Question 1

A gain will only arise on a distribution from a partnership of cash that exceeds the partner's basis in the partnership interest. For this purpose, only cash, checks, and credit card charges are treated as cash.

Accepted Answer

A) True 
 B)False  False

Question 2

Which of the following is not a specific adjustment to the partners' basis in the partnership interest?

Accepted Answer

A)   Increased by contributions the partner made to the partnership.
B)   Decreased by the amount of guaranteed payments shown on the partner's Schedule K-1.
C)   Increased by the partner's share of tax-exempt income.
D)   Decreased by any decrease in the partner's share of partnership liabilities.
E)   Increased by the partner's share of separately stated income items. B

Question 3

Serena owns a 40% interest in the RST LLP. Partnership assets consist of land (fair market value of $100,000, basis of $80,000), accounts receivable (fair market value of $120,000, basis of $0), and cash of $180,000. Serena sells her interest in RST to Jaclyn for cash of $140,000. In addition, Jaclyn assumes Serena's $40,000 share of the LLP's liabilities. Serena's basis in the partnership interest (including her share of the partnership's liabilities) is $120,000 immediately before the sale.
a. How much gain or loss does Serena recognize and what is its character?
b. What is Jaclyn's basis in the partnership interest?
c. If the LLP has a § 754 election in effect, how much is the adjustment and to which partner(s) is it allocated?

Accepted Answer

a. Serena recognizes a gain of $60,000, including ordinary income of $48,000 and a capital gain of $12,000. She received $140,000 plus relief of $40,000 of liabilities for a total of $180,000. Her basis in the LLP interest was $120,000, resulting in a net gain of $60,000. Of this gain, she reports ordinary income in the amount of her share of the LLP's unrealized receivables, or $48,000 ($120,000 × 40%).
The remaining gain is a capital gain.
b. Jaclyn's basis equals the $180,000 paid, including the $40,000 share of the LLP's liabilities.
c. If the LLP has a § 754 election in effect, it records an adjustment of $76,000 {$180,000 paid - $104,000 share of inside basis [($80,000 + $0 + $180,000) ×40%]}. This step up is allocated to Jaclyn.

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

Julie and Kate form an equal partnership during the current year. Julie contributes cash of $200,000, and Kate contributes property (adjusted basis of $90,000, fair market value of $260,000) subject to a nonrecourse liability of $60,000. As a result of these transactions, Kate has a basis in her partnership interest of $120,000.

Accepted Answer

A) True 
 B)False

Question 6

The taxable income of a partnership flows through to the partners, who report the income on their tax returns.

Accepted Answer

A) True 
 B)False

Question 7

Tim, Al, and Pat contributed assets to form the equal TAP Partnership. Tim contributed cash of $40,000 and land with a basis of $80,000 (fair market value of $60,000). Al contributed cash of $60,000 and land with a basis of $50,000 (fair market value of $40,000). Pat contributed cash of $60,000 and a fully depreciated property ($0 basis) valued at $40,000. Which of the following tax treatments is not correct?

Accepted Answer

A)   Tim's basis in his partnership interest is $120,000.
B)   Al realizes and recognizes a loss of $10,000.
C)   Pat realizes a gain of $40,000 but recognizes $0 gain.
D)   TAP has a basis of $80,000, $50,000, and $0 in the land and property (excluding cash)  contributed by Tim, Al, and Pat, respectively.
E)   All of these statements are correct.

Question 8

Connie owns a one-third capital and profits interest in the calendar-year CDB Partnership. Her adjusted basis for her partnership interest was $120,000 when she received a proportionate current (nonliquidating) distribution of the following assets.
  
a. Calculate Connie's recognized gain or loss on the distribution, if any.
b. Calculate Connie's basis in the land received.
c. Calculate Connie's basis for her partnership interest after the distribution.

Accepted Answer

The answer of Connie owns a one-third capital and profits...

Question 9

A partnership deducts all of its interest expense on Form 1065, page 1.

Accepted Answer

A) True 
 B)False

Question 10

PaulCo, DavidCo, and Sean form a partnership with cash contributions of $80,000, $50,000 and $30,000, respectively, and agree to share profits and losses in the ratio of their original cash contributions. PaulCo uses a January 31 fiscal year-end, while DavidCo and Sean use a November 30 and December 31 year-end, respectively. The partnership must use the least aggregate deferral method to determine its year end.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is correct regarding partnership or C corporation tax rates?

Accepted Answer

A)   Partners pay tax on their distributive shares of income at 37%.
B)   Partners pay a single tax on their distributive shares of income at the tax rate that applies to the partner's situation.
C)   C corporations pay a single level of tax on corporate income at rates up to 35%.
D)   C corporations pay tax at 21% and the shareholders pay a second tax of 37% when dividends are distributed.

Question 12

In the current year, Derek formed an equal partnership with Cody. Derek contributed land with an adjusted basis of $110,000 and a fair market value of $200,000. Derek also contributed $50,000 cash to the partnership. Cody contributed land with an adjusted basis of $80,000 and a fair market value of $230,000. The land contributed by Derek was encumbered by a $60,000 nonrecourse debt. The land contributed by Cody was encumbered by $40,000 of nonrecourse debt. Assume the partners share debt equally. Immediately after the formation, what is the basis of Cody's partnership interest?

Accepted Answer

The answer of In the current year, Derek formed an...

Question 13

The partnership agreement might provide, for example, that the first $40,000 of ordinary income is allocated to Partner A.
Allocating income in this manner is an example of a separately stated item.

Accepted Answer

A) True 
 B)False

Question 14

Carli contributes land to the newly formed CD Partnership in exchange for a 30% interest. The land has an adjusted basis and fair market value of $300,000 and is subject to a liability of $100,000, which the partnership assumes. None of this liability is repaid at year-end. At the end of the year, the partnership has trade accounts payable of $20,000. Assume all liabilities are allocated proportionately to the partners. Total partnership income for the year is $400,000. What is Carli's basis in her partnership interest at the end of the year?

Accepted Answer

The answer of Carli contributes land to the newly formed...

Question 15

The qualified business income deduction is calculated at the partner level. The partnership reports information the partner needs to calculate the deduction, such as W-2 wages and the unadjusted basis of the partnership's depreciable property.

Accepted Answer

A) True 
 B)False

Question 16

Patricia is a 25% owner and an active member in the PBK LLC, which operates a "qualified trade or business" for purposes of the deduction under § 199a. Patricia's distributive share of "qualified income" from the LLC is $250,000 for the year (the LLC's income is $1,000,000). Her share of the LLC's W-2 wages is $40,000, plus she received a guaranteed payment for services of $30,000. Her share of the LLC's "unadjusted basis immediately after acquisition of qualified property" is $1,200,000. How much is her qualified business income for this separate trade or business?

Accepted Answer

A)   $20,000.
B)   $35,000.
C)   $40,000.
D)   $47,500.
E)   $50,000.

Question 17

The amount of a partnership's income and loss from operating activities is combined with separately stated income and expenses to determine the partnership's equivalent of "taxable income." This amount is reconciled to book income on the partnership's Schedule M-1 or Schedule M-3.

Accepted Answer

A) True 
 B)False

Question 18

In a proportionate liquidating distribution of his 40% interest in the RST LLC, Stuart received cash ($100,000), land (basis of $60,000 and value of $90,000), and unrealized receivables (basis of $0 and value of $40,000). In addition, Stuart is relieved of his $80,000 share of the LLC's liabilities. Stuart's basis in RST (including his share of LLC liabilities) was $200,000 immediately prior to this distribution.
a. How much gain or loss does Stuart recognize on this distribution?
b. What is Stuart's basis in the receivables and land he receives in the distribution?

Accepted Answer

The answer of In a proportionate liquidating distribution of his...

Question 19

The sum of the partners' ending basis amounts on all Schedules K-1 equals the partners' ending capital account balance shown on the partnership's Schedule L.

Accepted Answer

A) True 
 B)False

Question 20

Tom and William are equal partners in the TW Partnership. Just before TW liquidated, Tom's capital account balance was $50,000 and William's capital account balance was $30,000. To meet the substantial economic effect requirements, any liquidating cash distribution must be allocated in proportion to those ending capital account balances.

Accepted Answer

A) True 
 B)False

Exam 21: Partnerships

A gain will only arise on a distribution from a partnership of cash that exceeds the partner's basis in the partnership interest. For this purpose, only cash, checks, and credit card charges are treated as cash.

Which of the following is not a specific adjustment to the partners' basis in the partnership interest?

The taxable income of a partnership flows through to the partners, who report the income on their tax returns.

A partnership deducts all of its interest expense on Form 1065, page 1.

Which of the following statements is correct regarding partnership or C corporation tax rates?

The partnership agreement might provide, for example, that the first $40,000 of ordinary income is allocated to Partner A. Allocating income in this manner is an example of a separately stated item.

The qualified business income deduction is calculated at the partner level. The partnership reports information the partner needs to calculate the deduction, such as W-2 wages and the unadjusted basis of the partnership's depreciable property.

The amount of a partnership's income and loss from operating activities is combined with separately stated income and expenses to determine the partnership's equivalent of "taxable income." This amount is reconciled to book income on the partnership's Schedule M-1 or Schedule M-3.

The sum of the partners' ending basis amounts on all Schedules K-1 equals the partners' ending capital account balance shown on the partnership's Schedule L.