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Exam 20: Forming and Operating Partnerships

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Question 71

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Jerry, a partner with 30 percent capital and profits interest, received his Schedule K-1 from Plush Pillows, LP. At the beginning of the year, Jerry's tax basis in his partnership interest was $40,000. His current-year Schedule K-1 reported an ordinary loss of $5,000, long-term capital gain of $5,000, qualified dividends of $4,000, $2,500 of non-deductible expenses, a $30,000 cash contribution, and a reduction of $6,000 in his share of partnership debt. What is Jerry's adjusted basis in his partnership interest at the end of the year?

A) $35,000
B) $44,000
C) $65,500
D) $71,500

E) A) and B)
F) A) and C)

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Question 72

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TQK,LLC, provides consulting services and was formed on 1/31/X5. Aaron and ABC, Incorporated, each hold a 50percent capital and profits interest in TQK. If TQK averaged $29,000,000 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) B) and C)
F) A) and D)

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Question 73

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Which of the following statements regarding capital and profits interests received for services contributed to a partnership is false?

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

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?

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.

Jay has a tax basis of $26,000 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-$15,000, (2) qualified nonrecourse debt-$3,000, and (3) nonrecourse debt-$1,700. There were no changes to the debt allocated to Jay during the tax year. If Jay is allocated a $29,000 loss for the current year, how much of the loss will be suspended under the tax basis and at-risk limitations?

Explain why partners must increase their tax basis for their share of partnership taxable and nontaxable income or gain and reduce their basis by their share of partnership deductible and nondeductible expenses or losses.

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

Sue and Andrew form SA general partnership. Each person receives an equal interest in the newly created partnership. Sue contributes $27,000 of cash and land with an FMV of $72,000. Her basis in the land is $37,000. Andrew contributes equipment with an FMV of $29,000 and a building with an FMV of $50,000. His basis in the equipment is $25,000, and his basis in the building is $37,000. How much gain must the SA general partnership recognize on the transfer of these assets from Sue and Andrew?

A partnership can elect to amortize organization and start-up costs; however, syndication costs are not deductible.