting a partner's basis for tax-exempt income prevent double taxation?

Which of the following items are subject to the Net Investment Income tax when an individual partner is a material participant in the partnership?