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Exam 20: Forming and Operating Partnerships

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Question 1

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Clint noticed that the Schedule K-1 he just received from ABC Partnership included a $20,000 ordinary business loss allocation. His tax basis in ABC at the beginning of ABC's most recent tax year was $10,000. Comparing the Schedule K-1 he recently received from ABC with the Schedule K-1 he received from ABC last year, Clint noted that his share of ABC partnership debt changed as follows: recourse debt increased from $0 to $2,000, qualified nonrecourse debt increased from $0 to $3,000, and nonrecourse debt increased from $0 to $3,000. Finally, the Schedule K-1 Clint recently received from ABC reflected a $1,000 cash contribution he made to ABC during the year. Clint is not a material participant in ABC partnership, and he received $10,000 of passive income from another investment during the same year he received the loss allocation from ABC. How much of the $20,000 loss from ABC can Clint deduct currently, and how much of the loss is suspended because of the tax basis, the at-risk, and the passive activity loss limitations?

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The amount of loss Clint can deduct curr...

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Question 2

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

A) GAAP
B) 704(b)
C) Tax
D) All of these
E) Only GAAP and 704(b)

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

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Question 3

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On March 15, 20X9, Troy, Peter, and Sarah formed Picture Perfect general partnership. This partnership was created to sell a variety of cameras, picture frames, and other photography accessories. When it was formed, the partners received equal profits and capital interests and the following items were contributed by each partner: • Troy - cash of $3,000, inventory with a FMV and tax basis of $5,000, and a building with a FMV of $22,000 and adjusted basis of $10,000. Additionally, the building was secured by a $10,000 nonrecourse mortgage. • Peter - cash of $5,000, accounts payable of $12,000 (recourse debt for which each partner becomes equally responsible), and land with a FMV of $27,000 and tax basis of $20,000. • Sarah - cash of $2,000, accounts receivable with a FMV and tax basis of $1,000, and equipment with a FMV of $40,000 and adjusted basis of $3,500. Sarah also contributed a $23,000 nonrecourse note payable secured by the equipment. What is each partner's outside basis and how much gain (loss) must the partners recognize in 20X9 when Picture Perfect was formed?

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

Gerald received a 33% capital and profit (loss) interest in XYZ Limited Partnership (LP) . In exchange for this interest, Gerald contributed a building with a FMV of $30,000. His adjusted basis in the building was $15,000. In addition, the building was encumbered with a $9,000 nonrecourse mortgage that XYZ, LP assumed at the time the property was contributed. What is Gerald's outside basis immediately after his contribution?

J&J, LLC was in its third year of operations when J&J decided to expand the number of members from two, A & B, with equal profits and capital interests to three members, A, B, andC. The third member, C, will contribute her financial expertise to the LLC in exchange for a 1/3 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 1/3 profit interest, what would be the tax consequences to members A, B, and C, and to J&J? $\begin{array}{|cccccccccccccccccccc|}\hline&&&&&\text{J\&.J Limited Liability Company}\\\hline&&&&&\text{Balance Sheet}&&&&&&&&&&&&\end{array}$ $\begin{array}{|l|r|r|l|r|r|}\hline & {\text { Basis }} & {\text { FMV }} & & {\text { Basis }} & {\text { FMV }} \\\hline \text { Cash } & 20,000 & 20,000 & \text { Accounts Payable } & 7,000 & 7,000 \\\hline \text { Inventory } & 5,000 & 5,000 & \text { Mortgage Payable } & 20,000 & 20,000 \\\hline \text { Equipment } & 10,000 & 17,000 & & & \\\hline \text { Building } & 30,000 & 45,000 & \text { A - Capital } & 22,000 & 30,000 \\\hline &&&\text { B - Capital } & 16,000 & 30,000 \\\hline &&&&&\\\hline \text { Total Assets } & 65,000 & 87,000 & \text { Total Liab. \& OE } & 65,000 & 87,000 \\\hline\end{array}$

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

On April 18, 20X8, Robert sold his 35 percent partnership interest in Fruit Wonder, LLC to Richard for $120,000. Prior to selling his interest, Robert had a basis in Fruit Wonder of $80,000. Robert's basis included $5,000 of recourse debt and $15,000 of nonrecourse debt that had been allocated to him. Immediately after the purchase, what is Richard's tax basis in Fruit Wonder?

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.

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% 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. $\begin{array}{c}\begin{array}{lll}\text{Gross receipts from sales}\\\text{Cost of sales}\\\text{Gross profit}\\\\\text{Guaranteed payments to Mr. Blue}\\\text{Interest paid on business debt}\\\text{Dividend income}\\\text{Tax exempt interest}\\\text{Operating expenses}\\\text{Depreciation expense}\\\text{Sec. 1231 Gains}\\\end{array}\begin{array}{lll}&&\end{array}\begin{array}{r}\$ 150,000 \\(\$ 220,000) \\(\$ 70,000) \\\\(\$ 36,000) \\(\$ 3,000) \\\$ 500 \\\$ 1,500 \\(\$ 138,000) \\(\$ 9,000) \\\$ 8,000\\\end{array}\end{array}$

Jordan, Inc., Bird, Inc., Ewing, Inc., and Barkley, Inc. formed Nothing-But-Net Partnership on June 1st, 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? $\begin{array} { | c | } \hline \quad\quad\quad\quad\quad{ \text { Nothing-But-Net Partnership } } \quad\quad\quad\\\end{array}$ $\begin{array} { | c | c | c | c | } \hline & \text { Year-End } & \text { Profits } & \text { Capital } \\\hline \text { Jordan, Inc. } & 4 / 30 & 45 \% & 25 \% \\\hline \text { Bird, Inc. } & 9 / 30 & 25 \% & 25 \% \\\hline \text { Ewing, Inc. } & 10 / 31 & 0 \% & 25 \% \\\hline \text { Barkley, Inc. } & 12 / 31 & 30 \% & 25 \% \\\hline\end{array}$

At the end of year 1, Tony had a tax basis of $40,000 in Tall Ladders, Limited Partnership. Tony has a 20 percent profits interest in Tall Ladders. For year 2, Tall Ladders will pay Tony a $10,000 guaranteed payment for extra services he provides to the partnership. Given the following Income Statement and Balance Sheet from Tall Ladders, what is Tony's adjusted tax basis at the end of year 2?

Under general circumstances, debt is allocated from the partnership to each partner in the following manner:

TQK, LLC provides consulting services and was formed on 1/31/X5. Aaron and ABC, Inc. each hold a 50% capital and profits interest in TQK. If TQK averaged $7,000,000 in annual gross receipts over the last three years, what accounting method can TQK use for X9?

Tax elections are rarely made at the partnership level.

Which of the following items are subject to the Medicare contribution tax when a partner is a not a material participant in the partnership?

What form does a partnership use when filing an annual informational return?

In X1, Adam and Jason formed ABC, LLC, a car dealership in Kansas City. In X2, Adam and Jason realized they needed an advertising expert to assist in their business. Thus, the two members offered Cory, a marketing expert, a 1/3 capital interest in their partnership for contributing his expert services. Cory agreed to this arrangement and received his capital interest in X2. If the value of the LLC's capital equals $180,000 when Cory receives his 1/3 capital interest, which of the following tax consequences does not occur in X2?

Jerry, a partner with 30% capital and profit interest, received his Schedule K-1 from Plush Pillows, LP. At the beginning of the year, Jerry's tax basis in his partnership interest was $50,000. His current year Schedule K-1 reported an ordinary loss of $15,000, long-term capital gain of $3,000, qualifying dividends of $2,000, $500 of non-deductible expenses, a $10,000 cash contribution, and a reduction of $4,000 in his share of partnership debt. What is Jerry's adjusted basis in his partnership interest at the end of the year?

A partner's self-employment earnings (loss) may be affected by her share of ordinary business income (loss) and any guaranteed payments she receives. The impact of these amounts typically depends on the status of the partner. Which of the following statements correctly describes the effect these items have on the partner's self-employment earnings (loss) ?