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Exam 15: Forming and Operating Partnerships

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Question 61

True/False

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A general partner's share of ordinary business income is similar to investment income; thus, a general partner only includes their guaranteed payments as self-employment income.

A) True
B) False

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Question 62

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

A) An individual who participates more than 100 hours a year and whose participation is not less than any other individual's participation.
B) An individual who participated in the activity for at least one of the preceding five taxable years.
C) An individual who participates in an activity regularly, continuously, and substantially.
D) An individual who participates in an activity for more than 500 hours a year.

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

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Question 63

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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: $\begin{array}{llcc} \text { Gain on Sale of Land}^{*} & \$4,000\\ \text { MACRS Depreciatior } &\$7,500\\ \text { Charitable Contributions } &\$12,500\\ \text {Sales } &\$40,000\\ \text { Interest Income } &\$500\\ \text {Cost of Goods Bold } &\$32,000\\ \text {Section179 Expense } &7,000\\ \text {Tax-Exempt Income } &\$2,000\\ \text { Other Income } &\$5,000\\\end{array}$ *The land is a

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 one-third capital and profits interest: -Troy-cash of $3,000, inventory with an FMV and tax basis $5,000, and a building with an 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 an FMV and tax basis of $19,000, and land with an FMV and tax basis of $20,000. -Sarah-cash of $2,000, accounts receivable with an FMV and tax basis of $1,000, and equipment with an 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.

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? $\begin{array} { l c c c } & \text { Presidential Suites Partrarship } & \\& \text { Year-End } & \text { Profits } & \text { Capital } \\\text { Lincoln, Inc. } & 3 / 31 & 35 \% & 30 \% \\\text { Washington, Inc. } & 7 / 31 & 30 \% & 40 \% \\\text { Adarns, Inc. } & 11 / 30 & 35 \% & 30 \%\end{array}$

On 12/31/X4, Zoom, LLC, reported a $60,000 loss on its books.The items included in the loss computation were $30,000 in sales revenue, $15,000 in qualified dividends, $22,000 in cost of goods sold, $50,000 in charitable contributions, $20,000 in employee wages, and $13,000 of rent expense.How much ordinary business income (loss) will Zoom report on its X4 return?