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Exam 20: Forming and Operating Partnerships

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Question 41

True/False

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

A) True
B) False

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Question 42

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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?

A) $165,000.
B) $200,000.
C) $175,000.
D) $140,000.

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

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Question 43

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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.

In what order are the loss limitations for partnerships applied?

XYZ, LLC has several individual and corporate members. Abe and Joe, individuals with4/30 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., acorporation with an 8/30 year end, owns a 4.9% profits and capital interest. Finally, thirtyother 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?

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

Lincoln, Inc., Washington, Inc., and Adams, Inc. form Presidential Suites Partnership on February15, 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?

Ruby's tax basis in her partnership interest at the beginning of the partnership's tax year was $13,000. The following items were included in her Schedule K-1 from the partnership for the year: Determine what amounts related to these items Ruby will report on her tax return assuming her tax basis and at risk amount are equal and that she is a material participant in the partnership's activities.

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

The term "outside basis" refers to the partnership's basis in its assets; whereas, the term"inside basis" refers an individual partner's basis in her partnership interest.

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.

Erica and Brett decide to form their new motorcycle business as an LLC. Each will receive an equal profits (loss) interest by contributing cash, property, or both. In addition to the members' contributions, their LLC will obtain a $50,000 nonrecourse loan from First Bank at the time it is formed. Brett contributes cash of $5,000 and a building he bought as a storefront for the motorcycles. The building has a FMV of $45,000, anadjusted basis of $30,000, and is secured by a $35,000 nonrecourse mortgage that theLLC will assume. What is Brett's outside tax basis in his LLC interest?

J&J, LLC was in its third year of operations when J&J decided to expand the number of members from two, A & 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 1/3 capital interestin 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 capitalinterest? If, instead, member C receives a 1/3 profit interest, what would be the tax consequences to membersA, B, and C, and to J&J?

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

Which of the following statements regarding the rationale for adjusting a partner's basis is false?

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?

What is the rationale for the specific rules partnerships must follow in determining a partnership's taxable year-end?

For partnership tax years ending after December 31, 2015, partnerships can request up to a six-month extension by filing IRS Form 7004 prior to the original due date of the partnership return.

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

Which of the following statements exemplifies the entity theory of partnership taxation?