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Exam 20: Forming and Operating Partnerships

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Question 21

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ER General Partnership, a medical supplies business, states in its partnership agreement that Erin and Ryan agree to split profits and losses according to a 40/60 ratio. Additionally, the partnership will provide Erin with a $15,000 guaranteed payment for services she provides to the partnership. ER Partnership reports the following revenues, expenses, gains, losses, and distributions for its current taxable year: *The land is a Section 1231 asset. Given these items, answer the following questions: A. Compute Erin's share of ordinary income (loss)and separately stated items. Include her self-employment income as a separately stated item. B. Compute Erin's self-employment income but assume ER Partnership is a limited partnership and Erin is a limited partner. C. Compute Erin's self-employment income but assume ER Partnership is an LLC and Erin is personally liable for half of the debt of the LLC. Apply the IRS's proposed regulations in formulating your answer.

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A. Erin's share of ordinary income (loss...

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Question 22

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Jordan, Incorporated, Bird, Incorporated, Ewing, Incorporated, and Barkley, Incorporated, formed Nothing-But-Net Partnership on June 1^st, 20X9. Now, Nothing-But-Net 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 Nothing-But-Net use, and what rule requires this year-end?

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Because the partners all have different ...

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Question 23

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Greg, a 40percent partner in GSS Partnership, contributed land to the partnership in exchange for his partnership interest when the partnership was formed. At the time, his basis in the land was $30,000 and its FMV was $133,000. Three years after the partnership was formed, GSS Partnership decided to sell the land to an unrelated party for $150,000. When the land is sold, how much of the gain should be allocated to each partner of GSS Partnership if Sam and Steve are each 30percent partners?

Sarah, Sue, and AS Incorporated formed a partnership on May 1, 20X9, called SSAS, LP. Now that the partnership is formed, they must determine its appropriate year-end. Sarah has a 30percent profits and capital interest while Sue has a 35percent profits and capital interest. Both Sarah and Sue have calendar year-ends. AS Incorporated holds the remaining profits and capital interest in the LP, and it has a September 30 year-end. What tax year-end must SSAS, LP, use for 20X9, and which test or rule requires this year-end?

Partnerships can request up to a six-month extension by filing IRS Form 7004 prior to the original due date of the partnership return.

When must a partnership file its return?

J&J, LLC, was in its third year of operations when J&J decided to expand the number of members from two, A and B, with equal profits and capital interests, to three members, A, B, and C. The third member, C, will contribute her financial expertise to the LLC in exchange for a one-third capital interest in J&J. Given the balance sheet below reflecting the financial position of J&J on the date member C is admitted, what are the tax consequences to members A, B, and C, and to J&J, when C receives her capital interest? If, instead, member C receives a one-third profits interest, what would be the tax consequences to members A, B, and C, and to J&J?

Erica and Brett decide to form their new motorcycle business as an LLC. Each will receive an equal profits (loss) interest by contributing cash, property, or both. In addition to the members' contributions, their LLC will obtain a $43,000 nonrecourse loan from First Bank at the time it is formed. Brett contributes cash of $3,600 and a building he bought as a storefront for the motorcycles. The building has an FMV of $38,000 and an adjusted basis of $23,000 and is secured by a $28,000 nonrecourse mortgage that the LLC will assume. What is Brett's outside tax basis in his LLC interest?

The main difference between a partner's tax basis and at-risk amount is that qualified nonrecourse financing is not included in the at-risk basis amount.

Ruby's tax basis in her partnership interest at the beginning of the partnership's tax year was $14,275. The following items were included in her Schedule K-1 from the partnership for the year: 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. Further, assume that Ruby and her husband, Gerald, are not involved in any other trade or business and that they file a joint return every year.

On January 1, X9, Gerald received his 50percent 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?

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

Which of the following does not represent a tax election available to either partners or partnerships?

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

This year, Reggie's distributive share from Almonte Partnership includes $25,000 of interest income, $21,000 of dividend income, and $77,000 of ordinary business income. A. Assume that Reggie materially participates in the partnership. How much of his distributive share from Almonte Partnership is potentially subject to the net investment income tax? B. Assume that Reggie does not materially participate in the partnership. How much of his distributive share from Almonte Partnership is potentially subject to the net investment income tax?

Partnership tax rules incorporate both the entity and aggregate approaches.

Alfred, a one-third profits and capital partner in Pizzeria Partnership, needs help in adjusting his tax basis to reflect the information contained in his most recent Schedule K-1 from the partnership. Unfortunately, the Schedule K-1 he recently received was for Year 3 of the partnership, but Alfred only knows that his tax basis at the beginning of Year 2 of the partnership was $23,400. Thankfully, Alfred still has his Schedule K-1 from the partnership for Years 1 and 2. Using the following information from Alfred's Year 1, Year 2, and Year 3 Schedule K-1, calculate his tax basis the end of Year 2 and Year 3.

The least aggregate deferral test uses the profit percentage of each partner to determine the minimum amount of tax deferral for the partner group as a whole in determining the permissible tax year-end of a partnership.

Which requirement must be satisfied in order to specially allocate partnership income or losses to partners?

Under proposed regulations issued by the Treasury Department, in which of the following situations should an LLC member be treated as a general partner for self-employment tax purposes?