Deck 10: Partnership Taxation

Question 1

An equal partnership is formed by Rita and Gerry. Rita contributes cash of $10,000 and a building with a fair market value of $150,000, adjusted basis of $55,000, and subject to a liability of $60,000. Gerry contributes cash of $100,000. What is Rita's basis in her partnership interest immediately after formation of the partnership?

A)$25,000
B)$35,000
C)$65,000
D)$70,000
E)None of these

Answer 1

B

Question 2

Leslie contributes a building worth $88,000, with an adjusted basis of $40,000, to a partnership in exchange for a 50 percent interest in the partnership's capital and profits. What is the amount of Leslie's basis in her partnership interest immediately after the contribution?

A)$20,000
B)$40,000
C)$44,000
D)$88,000
E)None of these

Answer 2

B

Question 3

A partner's interest in a partnership is decreased by:

A)Capital gains of the partnership.
B)Distributions from the partnership.
C)Taxable income of the partnership.
D)Additional contributions by the partner.
E)None of these

Answer 3

B

Question 4

An equal partnership is formed by Rita and Gerry. Rita contributes cash of $10,000 and a building with a fair market value of $150,000, adjusted basis of $55,000 and subject to a liability of $60,000. Gerry contributes cash of $100,000. What is the partnership's basis in the building contributed by Rita?

A)$55,000
B)$60,000
C)$90,000
D)$150,000
E)None of these

Question 5

On July 1 of the current year, Bertram acquired a 25 percent interest in Sycamore Company, a partnership, by contributing property with an adjusted basis of $7,000 and a fair market value of $12,000. The property was subject to a mortgage of $8,000, which was assumed by Sycamore Company. What is Bertram's basis in his partnership interest in Sycamore Company immediately after the partnership contribution?

A)$0
B)$1,000
C)$7,000
D)$12,000
E)None of these

Question 6

For the following separate, independent situations indicate with a "Yes" if a partnership return needs to be filed. Mark with a "No" if a partnership return is not required.
a. Tony and Gina form a joint venture to import goods from South Korea.
b. Nancy decided to start her own private investigative business.
c. Uncle Pennybag's estate assets are pooled together until they can be distributed
to the beneficiaries.
d. Howie, Dewey, and Cheatem form an LLC.
e. Flora, Fauna, and Merryweather start a child care business. No official documents
are drawn up.

Question 7

The basis of a partner's interest in a partnership is increased by losses of the partnership allocated to the partner.

Question 8

On July 1 of the current year, Ambrose was admitted to the partnership of Ambrose and Nectar. His contribution to capital consisted of 500 shares of stock in Paniculata Corporation, which he bought in 2015 for $10,000 and which had a fair market value of $50,000 on July 1 of the current year. Ambrose's interest in the partnership's capital and profits is 25 percent. On July 1 of the current year, the fair market value of the partnership's net assets (after Ambrose was admitted) was $200,000. What is Ambrose's taxable gain in the current year on the exchange of stock for his partnership interest?

A)$0 gain or loss
B)$40,000 ordinary income
C)$40,000 long-term capital gain
D)$40,000 Section 1231 gain
E)None of these

Question 9

If Margo and Bruce purchase and operate an ice cream store, for tax purposes they have formed a partnership.

Question 10

In general, income is recognized by the partner when a partnership interest is received in exchange for services rendered to the partnership.

Question 11

Jack and Jill decided to pool their money and start a water delivery business. Since they trust each other so much, they did not draw up any legal documents for the business. During the first year of business, they earned $50,000 which was net of $10,000 paid to Jill as a guaranteed payment. During the second year of business, they decided to limit their liability exposure by forming an LLC.
a. Was a partnership formed during the first year?
b. If a partnership was formed, how much income will be taxed at the partnership level?
c. For the second year, do they need to file a partnership tax return?

Question 12

Which one of the following is not true about partnerships?

A)There must be two or more owners.
B)General partners assume more risk of legal liability than limited partners.
C)An LLC limits certain liability risks.
D)A partnership is taxed like a corporation.
E)All of these are true

Question 13

The holding period of property contributed to a partnership includes the period of time that the contributor has held the property.

Question 14

Income from a partnership is taxed to the partner only if the partner receives the income as a distribution during the year.

Question 15

Which of the following statements is true about partnerships?

A)The formation of a general partnership must be documented in writing.
B)An LLC is generally treated as a partnership for tax law purposes.
C)General partners have no liability for partnership obligations beyond their capital contributions.
D)When Sue and Billy Bob invest in land together, they are considered to have formed a partnership.

Question 16

An equal partnership is formed by Rita and Gerry. Rita contributes cash of $10,000 and a building with a fair market value of $150,000, adjusted basis of $55,000, and subject to a liability of $60,000. Gerry contributes cash of $100,000. What amount of gain must Rita recognize as a result of this transaction?

A)$95,000
B)$35,000
C)$5,000
D)$0
E)None of these

Question 17

During the current year, Norman contributed investment property held for over one year to the Mary Ann Partnership for a 40 percent interest in partnership capital and profits. His tax basis in the property contributed was $8,000, and the property had a fair market value of $10,000 on the date of the contribution to the partnership. What gain or loss should Norman report as a result of the contribution of the property to the partnership in exchange for the 40 percent partnership interest?

A)No gain or loss
B)$2,000 long-term capital gain
C)$2,000 ordinary income
D)$10,000 long-term capital gain
E)None of these

Question 18

Sabrina contributes a building with an adjusted basis of $80,000 to a partnership. The fair market value of the building is $100,000 on the date of the contribution. What is Sabrina's basis in her partnership interest immediately after the contribution?

A)$0
B)$40,000
C)$80,000
D)$100,000
E)None of these

Question 19

Because a partnership does not pay taxes, a partnership is not recognized as a legal entity under civil law.

Question 20

Loretta contributes property to a partnership in exchange for a 25 percent partnership interest. The property contributed has a fair market value of $45,000 and a basis of $35,000 on the date of the contribution to the partnership. In addition, Loretta receives a 10 percent partnership interest, valued at $18,000, in exchange for services rendered to the partnership. What is Loretta's basis in her partnership interest, immediately after these transactions?

A)$35,000
B)$45,000
C)$53,000
D)$63,000
E)None of these

Question 21

A partnership reports its income on Form 1040.

Question 22

Oscar and Frank form an equal partnership, the O and F Partnership. Oscar contributes land with an adjusted basis of $45,000, subject to a mortgage of $100,000, in exchange for a partnership interest worth $250,000. Frank contributes cash of $100,000 and performs services for the partnership in exchange for a partnership interest worth $250,000.
a.What is the amount of Oscar's recognized gain or loss (if any) as a result of the contribution to the partnership in exchange for the partnership interest?
b.What is Oscar's basis in his partnership interest immediately after the contribution?
c.What is the amount of Frank's recognized income or loss (if any) as a result of the receipt of the partnership interest in exchange for the cash and services?
d.What is the partnership's basis in the land received from Oscar?

Question 23

Jennifer has a 25 percent interest in the Aspen Aircraft partnership. Her basis in her partnership interest is $10,000 at the beginning of the year. The partnership reported the following activity for the year: What is Jennifer's basis in her partnership interest at the end of the year?

Question 24

Please answer the following questions:
a.What form is used to report income and expenses from a partnership?
b.If a partner's basis at the beginning of the year is $1,000 and the partnership allocates $7,000 of loss to the partner: how much of the loss is deductible in the current year; what is his new basis in the partnership; and what happens to any excess loss not deducted?
c.What is the exemption amount for a partnership?

Question 25

A partnership must separately report Section 1231 gains and losses rather than including them in ordinary taxable income.

Question 26

A partnership may deduct a single personal exemption in calculating ordinary taxable income or loss.

Question 27

For tax purposes, in computing the ordinary income of a partnership, a deduction is allowed for:

A)Payments to partners, determined without regard to the income of the partnership, for services provided to the partnership.
B)The net operating loss deduction.
C)Contributions to charitable organizations.
D)Personal exemptions of the partners.
E)None of these

Question 28

Partnership income is taxed at the same tax rates as the income of corporations.

Question 29

Which of the following statements about partnerships is true?

A)Partnerships must file their tax returns on a calendar year basis.
B)No gain or loss is ever recognized in transactions between partners and a partnership.
C)Gain is never recognized by a partner on a contribution of property to a partnership.
D)A partner's initial basis in a partnership interest is equal to the basis of the property transferred (plus cash contributed) to the partnership, adjusted for any gain recognized on the transfer and reduced for liabilities assumed by the other partners.
E)The partnership's basis in property contributed by a partner is equal to the fair market value of the property on the date of the transfer.

Question 30

Cooke and Thatcher form the C&T Partnership. Cooke contributes equipment with a fair market value of $70,000 and a basis of $35,000, in exchange for a 70 percent interest in the partnership capital and profits. Thatcher performs services worth $30,000 for the partnership in exchange for a 30 percent interest in capital and profits.
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a.What is the amount of Cooke's recognized gain or loss (if any) as a result of the contribution to the partnership in exchange for the partnership interest?
b.What is Cooke's basis in his partnership interest immediately after the contribution?
c.What is the amount of Thatcher's recognized income or loss (if any) on the contribution to the partnership?
d.What is Thatcher's basis in her partnership interest immediately after the contribution?
e.What is C&T Partnership's basis in the equipment received from Cooke?

Question 31

The partnership of Felix and Oscar had the following items of income during the current tax year: $$\begin{array} { l r } \text { Income from operations } & \$ 157,000 \\\text { Tax-exempt interest income } & 8,000 \\\text { Dividend income } & 6,000\end{array}$$ What is the total ordinary income from business activities passed through by the partnership for the current tax year?

A)$156,000
B)$157,000
C)$165,000
D)$110,000
E)None of these

Question 32

Which of the following items must be reported separately from ordinary income or loss on a partnership return?

A)Capital losses
B)Miscellaneous income
C)Cost of goods sold
D)Sales income
E)None of these

Question 33

A partner contributes assets with a basis of $50,000 and a fair market value of $80,000 to a partnership. What is the basis of the property to the partnership and what is the general rule for the basis of appreciated property contributed to a partnership?

Question 34

A partnership may not show a loss as a result of deducting guaranteed payments made to the partners.

Question 35

Nash and Ford are partners who share profits and losses equally. For the current tax year, the partnership had book income of $70,000 which included the following deductions: Guaranteed payments to partners:
$\begin{array}{lr}\text { Nash } & \$ 35,000 \\\text { Ford } & 25,000 \\\text { Charitable contributions } & 5,000\end{array}$ What amount should be reported as ordinary income on the partnership return for the current tax year?

A)$75,000
B)$85,000
C)$130,000
D)$135,000
E)None of the above

Question 36

Partnership losses that are not used because a partner's basis in the partnership interest is zero may not be carried forward and are lost by the partner.

Question 37

Guaranteed payments made by a partnership must be made to individuals other than partners in the partnership.

Question 38

Which one of the following is not true about partnerships and their income-reporting process?

A)The partnership must file a Form 1065.
B)The partner's share of income/loss is presented on Schedule K-1.
C)A partner's deductible loss is limited to basis in the partnership.
D)The partnership pays income tax.
E)All of these are true.

Question 39

The partnership of Truman and Hanover realized the following items of income during the current tax year: $\begin{array}{lr}\text { Net income from operations } & \$ 65,000 \\\text { Dividends received from domestic corporations } & 4,000 \\\text { Interest income on corporate bonds } & 3,000 \\\text { Net long-term capital gains } & 5,000 \\\text { Net short-term capital gains } & 1,000\end{array}$ Both the partners are on a calendar year basis. What is the total income which should be reported as ordinary income from business activities of the partnership for the current tax year?

A)$0
B)$65,000
C)$69,000
D)$71,000
E)None of these

Question 40

Jamie decides to contribute cash and property to a partnership she and her friends started. She contributes a building worth $260,000 that has an adjusted basis of $100,000 and she also contributes $40,000 in cash. What is her basis in the partnership?

A)$100,000
B)$140,000
C)$260,000
D)$300,000
E)None of these

Question 41

Ownership of a partnership interest by a taxpayer's brother is considered indirect ownership by the taxpayer.

Question 42

Lucky's original contribution to the Boxwood Partnership was land with a basis of $5,000 and a market value of $55,000. Her share of the taxable income from the partnership since her original contribution has been $95,000 and Lucky has received $45,000 in cash distributions from the partnership. Lucky did not recognize any gains as a result of the distributions. Calculate Lucky's current basis in her partnership interest.

Question 43

A distribution of cash to a partner was greater than his basis in the partnership. How would this distribution be treated by the partner, assuming the distribution is not a liquidating distribution?

Question 44

Debbie and Betty operate the D & B partnership. Betty, a 50 percent partner, receives a guaranteed payment of $10,000 for her services in operating the partnership. The partnership has income before the guaranteed payment of $5,000. What is the taxable income Debbie and Betty must each report from the partnership for the year?
Debbie should report income of $__________.
Betty should report income of $__________.

Question 45

Guaranteed payments received from a partnership are included in the income of the partner receiving the payments on a cash basis, without regard to the partnership's tax year.
Guaranteed payments received from a partnership are included in the income of the partner receiving the payments on a cash basis, without regard to the partnership's tax year.Guaranteed payments received from a partnership are included in the income of the partner receiving the payments on a cash basis, without regard to the partnership's tax year.

Question 46

Jordan files his income tax return on a calendar-year basis. He is the principal partner of a partnership reporting on a June 30 fiscal year end basis. Jordan's share of the partnership's ordinary income was $24,000 for the fiscal year ended June 30, 2019, and $72,000 for the fiscal year ended June 30, 2020. How much should Jordan report on his 2019 individual income tax return as his share of taxable income from the partnership?

A)$24,000
B)$36,000
C)$48,000
D)$72,000
E)None of these

Question 47

Phil and Bill each own a 50 percent interest in P&B Interests. P&B Interests has ordinary income for the year of $35,000 before guaranteed payments to Phil. If Phil receives guaranteed payments of $20,000 during the tax year, what is the total income or loss that should be reported by Bill from the partnership for this tax year?

A)$5,000 income
B)$7,500 income
C)$25,000 income
D)$30,000 income
E)None of these

Question 48

Assuming that a partnership normally has a calendar year-end, what should the tax year-end be in the following independent cases?
a. Jim, a 70 percent partner, sells his partnership interest to Fred on August 10.
b. On July 13, the partnership sells its office building and moves its business across town.
c. June buys a 15 percent interest in the partnership on May 14.
d. The partnership goes out of business on February 26.

Question 49

In December of 2019, Ms. Havisham and Pip form a wedding planning business. They each own 50 percent of the partnership. The partnership establishes a September 30th year-end since most weddings are during the summer. Therefore, the partnership's initial year-end is September 30, 2020. For the month of December 2019, the partnership made a net income of $3,000 after Ms. Havisham's guaranteed payment of $1,000. From January through September of 2020, the partnership made a net income of $65,000 after a $1,500 per month guaranteed payment to Ms. Havisham.
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a. How much income should Ms. Havisham report for 2019?
b. How much income should Ms. Havisham report for 2020?

Question 50

A partnership will terminate and its tax year will close if the partnership ceases to carry on any business activity.

Question 51

Cypress Road is a partnership with two partners, Saul, a 60 percent partner, and Robbie, a 40 percent partner. The partnership has income for the year of $100,000 before guaranteed payments to Robbie. Guaranteed payments of $50,000 are paid to Robbie for his management services during the year. Calculate the amount of income that should be reported by Saul and Robbie from the partnership for the year.
Saul should report income of $__________.
Robbie should report income of $__________.

Question 52

Lilac Designs is a partnership with a tax year that ends November 30, 2019. During that year, William, a partner, received $4,000 per month as a guaranteed payment and his share of partnership income after guaranteed payments was $20,000. For December of 2019, William received a guaranteed payment of $10,000. Calculate the amount of income from the partnership that William should report for his tax year ended December 31, 2019.

Question 53

Salix Associates is a partnership with an October 31 year-end. For the fiscal year ended October 31, 2019, Salix Associates reported ordinary income of $100,000, after deducting guaranteed payments. Max, a calendar year taxpayer, is a 30 percent partner in the partnership and received $2,000 monthly as a guaranteed payment for the calendar year 2018, and $2,100 monthly for the calendar year 2019. What is the total income from the partnership that Max should report on his 2019 individual income tax return?

A)$30,000
B)$54,200
C)$55,000
D)$55,200
E)None of these

Question 54

Jim's basis in his partnership is $200,000. His share of the current year partnership income is $60,000. The partnership paid him a $75,000 distribution in the current year. What is his new basis in the partnership at the end of the year and what is his taxable income from the partnership?

A)$200,000; $75,000
B)$260,000; $60,000
C)$140,000; $60,000
D)$185,000; $60,000
E)$185,000; $135,000

Question 55

A partnership generally must adopt the same tax year as its majority partners.

Question 56

Under which of the following circumstances would a partnership terminate and close its tax year?

A)Divorce of a partner
B)Cessation of business activities by the partnership
C)Entry of a new partner
D)Distribution of property to a 10 percent partner in complete termination of the partner's interest in the partnership
E)None of these

Question 57

Barbara receives a current distribution consisting of $2,000 cash plus other property with an adjusted basis to the partnership of $2,300 and a fair market value on the date of the distribution of $7,000. Barbara has a 10 percent interest in the partnership and her basis in her partnership interest, immediately prior to the distribution, is $5,000. What is Barbara's basis in the noncash property received in the current distribution?

A)$2,000
B)$2,300
C)$3,000
D)$7,000
E)None of these

Question 58

Losses on transactions between a partnership and its partners are always disallowed.

Question 59

If a partner has a more than 50 percent interest in a partnership, a capital gain resulting from the sale of property by the partner to the partnership will be taxed as ordinary income to the partner, provided the property is not a capital asset to the partnership.

Question 60

The tax year of a partnership generally closes upon entry of a new 20% partner.

Question 61

Wallace and Pedersen have equal interests in the capital and profits of the partnership of Wallace and Pedersen. They are otherwise unrelated to each other. On August 1, 2019, Wallace sold 100 shares of Kalmia Mining Corporation to the partnership for its fair market value of $7,000. Wallace had bought the stock in 2010 at a cost of $10,000. What is Wallace's deductible loss for 2019 as a result of the sale of this stock?

A)$0
B)$1,500 long-term capital loss
C)$3,000 long-term capital loss
D)$3,000 ordinary loss
E)None of these

Question 62

Which of the following liabilities would be considered nonrecourse?

A)A bank loan for which the taxpayer is personally liable.
B)Credit card debt.
C)A $20,000 real estate loan which allows the bank to take the real estate if the taxpayer stops making payments on the loan.
D)All of these are non-recourse liabilities.

Question 63

Limited liability companies may operate in more than one state.

Question 64

List three benefits of an LLC.

Question 65

Which of the following is true about an LLC (Limited Liability Company)?

A)An LLC is always treated like a corporation for tax purposes.
B)An LLC must have at least two members.
C)An LLC is always taxed like a partnership.
D)An LLC's limited liability is similar to a corporation's.
E)All of these are false.

Question 66

A partner's receipt of guaranteed payments is a form of qualified business income.

Question 67

There is no general partner required in a limited liability company (LLC).

Question 68

Josh is a 30% partner in the Ghost Partnership. Ghost paid W-2 wages of $100,000 and also made a guaranteed payment to Josh of $20,000. The amount includable as wages in Josh's wage limitation on his QBI deduction is:

A)$0.
B)$30,000.
C)$50,000.
D)$100,000.

Question 69

At the beginning of the year, Joe's basis in his partnership interest was $5,000. During the year, Joe contributed $10,000 in cash to the partnership and signed a bank loan to be personally liable for the partnership's debt of $25,000. For the current year, the partnership allocated a loss of $60,000 to Joe. In the following year, Joe's portion of the partnership income is $30,000. Which of the following is accurate?

A)In the following year, Joe's reportable taxable income from the partnership is $10,000.
B)Joe's basis in his partnership at the end of the current year is $15,000.
C)Joe may deduct all of the $60,000 loss in the current year.
D)Joe may carry over a $45,000 loss to the following year.

Question 70

Which of the following is a not true about an LLC?

A)LLCs are not required to have a general partner.
B)LLC members can participate in the management of the business.
C)Taxable income and losses pass through to the owners.
D)An LLC must have at least two members.

Question 71

Kitty is a 60 percent partner of Tabby Associates. Kitty sells a building to the partnership for $75,000. If the building had an adjusted basis to Kitty of $95,000, how much gain or loss does Kitty recognize on this transaction?

A)$95,000 loss
B)$20,000 loss
C)$0 gain or loss
D)$20,000 gain
E)None of these

Question 72

The "at-risk" rule does not apply to activities involving real estate.

Question 73

During the current year, Jay is a partner in an automobile dealership. Jay's amount at risk at the beginning of the year is $90,000, and during the current year Jay's share of the dealership's ordinary loss is $120,000.
a.What is the amount of the loss from the automobile dealership that Jay may deduct in the current year?
b.If the dealership has a profit of $63,000 in the subsequent year, how much of the subsequent year income is taxable to Jay?

Question 74

The "at-risk" rule acts to prevent tax shelters from generating large losses for their investors while exposing them to little personal risk.

Question 75

Owen owns 60 percent of the Big Time partnership. He sells to the partnership a machine for $70,000 that has a $45,000 basis. What would the taxable income be for Owen and what is the partnership's basis in the machine?

A)$25,000; $45,000
B)$0; $45,000
C)$25,000; $70,000
D)None of these is correct

Question 76

Mario and Luigi are brothers and they are equal partners in Pipes of Your Dreams Plumbing. Mario sells his fancy sports car to the business for $40,000. Mario's basis in the car is $45,000.
a. What is the amount of Mario's recognized gain or loss on this transaction, and what is the nature of the gain or loss?
b. If the partnership later sells the sports car for $55,000, how much of the gain is recognized?

Question 77

The "at-risk" rule applies, with limited exceptions, to all taxable activities.

Question 78

Barry owns a 50 percent interest in B&B Interests, a partnership. His brother, Benny, owns a 35 percent interest in that same partnership, and the remaining 15 percent is owned by an unrelated individual. During the current year, Barry sells a rental property with a basis of $60,000 to B&B Interests for $100,000. The partnership intends to hold the rental as inventory for resale. What is the amount and nature of Barry's gain or loss on this transaction?

A)$40,000 long-term capital loss
B)$0 gain or loss
C)$40,000 long-term capital gain
D)$40,000 ordinary income
E)None of these

Question 79

Losses are disallowed for transactions between a partnership and a partner who has a 50 percent interest in the partnership.