Question 1

All of the following statements are true regarding nonliquidating distributions of a partnership except

Accepted Answer

This statement is incorrect. In certain circumstances, a partner or the partnership may need to recognize gain or loss from a nonliquidating distribution, such as when the distribution is made from a disproportionate distribution of hot assets (assets with built-in gains or losses).

Question 2

Joey and Bob each have a 50% interest in a Partnership.Both Joey and the partnership file returns on a calendar-year basis.Partnership Q had a $12,000 loss in 2018.Joey's adjusted basis in his partnership interest on January 1,2018,was $5,000.In 2019,the partnership had a profit of $10,000.Assuming there were no other adjustments to Joey's basis in the partnership,what amount of partnership income (loss)should Joey show on his 2018 and 2019 individual income tax returns?

Accepted Answer

In 2018, Joey can only deduct a loss up to his basis of $5,000. In 2019, he can recognize his share of the profit, which is $5,000, but he can only use $4,000 of it to offset the suspended loss from 2018, resulting in a net income of $4,000.

Question 3

Priya is a partner in a partnership.The partnership has incurred a loss for the year.Priya's ability to recognize the loss will be tested in the following order:

Accepted Answer

The order in which a partner can recognize a loss in a partnership is determined by the basis limitations and the passive and excess business loss limitations. The basis limitations are calculated first, followed by the passive loss limitations, and then the excess business loss limitations. Therefore, Priya's ability to recognize the loss will be tested in the following order: (1) basis limitations, (2) passive loss limitations, and (3) excess business loss limitations. Choice B is the best choice as it follows this order correctly.

Question 4

Brittany receives a nonliquidating distribution of $48,000 cash from her partnership.Brittany's basis in her partnership interest prior to the distribution is $25,000.What are the tax consequences of the distribution?

Accepted Answer

The distribution is a return of capital up to Brittany's basis of $25,000, reducing her basis to $0. The excess $23,000 is a capital gain.

Question 5

Ben is a 30% partner in a partnership.The partnership guarantees Ben payments of $25,000 for the year.If the partnership has ordinary income of $15,000 before adjustment for the guaranteed payment,Ben must report

Accepted Answer

The answer of Ben is a 30% partner in a...

Question 6

MN Partnership has two equal partners,Mark and Nadia.In the current year,the MN earns $140,000 of ordinary business income and a $30,000 long-term capital gain.Nadia is single.In addition to the partnership items,she reports $40,000 of interest income and a long-term capital loss of $13,000 from her personal investment accounts.Nadia does not itemize her deductions.Calculate Nadia's 2019 taxable income.

Accepted Answer

The answer of MN Partnership has two equal partners,Mark and...

Question 7

Joy is a material participant in a partnership.Her basis in her partnership interest is $150,000.Due to a major expansion,the partnership will generate a significant loss this year,and Joy's share is expected to be $200,000.The partners expect the partnership to report a large profit next year.Joy is in the top tax bracket this year,and she expects to be in a lower tax bracket next year.Due to her higher marginal tax rate this year,Joy would like to deduct her full share of the partnership loss this year.What strategies can she employ before year-end to assure full deduction of this year's loss?

Accepted Answer

By making a loan or contributing capital to the partnership before year-end, Joy can increase her basis in her partnership interest, which will allow her to deduct her full share of the partnership loss this year.

Question 8

On July 1,Joseph,a 10% owner,sells his interest in ABC Partnership to Andy,an outsider,for $165,000 cash and the release from $20,000 of partnership liabilities.Joseph's partnership interest at the beginning of the year was $120,000.The partnership earned income through June 30 of $100,000.Joseph's share of partnership liabilities increased by $5,000 from January 1 to June 30.What are the tax consequences to Joseph on the sale of his partnership interest (assume the partnership does not hold any inventory or unrealized receivables)?

Accepted Answer

The answer of On July 1,Joseph,a 10% owner,sells his interest...

Question 9

Jamahl has a 65% interest in a partnership.Jamahl sells land to the JK partnership for $70,000.Prior to the sale,the land had a FMV of $70,000 and an adjusted basis of $90,000 to Jamahl.Two years later,the partnership sells the land for $123,000.Due to the sale,the partnership will recognize

Accepted Answer

Jamahl's 65% interest in the partnership means he owns 65% of the land sold to the partnership. Therefore, he sells 65% of the land to the partnership for $70,000.

The FMV of the land was also $70,000 at the time of the sale, so there was no gain or loss recognized by the partnership at the time of the sale.

However, since the adjusted basis of the land to Jamahl was $90,000, he incurred a loss of $20,000 on the sale. Jamahl can use this loss to offset any capital gains he may have.

Two years later, the partnership sells the land for $123,000, resulting in a gain of $53,000 ($123,000 - $70,000 - $0).

Since Jamahl owns a 65% interest in the partnership, he will recognize a gain of $34,450 ($53,000 x 0.65). Therefore, the answer is C) a gain of $33,000.

Question 10

Iris and Jeong file a joint return.Iris is an executive with a corporation,earning a $800,000 salary.Jeong is a 50% partner in JK Partnership.He works full-time in the partnership.Jeong's basis in his partnership interest at the beginning of the year is $1 million.In the current year,the partnership reports an ordinary loss of $1.2 million,half of which is allocated to Jeong.There were no separately stated items,no distributions made and no changes in liabilities.Iris and Jeong earned $100,000 of dividend income from their investment portfolio.They do not itemize deductions.
a.Determine 2019 taxable income for Iris and Jeong.
b.Discuss the treatment of any income or loss items not recognized in 2019.

Accepted Answer

The answer of Iris and Jeong file a joint return.Iris...

Question 11

Explain the difference between expenses of organizing a partnership and expenses of syndicating a partnership and the difference in their tax treatment.

Accepted Answer

The answer of Explain the difference between expenses of organizing...

Question 12

Cal and Ann are a married couple filing a joint return.Ann earns a $700,000 salary as a bank executive.The couple has $150,000 of interest and dividend income.Cal is a 50% partner and material participant in CD Partnership.CD has incurred a $1.5 million ordinary loss in 2019,and Cal's share is $750,000.Cal's basis is large enough to absorb the loss.With respect to the partnership loss,the couple will deduct

Accepted Answer

The couple can deduct $510,000 of the partnership loss due to the passive activity loss rules and the limitation on losses for non-corporate taxpayers. The Tax Cuts and Jobs Act limits the deduction of excess business losses to $250,000 for single filers and $500,000 for joint filers, plus any net business income. Here, the couple can deduct $500,000 plus $10,000 of net business income (from interest and dividends), totaling $510,000.

Question 13

Lars has a basis in his partnership interest in XXL of $100,000.He sells the partnership interest in XXL for $160,000.XXL is a cash-basis partnership which has accounts receivable with a $30,000 fair market value and a zero adjusted basis.Lars's share of these receivables is $10,000.What is the amount and character of the gain that Lars recognizes on the sale of his partnership interest?

Accepted Answer

Lars has a basis in his partnership interest of $100,000 and sells it for $160,000, resulting in a $60,000 capital gain. However, he also has a share of the partnership's accounts receivable, which have a fair market value of $30,000 but a zero adjusted basis. When he sells his partnership interest, he is required to recognize the gain on the receivables as ordinary income. Lars's share of the receivables is $10,000, so he will recognize $10,000 of ordinary income in addition to the $60,000 capital gain, resulting in a total recognized gain of $70,000, of which $10,000 is ordinary income and $60,000 is capital gain. Therefore, the correct answer is C.

Question 14

Atiqa receives a nonliquidating distribution of land from her partnership.The partnership purchased the land five years ago for $20,000.At the time of the distribution,it is worth $28,000.Prior to the distribution,Atiqa's basis in her partnership interest is $37,000.Atiqa's basis in the distributed land and her post-distribution basis in her partnership interest are

Accepted Answer

In a nonliquidating distribution, the basis of the distributed property is the lesser of the partnership's basis in the property ($20,000) or the partner's basis in the partnership interest ($37,000). Therefore, Atiqa's basis in the land is $20,000. Her post-distribution basis in her partnership interest is her original basis ($37,000) minus the basis of the distributed land ($20,000), which equals $17,000.

Question 15

Ariel receives from her partnership a nonliquidating distribution of $9,000 cash plus a parcel of land.The partnership had purchased the land five years ago for $20,000,but it is worth $28,000 at the time of the distribution.Ariel's predistribution basis is $17,000.How much income will Ariel recognize due to the distribution,and what is her basis in the land?

Accepted Answer

Ariel recognizes no income on a nonliquidating distribution. Her basis in the land is her remaining basis after the cash distribution: $17,000 - $9,000 = $8,000.

Question 16

Which of the following assets may cause a partner to recognize ordinary income rather than capital gain on the sale of a partnership interest?

Accepted Answer

If the partnership holds inventory, the sale of the partnership interest will result in ordinary income for the partner, rather than capital gain. This is because inventory is considered to be primarily attributable to the ordinary income of the partnership. The other assets listed (land, marketable securities, buildings placed in service after 1986) would generally result in capital gain treatment upon the sale of a partnership interest.

Question 17

Jamahl has a 65% interest in a partnership.Jamahl sells land to the partnership for $70,000.Prior to the sale,the land had a FMV of $70,000 and an adjusted basis of $90,000 to Jamahl.Due to the sale,Jamahl will recognize

Accepted Answer

Jamahl will not recognize any loss on the sale of land to the partnership because he owns more than 50% of the partnership, making it a related party transaction. Losses are not recognized in such transactions.

Question 18

Which of the following statements regarding the Sec.754 adjustment is incorrect?

Accepted Answer

The Sec.754 election is made by the partnership only once, and the election remains in effect until revoked. It is not made annually.

Question 19

Atiqa receives a nonliquidating distribution of land from her partnership.The partnership purchased the land five years ago for $20,000.At the time of the distribution,it is worth $28,000.Prior to the distribution,Atiqa's basis in her partnership interest is $37,000.Due to the distribution,Atiqa and the partnership will recognize income of

Accepted Answer

In a nonliquidating distribution, neither the partner nor the partnership recognizes gain or loss. The distribution is generally tax-free, and Atiqa's basis in the partnership interest is reduced by the partnership's basis in the distributed property.

Question 20

Sandy and Larry each have a 50% interest in SL Partnership.The partnership and the individuals file on a calendar-year basis.In 2018,SL Partnership had a $30,000 ordinary loss.Sandy's adjusted basis in her partnership interest on January 1,2018,was $12,000.In 2019,SL Partnership had ordinary income of $20,000.Assuming there were no other adjustments to Sandy's basis in the partnership,what amount of partnership income (loss)would Sandy show on her 2018 and 2019 individual income tax returns?

Accepted Answer

In 2018, Sandy can only deduct a loss up to her basis of $12,000. In 2019, her share of the income is $10,000, but she can only recognize $7,000 to offset the remaining suspended loss.

Quiz 33: Partnerships and S Corporations