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Exam 15: Forming and Operating Partnerships

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Question 51

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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 bases at the beginning of 20X8: (1) Jane, a member with a 25 percent profits and capital interest and a $5,000 outside basis, (2) Joe, a member with a 45 percent profits and capital interest and a $10,000 outside basis, and (3) Jack, a member with a 30 percent 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) A) and C)
F) None of the above

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Question 52

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TQK, LLC, provides consulting services and was formed on 1/31/X5.Aaron and ABC, Inc., each hold a 50 percent capital and profits interest in TQK.If TQK averaged $27,000,000 in annual gross receipts over the last three years, what accounting method can TQK use for X9?

A) Accrual method.
B) Cash method.
C) Hybrid method.
D) Accrual method or cash method.

E) None of the above
F) All of the above

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Question 53

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A partner's outside basis must first be decreased by any negative basis adjustments and then increased by any positive basis adjustments.

Partners must generally treat the value of profits interests they receive in exchange for services as ordinary income.

Tom is talking to his friend Bob, who has an interest in Freedom, LLC, about purchasing his LLC interest.Bob's outside basis in Freedom, LLC, is $10,000.This includes his $2,500 one-fourth share of the LLC's debt.Bob's 704(b) capital account is $17,000.If Tom bought Bob's LLC interest for $17,000, what would Tom's outside basis be in Freedom, LLC?

Illuminating Light Partnership had the following revenues, expenses, gains, losses, and distributions: $\begin{array}{llcc} \text {Sales } & \$60,000\\ \text { Long-Term Capital Gain} &\$8,000\\ \text {Qualified Dividends } &\$5,000\\ \text {Cost of Goods Bold } &\$40,000\\ \text {Employee Wages } &\$15,000\\ \text {Guararnteed Paynnent to Mariaging Partrier } &\$25,000\\ \text { Muruicipal Bond Iraterest } &\&5,000\\ \text {Section 179 Expense } &\$10,000\\ \text { MACRE Depreciation } &\$8,000\\ \text {Section 1231 Gains } &\$3,000\\ \text { Fines and Penalties } &\$1,500\\\end{array}$ Given these items, what is Illuminating Light's ordinary business income (loss)for the year?

On June 12, 20X9, Kevin, Chris, and Candy Corp.came together to form Scrumptious Sweets General Partnership.Now, Scrumptious Sweets must decide which tax year-end to use.Kevin and Chris have calendar year-ends and each holds a 35 percent profits and capital interest.However, Candy Corp.has a September 30^th year-end and holds the remaining 30 percent profits and capital interest.What tax year-end must Scrumptious Sweets adopt, and what rule mandates this year-end?

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.

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

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

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 percent profits interest in the LLC, with C Inc.having a 10 percent 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?

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 ________.

Frank and Bob are equal members in Soxy Socks, LLC.When forming the LLC, Frank contributed $50,000 in cash and $50,000 worth of equipment.Frank's adjusted basis in the equipment was $35,000.Bob contributed $50,000 in cash and $50,000 worth of land.Bob's adjusted basis in the land was $30,000.On 3/15/X4, Soxy Socks sells the land Bob contributed for $60,000.How much gain (loss) related to this transaction will Bob report on his X4 return?

Jordan, Inc., Bird, Inc., Ewing, Inc., and Barkley, Inc., 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? $\begin{array}{l}\text { Nothirg-But-Net Partrership }\\\begin{array} { l r c c } & \text { Year-End } & \text { Profits } & \text { Capital } \\\text { Jordan, Inc. } & 4 / 30 & 45 \% & 25 \% \\\text { Bird, Inc. } & 9 / 30 & 25 \% & 25 \% \\\text { Ewing, Inc. } & 10 / 31 & 0 \% & 25 \% \\\text { Barkley, Inc. } & 12 / 31 & 30 \% & 25 \%\end{array}\end{array}$

Which of the following statements regarding partnership losses suspended by the tax basis limitation is true?

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

What is the difference between the aggregate and entity theories of partnership taxation? Provide two examples of how partnership tax rules reflect the aggregate theory and two examples of how they reflect the entity theory.

Jay has a tax basis of $14,000 in his partnership interest at the beginning of the partnership tax year.The following amounts of partnership debt were allocated to Jay and are included in his beginning-of-the-year tax basis: (1) recourse debt-$3,000, (2) qualified nonrecourse debt-$1,000, and (3) nonrecourse debt-$500.There were no changes to the debt allocated to Jay during the tax year.If Jay is allocated a $15,000 loss for the current year, how much of the loss will be suspended under the tax basis and at-risk limitations?

Partnerships can use special allocations to shift built-in gains and built-in losses on contributed property from a partner who contributed the property to other partners.

Gerald received a one-third capital and profit (loss) interest in XYZ Limited Partnership (LP) .In exchange for this interest, Gerald contributed a building with an 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?