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Exam 15: Forming and Operating Partnerships

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Question 21

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Which of the following statements regarding a partner's basis adjustments is true?

A) A partner's basis may never be reduced below zero.
B) A partner must adjust his basis for ordinary income (loss) but not for separately stated items.
C) A partnership fine or penalty paid by the partnership does not affect a partner's basis.
D) Relief of partnership debt increases a partner's tax basis.

E) A) and B)
F) B) and D)

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Question 22

Multiple Choice

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On January 1, X9, Gerald received his 50 percent profits and capital interest in High Air, LLC, in exchange for $2,000 in cash and real property with a $3,000 tax basis secured by a $2,000 nonrecourse mortgage.High Air reported a $15,000 loss for its X9 calendar year.How much loss can Gerald deduct, and how much loss must he suspend if he only applies the tax basis loss limitation?

A) $0, $4,000.
B) $0, $7,500.
C) $0, $15,000.
D) $4,000, $0.
E) None of the choices are correct.

F) A) and B)
G) A) and E)

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Question 23

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Guaranteed payments are included in the calculation of a partnership's ordinary business income (loss)and are also treated as separately stated items.

Partners adjust their outside basis by adding nondeductible expenses and subtracting any tax-exempt income to avoid being double taxed.

Which of the following items is subject to the net investment income tax when a partner is not a material participant in the partnership?

Nonrecourse debt is generally allocated according to the profit-sharing ratios of the partnership.

Hilary had an outside basis in LTL General Partnership of $10,000 at the beginning of the year.LTL reported the following items on Hilary's K-1 for the year: ordinary business income of $5,000, a $10,000 reduction in Hilary's share of partnership debt, a cash distribution of $20,000, and tax-exempt income of $3,000.What is Hilary's adjusted basis at the end of the year?

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 an FMV of $55,000.Her basis in the land is $20,000.Andrew contributes equipment with an FMV of $12,000 and a building with an 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?

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

Which of the following statements regarding capital and profits interests received for services contributed to a partnership is false?

How does a partnership make a tax election for the current year?

Partnerships may maintain their capital accounts according to which of the following rules?

Lloyd and Harry, equal partners, form the Ant World Partnership.During the year, Ant World had the following revenue, expenses, gains, losses, and distributions: $\begin{array}{llcc} \text {Cost of Goods sold } & \$85,000\\ \text { Cash Distribution to Harry} &\$15,000\\ \text {Municipal Bond Interest } &\$1,500\\ \text Short-Term Capital Gains{ } &\$4,500\\ \text {Employee Wages } &\$140,000\\ \text {Rent } &\$10,000\\ \text {Charitable Contributions} &\$25,000\\ \text {Sales } &\$175,000\\ \text {Repairs and Maintenance } &\$5,000\\ \text { Long-Term Capital Gains} &\$12,000\\ \text { Fines and Penalties} &\$5,000\\ \text { Guaranteed Payment to Lloyd } &25,000\\\end{array}$ Given these items, what amount of ordinary business income (loss)and what separately stated items should be allocated to each partner for the year?

Which of the following statements regarding the process for determining a partnership's tax year-end is true?

On January 1, 20X9, Mr.Blue and Mr.Grey each contributed $100,000 to form the B&G General Partnership.Their partnership agreement states that they will each receive a 50 percent profits and loss interest.The partnership agreement also provides that Mr.Blue will receive an annual $36,000 guaranteed payment.B&G began business on January 1, 20X9.For its first taxable year, its accounting records contained the following information: $\begin{array}{c}\begin{array}{lll} \text {Gross receipts fromt sales}\\ \text {Cost of sales}\\ \text {Gross profit}\\ \text {Guarariteed paynents to Mr. Blue}\\ \text {Interest paid on business debt}\\ \text {Dividend income}\\ \text {Tax-exerrpt interest}\\ \text {Operating experises}\\ \text {Depreciation expense}\\ \text {Section 1231 gairs}\\\end{array}\begin{array}{lr}\$ & 150,000 \\\$ & (220,000 \\\$ & (70,000 \\\$ & (36,000 \\\$ & (3,000 \\\$ & 500 \\\$ & 1,500 \\\$ & (138,000 \\\$ & (9,000 \\\$ & 8,000 \end{array}\end{array}$ The $3,000 of interest was paid on a $60,000 loan made to B&G by Key Bank on June 30, 20X9.B&G repaid $10,000 of the loan on December 15, 20X9.Neither of the partners received a cash distribution from B&G in 20X9. Complete the following table related to Mr.Blue's interest in B&G partnership: $\begin{array}{llcc} \quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad \text { Item } & \text { Amount} \\ \text { Mr. Blue's ordinary business income (loss) allocation for 20 X 9 } &\\ \text { Mr. Blue's self-ernployment earnings (loss) for 20X9 } &\\ \text { Mr. Blue's tax basis in his B\&G interest on Deceunber \(31,20 X 9\) } &\\\end{array}$

KBL, Inc., AGW, Inc., Blaster, Inc., Shiny Shoes, Inc., and a group of 24 individuals form Shoes Galore General Partnership on October 11, 20X9.Now, Shoes Galore must adopt its required tax year-end.The partners' year-ends, profits interests, and capital interests are reflected in the table below.Given this information, what tax year-end must Shoes Galore use, and what rule requires this year-end? $\begin{array} { l c c c } & { \text { Shoes Galore General Partrership } } & \\& \text { Year-End } & \text { Profits } & \text { Capital } \\\text { KBL, Inc } & 1 / 31 & 25 \% & 25 \% \\\text { AGW, Inc. } & 1 / 31 & 20 \% & 20 \% \\\text { Blaster, Inc } & 3 / 31 & 4 \% & 4 \% \\\text { Shiry Shoes, Inc. } & 6 / 30 & 3 \% & 3 \% \\\text { 24 Individuals } & 12 / 31 & 2 \% \text { each } ( 48 \% \text { total) } & 2 \% \text { each } ( 48 \% \text { total) }\end{array}$

What is the rationale for the specific rules partnerships must follow in determining a partnership's taxable year-end?

Ruby's tax basis in her partnership interest at the beginning of the partnership's tax year was $13,000.The following items were included in her Schedule K-1 from the partnership for the year: $\begin{array}{llcc} \text { Cash Distribution } & \$2,000 \\ \text {Ordinary Business Loss } &\$(14,000)\\ \text { Short-Term Capital Gairs } &\$2,000\\ \text {Reduction in Ruby's Share of Partreeship Debt } &\$4,000\\\end{array}$ Determine what amounts related to these items Ruby will report on her tax return assuming her tax basis and at-risk amount are equal and that she is a material participant in the partnership's activities.

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?

A partnership with a C corporation partner must always use the accrual method as its accounting method.