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Exam 20: Forming and Operating Partnerships

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Question 51

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

A) A partner's basis may never be reduced below zero.
B) A partner must adjust his basis for ordinary income (loss) but not for separately stated items.
C) A partnership fine or penalty paid by the partnership does not affect a partner's basis.
D) Relief of partnership debt increases a partner's tax basis.

E) All of the above
F) A) and B)

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Question 52

Multiple Choice

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For partnership tax years ending after December 31,2015,when must a partnership file its return?

A) By the 15^th day of the third month after the partnership's tax year-end.
B) By the fifth month after the original due date if an extension is filed.
C) By the 15^th day of the fourth month after the partnership's tax year-end.
D) By the 15^th day of the third month after the partnership's tax year-end and by the fifth month after the original due date if an extension is filed.
E) By the fifth month after the original due date if an extension is filed and by the 15^th day of the fourth month after the partnership's tax year-end.

F) None of the above
G) A) and B)

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Question 53

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

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?

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.

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.

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

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?

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.

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?

Kim received a one-third profits and capital interest in Bright Line,LLC,in exchange for legal services she provided.In addition to her share of partnership profits or losses,she receives a $30,000 guaranteed payment each year for ongoing services she provides to the LLC.For X4,Bright Line reported the following revenues and expenses: sales-$150,000,cost of goods sold-$90,000,depreciation expense-$45,000,long-term capital gains-$15,000,qualified dividends-$6,000,and municipal bond interest-$3,000.How much ordinary business income (loss) will Bright Line allocate to Kim on her Schedule K-1 for X4?

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,at-risk,and 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

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?

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 one-third 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 one-third capital interest,which of the following tax consequences does not occur in X2?

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 interests 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?

If a taxpayer sells a passive activity with suspended passive activity losses from prior years,what type of income can generally be offset by the suspended passive losses in the year of sale?

Under proposed regulations issued by the Treasury Department,in which of the following situations should an LLC member be treated as a general partner for self-employment tax purposes?

J&J,LLC,was in its third year of operations when J&J decided to expand the number of members from two,A and B,with equal profits and capital interests,to three members,A,B,and C.The third member,C,will contribute her financial expertise to the LLC in exchange for a one-third 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 one-third profits interest,what would be the tax consequences to members A,B,and C,and to J&J?

Greg,a 40 percent partner in GSS Partnership,contributed land to the partnership in exchange for his partnership interest when the partnership was formed.At the time,his basis in the land was $30,000 and its FMV was $133,000.Three years after the partnership was formed,GSS Partnership decided to sell the land to an unrelated party for $150,000.When the land is sold,how much of the gain should be allocated to each partner of GSS Partnership if Sam and Steve are each 30 percent partners?