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Exam 20: Forming and Operating Partnerships

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Question 31

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XYZ, LLC has several individual and corporate members. Abe and Joe, individuals with 4/30 year-ends, each have a 23% profits and capital interest. RST, Inc., a corporation with a 6/30 year end, owns a 4% profits and capital interest while DEF, Inc., a corporation with an 8/30 year end, owns a 4.9% profits and capital interest. Finally, thirty other calendar year-end individual partners (each with less than a 2% profits and capital interest) own the remaining 45% of the profits and capital interests in XYZ. What tax year-end should XYZ use and which test or rule requires this year-end?

A) 4/30, principal partners test
B) 4/30, least aggregate deferral test
C) 12/31, principal partners test
D) 12/31, least aggregate deferral test

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

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Question 32

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Lincoln, Inc., Washington, Inc., and Adams, Inc. form Presidential Suites Partnership on February 15, 20X9. Now, Presidential Suites 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 Presidential Suites use and what rule requires this year-end? $\begin{array}{l}\hline\quad\quad\quad\quad\quad\quad\text { Presidential Suites Partnership }\\\begin{array} { | c | c | c | c | } \hline & \text { Year-End } & \text { Profits } & \text { Capital } \\\hline \text { Lincoln, Inc. } & 3 / 31 & 35 \% & 30 \% \\\hline \text { Washington, Inc. } & 7 / 31 & 30 \% & 40 \% \\\hline \text { Adams, Inc. } & 11 / 30 & 35 \% & 30 \% \\\hline\end{array}\end{array}$

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Because the partners all have different ...

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Question 33

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Which of the following items are subject to the Medicare contribution tax when an individual partner is a material participant in the partnership?

This year, Reggie's distributive share from Almonte Partnership includes $8,000 of interest income, $4,000 of dividend income, and $60,000 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 Medicare contribution tax? A. If Reggie materially participates in the business, the ordinary income is not passive to him and should not be subject to the Medicare contribution tax. The $8,000 of interest income and the $4,000 of dividend income are potentially subject to the Medicare contribution 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 Medicare contribution tax? B. If Reggie is not a material participant in the partnership the $8,000 of interest income, the $4,000 of dividend income, and the $60,000 of ordinary business income are potentially subject to the Medicare contribution tax.

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 amount.

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

Bob is a general partner in Fresh Foods Partnership and is trying to determine if the income reported on his K-1 should be classified as passive or active trade or business income. List three different criteria that, if met, would allow Bob to treat the income from Fresh Foods as active trade or business income.

Fred has a 45% profits interest and 30% capital interest in the SAP Partnership and his tax basis before considering his share of SAP's current year loss is $11,000. Included in his tax basis is a $2,600 share of recourse debt and $5,300 share of nonrecourse debt. Fred is a limited partner in SAP. He is not involved in any other activities. If SAP has a $15,000 ordinary loss for the year, how much of the loss can be deducted currently, and how much of the loss is suspended because of the tax basis, the at-risk, and the passive activity loss limitations?

In each of the independent scenarios below, how does the partner or partnership determine its holding period in the property received? a. A partner contributes property in exchange for a partnership interest b. The partnership receives contributed property c. A partner contributes services in exchange for a partnership interest d. A partner purchases a partnership interest from an existing partner

Which of the following would not be classified as a separately-stated item?

In what order are the loss limitations for partnerships applied?

Tim, a real estate investor, Ken, a dealer in securities, and Hardware, Inc., a retail lumber store form a partnership called HKT, LP. HKT is in the home building business. Tim recently purchased his interest in HKT while the other partners purchased their interest several years ago. During X3, HKT reports a $12,000 gain from the sale of a stock in a wholesale lumber company it purchased in X1 for investment purposes. Which of the following statements best represents how their portion of the gain should be reported to the partner?

Sarah, Sue, and AS Inc. 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 30% profits and capital interest while Sue has a 35% profits and capital interest. Both Sarah and Sue have calendar year-ends. AS Inc. 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?

A purchased partnership interest has a holding period beginning on the date of purchase regardless of the type of property held by the partnership.

Which person would generally be treated as a material participant in an activity?

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. The following items were contributed by each partner in exchange for a 1/3 capital and profits interest: • Troy - cash of $3,000, inventory with a FMV and tax basis $5,000, and a building with a FMV of $8,000 and adjusted basis of $10,000. Additionally, the building is secured by a $10,000 mortgage. • Peter - cash of $5,000, accounts payable with a FMV and tax basis of $19,000, and land with a FMV 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 $26,000 and adjusted basis of 4,000. Also, the equipment is secured by a $23,000 note payable. What is the partnership's inside basis in each asset? How much gain or loss must Picture Perfect recognize? Prepare Picture Perfect's balance sheet reflecting the partners' capital accounts on both a tax basis and 704(b)/FMV basis.

Partnerships tax rules incorporate both the entity and aggregate approaches.

John, a limited partner of Candy Apple, LP, is allocated $30,000 of ordinary business loss from the partnership. Before the loss allocation, his tax basis is $20,000 and at-risk amount is $10,000. John also has ordinary business income of $20,000 from Sweet Pea, LP as a general partner and ordinary business income of $5,000 from Red Tomato, as a limited partner. How much of the $30,000 loss from Candy Apple can John deduct currently?

An additional allocation of partnership debt or relief of partnership debt is considered to be a deemed cash contribution or cash distribution respectively.

A partnership can request a five month extension by filing Form 7004 prior to the original due date of the partnership return.