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Exam 20: Forming and Operating Partnerships

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Question 51

True/False

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Adjustments to a partner's outside basis are made annually to prevent double taxation on the sale of a partnership interest or at the time of a partnership distribution.

A) True
B) False

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Question 52

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Styling Shoes, LLC filed its 20X8 Form 1065 on March 15, 20X9. Styling had three members with the following ownership interests and tax basis at the beginning of the 20X8: (1) Jane, a member with a 25% profits and capital interest and a $5,000 outside basis, (2) Joe, a member with a 45% profits and capital interest and a $10,000 outside basis, and (3) Jack, a member with a 30% profits and capital interest and a $2,000 outside basis. The following items were reported on Styling's Schedule K for the year: ordinary income of $100,000, Section 1231 gain of $15,000, charitable contributions of $25,000, and tax-exempt income of $3,000. In addition, Styling received an additional bank loan of $12,000 during 20X8. What is Jane's tax basis after adjustment for her share of these items?

A) $28,250
B) $31,250
C) $33,500
D) $57,250

E) C) and D)
F) None of the above

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Question 53

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Why are guaranteed payments deducted in calculating the ordinary business income (loss) of partnerships and treated as a separately-stated item for the partners that receive the payment?

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?

What general accounting methods may be used by a partnership and how and by whom are they selected?

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

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

What type of debt is not included in calculating a partner's at-risk amount?

A partner's tax basis or at-risk amount can be increased by making capital contributions, by paying off partnership debt, or by increasing the profitability of the partnership.

What is the correct order for applying the following three items to adjust a partner's tax basis in his partnership interest: (1) Increase for share of ordinary business income, (2) Decrease for share of separately stated loss items, and (3) Decrease for distributions?

Which of the following items will affect a partner's tax basis?

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

Zinc, LP was formed on August 1, 20X9. When the partnership was formed, Al contributed $10,000 in cash and inventory with a FMV and tax basis of $40,000. In addition, Bill contributed equipment with a FMV of $30,000 and adjusted basis of $25,000 along with accounts receivable with a FMV and tax basis of $20,000. Also, Chad contributed land with a FMV of $50,000 and tax basis of $35,000. Finally, Dave contributed a machine, secured by $35,000 of debt, with a FMV of $15,000 and a tax basis of $10,000. What is the total inside basis of all the assets contributed to Zinc, LP?

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

Actual or deemed cash distributions in excess of a partner's outside basis are generally taxable as capital gains.

How does additional debt or relief of debt affect a partner's basis?

A partnership may use the cash method despite having a corporate partner when the partnership's average gross receipts for the prior three taxable years don't exceed _________.

This year, HPLC, LLC was formed by H Inc., P Inc., L Inc., and C Inc. Each member had an equal share in the LLC's capital. H Inc., P Inc., and L Inc. each had a 30% profits interest in the LLC with C Inc. having a 10% profits interest. The members had the following tax year-ends: H Inc. [1/31], P Inc. [5/31], L Inc. [7/31], and C Inc. [10/31]. What tax year-end must the LLC use?

Which of the following would not be classified as a material participant in an activity?

Lloyd and Harry, equal partners, form the Ant World Partnership. During the year, Ant World had the following revenue, expenses, gains, losses, and distributions: $\begin{array}{lr}\text { Cost of Goods Sold } & \$ 85,000 \\\text { Cash Distribution to Harry } & \$ 15,000 \\\text { Municipal Bond Interest } & \$ 1,500 \\\text { Short-Term Capital Gains } & \$ 4,500 \\\text { Employee Wages } & \$ 40,000 \\\text { Rent } & \$ 10,000 \\\text { Charitable Contributions } & \$ 25,000 \\\text { Sales } & \$ 175,000 \\\text { Repairs and Maintenance } & \$ 5,000 \\\text { Long-term Capital Gains } & \$ 12,000 \\\text { Fines and Penalties } & \$ 5,000 \\\text { Guaranteed Payment to Lloyd } & \$ 25,000\end{array}$ Given these items, what amount of ordinary business income (loss) and what separately-stated items should be allocated to each partner for the year?