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Exam 15: Forming and Operating Partnerships

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Question 21

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Does adjusting a partner's basis for tax-exempt income prevent double taxation?

A) Yes, if this basis adjustment is not made the partner will be taxed once when the income is allocated to him and a second time when he sells his partnership interest
B) Yes, if this basis adjustment is not made the partner will be taxed on the tax-exempt income twice when he sells his partnership interest because he was not taxed on this income when it was earned
C) No, making this adjustment to the partner's basis prevents the tax-exempt income from being converted to taxable income
D) No, the partner should not adjust his tax basis by his share of tax-exempt income

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

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Question 22

Multiple Choice

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A partner's self-employment earnings (loss) may be affected by her share of ordinary business income (loss) and any guaranteed payments she receives. The impact of these amounts typically depends on the status of the partner. Which of the following statements correctly describes the effect these items have on the partner's self-employment earnings (loss) ?

A) General partner - only guaranteed payments affect self-employment earnings (loss)
B) General partner - ordinary business income (loss) and guaranteed payments affect self-employment earnings (loss)
C) Limited partner - only guaranteed payments affect self-employment earnings (loss)
D) Limited partner - only ordinary business income (loss) affects self-employment income (loss)
E) Both B and C

F) B) and C)
G) C) and D)

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Question 23

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Tax elections are rarely made at the partnership level.

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

What general accounting methods may be used by a partnership and how and by whom are they selected?

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

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.

Under general circumstances, debt is allocated from the partnership to each partner in the following manner:

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

Why are guaranteed payments deducted in calculating the ordinary business income (loss) of partnerships and treated as a separately-stated item for the partners that receive the payment?

The main difference between a partner's tax basis and at-risk amount is that qualified nonrecourse financing is not included in the at-risk basis amount.

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

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.

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

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. When it was formed, the partners received equal profits and capital interests and the following items were contributed by each partner: • Troy - cash of $3,000, inventory with a FMV and tax basis of $5,000, and a building with a FMV of $22,000 and adjusted basis of $10,000. Additionally, the building was secured by a $10,000 nonrecourse mortgage. • Peter - cash of $5,000, accounts payable of $12,000 (recourse debt for which each partner becomes equally responsible), and land with a FMV of $27,000 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 $40,000 and adjusted basis of $3,500. Sarah also contributed a $23,000 nonrecourse note payable secured by the equipment. What is each partner's outside basis and how much gain (loss) must the partners recognize in 20X9 when Picture Perfect was formed?

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?

In what order are the loss limitations for partnerships applied?

Alfred, a one-third profits and capital partner in Pizzeria Partnership needs help in adjusting his tax basis to reflect the information contained in his most recent Schedule K-1 from the partnership. Unfortunately, the Schedule K-1 he recently received was for year 3 of the partnership, but Alfred only knows that his tax basis at the beginning of year 2 of the partnership was $23,000. Thankfully, Alfred still has his Schedule K-1 from the partnership for years 1 and 2. Using the following information from Alfred's year 1, year 2, and year 3 Schedule K-1, calculate his tax basis the end of year 2 and year 3. LEAST AGGREGATE DEFERRAL TEST $\begin{array}{|l|r|r|r|r|r|r|r|r|r|rr|r|}\hline &31-Jan&&&31-may&&&31-Jul&&&31-Oct\\\hline &\text { Profits }&\text {Deferral }&&\text {Profits }&\text {Deferral }&&\text { Profits }&\text {Deferral }&&\text { Profits }&\text {Deferral }\\&\text {Interest }&\text {Months }&\text { Total}&\text {Interest }&\text {Months }&\text { Total}&\text {Interest }&\text {Months }&\text { Total}&\text {Interest }&\text {Months }&\text { Total}\\\hline \text { Inc. } & 30 \% & 0 & 0 & 30 \% & 8 & 2.4 & 30 \% & 6 & 1.8 & 30 \% & 3 & 0.9 \\\hline \text { P } & 30 \% & 4 & 1.2 & 30 \% & 0 & 0 & 30 \% & 10 & 3 & 30 \% & 7 & 2.1 \\\text { Inc. }\\\hline \text L &30\%&6&1.8&30\%&2&0.6&30\%&0&0&30\%&9&2.7 \\\text { Inc. } \\\hline \text C&10\%&9&0.9&10\%&5&0.5&10\%&3&0.3&10\%&0&0 \\\text { Inc. }\\\hline \text {Total}&100\%&&3.9&100\%&&3.5&100\%&&5.1&100\%&&5.7\\\hline\end{array}$

Which of the following statements is true when property is contributed in exchange for a partnership interest?

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?