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Exam 14: Forming and Operating Partnerships

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Question 1

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Which of the following statements regarding partnerships losses suspended by the tax basis limitation is true?

A) Partnership losses must be used only in the year the losses are created.
B) Partnership losses may be carried back 2 years and carried forward 5 years.
C) Partnership losses may be carried forward indefinitely.
D) Partnership losses may be carried back 2 years and carried forward 20 years.

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

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C

Question 2

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

A) Recourse debt.
B) Qualified nonrecourse debt.
C) Nonrecourse debt.
D) All of these types of debt are included in the at-risk amount.

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

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Question 3

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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?

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.

Greg,a 40% 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% partners?

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: $\begin{array}{l}\begin{array}{lll}\text { Gain on Sale of Land*}\\\text { MACRS Depreciation }\\\text { Charitable Contributions }\\\text { Sales }\\\text { Interest Income }\\\text { Cost of Goods Sold }\\\text { 179 Expense Tax-Exempt Income }\\\text { Other Income}\\\end{array}\begin{array}{lll} \$ & 4,000 \\ \$ & 7,500 \\ \$ & 12,500 \\ \$ & 40,000 \\ \$ & 500 \\ \$ & 32,000 \\ \$ & 7,000 \\ \$ & 2,000 \\ \$ & 5,000 \end{array}\end{array}$ *The Land is a Section 1231 asset Given these items,answer the following questions: A.Compute Erin's share of ordinary income (loss)and separately-stated items.Include her self-employment income as a separately-stated item. B.Compute Erin's self-employment income,except assume ER Partnership is a limited partnership and Erin is a limited partner. C.Compute Erin's self-employment income,except assume ER Partnership is an LLC and Erin is personally liable for half of the debt of the LLC.Apply the IRS's proposed regulations in formulating your answer.

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

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

Hilary had an outside basis in LTL,General Partnership of $10,000 at the beginning of the year.LTL reported the following items on Hilary's K-1 for the year: ordinary business income of $5,000,a $10,000 reduction in Hilary's share of partnership debt,a cash distribution of $20,000,and tax-exempt income of $3,000.What is Hilary's adjusted basis at the end of the year?

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

Partners adjust their outside basis by adding non-deductible expenses and subtracting any tax-exempt income to avoid being double taxed.

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: $\begin{array} { l r r } \text { Cash Distribution } & \$ 2,000 \\\text { Ordinary Business Loss } & \$ ( 14,000 ) \\\text { Short-Tern Capital Gains } & \$ 2,000 \\\text { Reduction in Ruby's Share of Partrership Debt } & \$ 4,000\end{array}$ 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.

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,an adjusted basis of $30,000,and is secured by a $35,000 nonrecourse mortgage that the LLC will assume.What is Brett's outside tax basis in his LLC interest?

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

A partnership with a C corporation partner must always use the accrual method as its accounting method.

Sarah,Sue,and AS Inc.formed a partnership on May 1,20X9 called SSAS,LP.Now that the partnership is formed,they must determine its appropriate year-end.Sarah has a 30% profits and capital interest while Sue has a 35% profits and capital interest.Both Sarah and Sue have calendar year-ends.AS Inc.holds the remaining profits and capital interest in the LP,and it has a September 30 year-end.What tax year-end must SSAS,LP use for 20X9 and which test or rule requires this year-end?

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 basis at the beginning of the 20X8: (1) Jane,a member with a 25% profits and capital interest and a $5,000 outside basis,(2) Joe,a member with a 45% profits and capital interest and a $10,000 outside basis,and (3) Jack,a member with a 30% 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?

Partnerships can use special allocations to shift built-in gains and built-in losses on contributed property from a partner who contributed the property to other partners.

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?