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Exam 9: Forming and Operating Partnerships

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Question 1

True/False

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

A) True
B) False

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Question 2

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In what order are the loss limitations for partnerships applied?

A) Tax Basis - At-Risk Amount - Passive Activity Loss.
B) Passive Activity Loss - Tax Basis - At-Risk Amount.
C) Tax Basis - Passive Activity Loss - At-Risk Amount.
D) At-Risk Amount - Tax Basis - Passive Activity Loss.

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

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Question 3

Multiple Choice

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Which of the following items are subject to the Net Investment Income tax when an individual partner is a material participant in the partnership?

Nonrecourse debt is generally allocated according to the profit-sharing ratios of the partnership.

An additional allocation of partnership debt or relief of partnership debt is considered to be a deemed cash contribution or cash distribution respectively.

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

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 ________.

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.

If partnership debt is reduced and a partner is deemed to receive a cash distribution, what impact does the deemed distribution have on the partner if it is in excess of her tax basis?

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

Jordan, Inc., Bird, Inc., Ewing, Inc., and Barkley, Inc. formed Nothing-But-Net Partnership on June 1ˢᵗ, 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?  

Which requirement must be satisfied in order to specially allocate partnership income or losses to partners?

Jerry, a partner with 30% capital and profit 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 $50,000. His current year Schedule K-1 reported an ordinary loss of $15,000, long-term capital gain of $3,000, qualified dividends of $2,000, $500 of non-deductible expenses, a $10,000 cash contribution, and a reduction of $4,000 in his share of partnership debt. What is Jerry's adjusted basis in his partnership interest at the end of the year?

In what order should the tests to determine a partnership's year end be applied?

Kim received a 1/3 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?

Which of the following statements regarding the process for determining a partnership's tax year-end is True?

Partnerships tax rules incorporate both the entity and aggregate approaches.

What is the difference between the aggregate and entity theory 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.

What type of debt is not included in calculating a partner's at-risk amount?

Which of the following entities is not considered a flow-through entity?