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Exam 11: Partnerships and Limited Liability Entities

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Question 21

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Tim,Al,and Pat contributed assets to form the equal TAP Partnership.Tim contributed cash of $40,000 and land with a basis of $80,000 (fair market value of $60,000) .Al contributed cash of $60,000 and land with a basis of $50,000 (fair market value of $40,000) .Pat contributed cash of $60,000 and a fully depreciated property ($0 basis) valued at $40,000.Which of the following tax treatments is not correct?

A) Tim's basis in his partnership interest is $120,000.
B) Al realizes and recognizes a loss of $10,000.
C) Pat realizes a gain of $40,000 but recognizes $0 gain.
D) TAP has a basis of $80,000,$50,000,and $0 in the land and property (excluding cash) contributed by Tim,Al,and Pat,respectively.
E) All of these statement are correct.

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

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Question 22

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On a partnership's Form 1065,which of the following statements is not true?

A) The partnership reconciles its net income (including separately stated items) to book income on Schedule M-1 or M-3.
B) The partnership balance sheet on Schedule L is generally presented on a financial (book) basis.
C) All partnership income and expense items are reported on Form 1065,page 1.
D) The partnership's equivalent of taxable income is reported in the "Analysis of Income (Loss) ."
E) None of the above statements are true.

F) C) and D)
G) All of the above

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Question 23

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Ken and Lars formed the equal KL Partnership during the current year,with Ken contributing $100,000 in cash and Lars contributing land (basis of $60,000,fair market value of $40,000)and equipment (basis of $0,fair market value of $60,000).Lars recognizes a $40,000 gain on the contribution and his basis in his partnership interest is $100,000.

The JPM Partnership is a US-based manufacturing company.JPM calculates the domestic production activities deduction (§ 199)and deducts that amount on its Form 1065.

Which of the following entity owners cannot participate in management of the entity?

On the formation of a partnership,when might a "disguised sale" occur? How can this treatment be avoided?

During the current tax year,Jordan and Whitney each contributed $50,000 to form the J&W LLC.Each member has a 50% interest in LLC capital,profits,and losses,except that depreciation expense is allocated 40% to Jordan and 60% to Whitney.During the first year,the LLC reported income (before depreciation expense) of $20,000 and had depreciation expense of $10,000.The LLC incurred recourse debt (that was personally guaranteed by both of the LLC members) of $60,000.Partnership assets are $170,000 at the end of the year.Under the constructive liquidation scenario,how is the recourse debt allocated to Jordan and Whitney?

George and James are forming the GJ Partnership.George contributes $600,000 cash and James contributes nondepreciable property with an adjusted basis of $400,000 and a fair market value of $750,000.The property is subject to a $150,000 liability,which is also transferred into the partnership and is shared equally by the partners for basis purposes.George and James share in all partnership profits equally except for any precontribution gain,which must be allocated according to the statutory rules for built-in gain allocations. a. What James's adjusted tax basis for his partnershp interest munediately after the partnership is formed? b. What is the partnership's adjusted basis for the property contributed by James? c. If the partnership sells the property contributed by James for $800,000, how is the tax gain allocated between the partners?

Rebecca is a limited partner in the RST Partnership,which is not publicly traded.Her allocable share of RST's passive ordinary losses from a nonrealty activity for the current year is ($60,000) .Rebecca has a $40,000 adjusted basis (outside basis) for her interest in RST (before deduction of any of the passive losses) .Her amount "at risk" under § 465 is $30,000 (before deduction of any of the passive losses) .She also has $25,000 of passive income from other sources.How much of her ($60,000) allocable loss can Rebecca deduct on her current year's tax return?

The "inside basis" is defined as a partner's basis in the partnership interest.

One of the disadvantages of the partnership form is that the partner's share of the partnership's taxable income is taxed to the partner,regardless of whether or not distributed.

Which of the following statements is not a requirement of the substantial economic effect test?

Ashley purchased her partnership interest from Lindsey on the first day of the current year for $40,000 cash.She received a $10,000 cash distribution from the partnership during the year,and her share of partnership income is $15,000.Her share of partnership liabilities on the last day of the partnership year is $20,000.Ashley's outside basis for her partnership interest at the end of the year is $45,000.

Blaine contributes property valued at $50,000 (basis of $40,000)in exchange for a 25% interest in the BIKE Partnership.If the property is later sold for $70,000,gain of $15,000 will be allocated to Blaine.

Seven years ago,Paul purchased residential rental estate that he has been depreciating as MACRS property over 27.5 years.This year,when his adjusted basis in the property was $250,000,Paul transferred the property to the newly formed PLA LLC in exchange for a one-third interest in the LLC.PLA incurred $10,000 of transfer taxes and fees related to the property.PLA must treat the $260,000 basis in the property,fees,and expenses,as new MACRS property depreciable over 27.5 years.

JLK Partnership incurred $6,000 of organizational costs and $50,000 of startup costs in 2013.JKL may deduct $5,000 each of organizational and startup costs,and the remaining costs ($1,000 of organizational costs and $45,000 of startup costs)may be amortized over 60 months.

Which of the following is not a correct statement regarding the advantage of the partnership entity form over the subchapter C corporate form?

TEC Partners was formed during the current tax year.It incurred $10,000 of organizational expenses,$80,000 of startup expenses,and $5,000 of transfer taxes to retitle property contributed by a partner.The property had been held as MACRS property for ten years by the contributing partner,and had an adjusted basis to the partner of $300,000 and fair market value of $400,000.Which of the following statements is correct regarding these items?

Jeordie and Kendis created the JK Partnership by contributing $100,000 each.The $200,000 cash was used by the partnership to acquire a depreciable asset.The partnership agreement provides that the partners' capital accounts will be maintained in accordance with Reg.§ 1.704-1(b)(the "economic effect" Regulations)and that any partner with a deficit capital account will be required to restore that capital account when the partner's interest is liquidated.The partnership agreement provides that MACRS will be allocated 20% to Jeordie and 80% to Kendis.All other items of partnership income,gain,loss,deduction,and credit will be allocated equally between the partners.In the first year,MACRS is $40,000 and no other operating transactions occur.The property is sold at the end of the year for $160,000 and the partnership is liquidated immediately thereafter.

If a partnership allocates losses to the partners,the partners must first apply the passive loss limitations,then the basis limitation,and finally the at-risk limitations.If all three hurdles are met,the partner may deduct the loss.