Question 1

A partnership sells equipment and recognizes depreciation recapture under Sec. 1245. In reporting its results for the year, the partnership will separately state the Sec. 1245 depreciation recapture.

Accepted Answer

False

Question 2

The basis of a partnership interest is equal to the sum of money contributed plus the FMV of the property transferred to the partnership.

Accepted Answer

False

Question 3

The partnership's assumption of a liability from a partner is treated as a cash distribution to the partner whose liability is assumed, which decreases his basis in the partnership.

Accepted Answer

When a partnership assumes a liability of a partner, it is considered as a cash distribution to that partner. As a result, the partner's basis in the partnership decreases. This is because the partner is no longer considered personally liable for that debt, and his equity interest in the partnership decreases accordingly.

Question 4

If a partner contributes inventory to the partnership in exchange for a partnership interest, the holding period for the partnership interest begins on the date the inventory was acquired by the transferor partner.

Accepted Answer

The answer of If a partner contributes inventory to the...

Question 5

In a limited partnership, the limited partners are liable for partnership debts only to the extent of their investment in the partnership plus any amount they commit to contribute to the partnership if called upon.

Accepted Answer

Limited partners have limited liability, meaning their personal assets are not at risk for partnership debts beyond their investment and any committed contributions. However, the general partner(s) are fully liable for all partnership debts.

Question 6

Because a partnership is a pass-through entity rather than a taxable entity, partnerships need not file tax returns.

Accepted Answer

Partnerships are required to file an information tax return, Form 1065, even though the partnership itself is not taxed. The information on this return is used to determine each partner's share of the income, deductions, and credits of the partnership, which are then reported on their individual tax returns.

Question 7

If a partner contributes property to a partnership, and that property is subject to a liability, the noncontributing partners increase the basis of their partnership interests by their share of the partnership liabilities that were transferred to the partnership.

Accepted Answer

When a partner contributes property that is subject to a liability to a partnership, the noncontributing partners' basis in their partnership interests is increased by their share of the partnership liabilities assumed by the partnership. This is known as the "liability allocation method."

Question 8

An LLC that elects to be taxed like a partnership is also classified as a partnership for legal purposes.

Accepted Answer

The answer of An LLC that elects to be taxed...

Question 9

The income of a single member LLC is taxed to its owner under the sole proprietorship rules if no election to be taxed as a corporation is made.

Accepted Answer

This is correct as per the default taxation rules for a single-member LLC. The owner reports the income and expenses of the LLC on their personal tax return using Schedule C, just like a sole proprietor. However, the owner can choose to be taxed as a corporation by filing Form 8832.

Question 10

If a partner contributes depreciable property to a partnership in exchange for a partnership interest, the depreciation recapture potential of the contributed assets does not carry over to the partnership.

Accepted Answer

The depreciation recapture potential of the contributed assets does carry over to the partnership. The partnership will be subject to recapture rules upon disposition of those assets.

Question 11

The primary purpose of a partnership tax return is to determine the income, deduction, loss and credit items of the partnership and thus the amounts that should be reported by the individual partners.

Accepted Answer

The primary purpose of a partnership tax return is to determine the income, deduction, loss and credit items of the partnership and allocate them to the individual partners based on their ownership percentage. This information is then used by the individual partners to report their share of the partnership's income, deductions, losses and credits on their own tax returns. Therefore, statement A is true.

Question 12

When property is contributed to a partnership, the partnership's basis in the property is the same as that of the transferor partner even if gain is recognized on the transfer.

Accepted Answer

The partnership's basis in contributed property is generally equal to the basis the transferor partner had in the property, even if the transferor partner recognized a gain on the transfer. This is known as the carryover basis rule.

Question 13

Although a partner's distributive share of income, deductions, losses, and credits is generally determined by partnership agreement, special allocation provisions restrict the partners' freedom to shift some tax benefits among partners.

Accepted Answer

Special allocation provisions are set by the Internal Revenue Code and restrict the partners' ability to shift tax benefits without a valid business reason.

Question 14

All costs of organizing a partnership can be deducted in the year in which the partnership begins business.

Accepted Answer

The costs of organizing a partnership cannot be fully deducted in the year the partnership begins business. Instead, they must be amortized (deducted over time) over the life of the partnership.

Question 15

The transfer of property to a partnership in exchange for a partnership interest will generally be a nontaxable event.

Accepted Answer

This is generally true, as long as the transfer meets certain requirements and qualifies under the tax code. However, there are exceptions and limitations to this rule, so it is important to consult with a tax professional for guidance on specific situations.

Question 16

A partnership sells an asset for a gain. The asset had been transferred to the partnership two years ago by Partner J in exchange for a partnership interest. The asset was worth substantially more than its cost as of the transfer date. The partnership gain will allocated to all of the partners in accordance with their profit and loss sharing ratios.

Accepted Answer

The answer of A partnership sells an asset for a...

Question 17

Pass-through entities are taxed at only one level-the ownership level.

Accepted Answer

Pass-through entities (such as partnerships, S corporations, and limited liability companies) are not subject to entity-level taxation. Instead, their income is "passed through" to their owners, who include it on their individual tax returns and pay taxes on it at their individual tax rates. Therefore, pass-through entities are taxed at only one level-the ownership level.

Question 18

Under the "check-the-box" Treasury Regulations, an LLC with more than one member is treated as a partnership unless the LLC affirmatively elects to be classified as a corporation.

Accepted Answer

Under the "check-the-box" Treasury Regulations, an LLC with more than one member is automatically treated as a partnership unless the LLC affirmatively elects to be classified as a corporation.

Question 19

When capital or Sec. 1231 assets are transferred to a partnership in exchange for a partnership interest qualifying under Sec. 721, the holding period for the partnership interest includes the holding period of the contributed property.

Accepted Answer

The holding period for the partnership interest received in exchange for a contribution of a capital or Sec. 1231 asset includes the holding period of the contributed property, according to Sec. 1223(2) and Treasury Regulation 1.721-1(c)(5).

Question 20

A contribution of services to a partnership will result in recognition of compensation to the contributing partner equal to the fair market value of the services as well as an increase in partnership basis to the extent of the income recognized.

Accepted Answer

When a partner contributes services to a partnership, the fair market value of those services is recognized as compensation to the contributing partner. This compensation is taxable to the partner as ordinary income. Additionally, the partnership’s basis in its assets is increased by the amount of income recognized, up to the fair market value of the services contributed. This increase in basis can be important in determining each partner’s share of the partnership’s profits and losses, as well as their basis in their partnership interest.

Quiz 17: Partnerships and S Corporations