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

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A disguised sale might occur when a part...

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


A) The partnership reconciles its net (tax basis) 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) A) and E)
G) A) and D)

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Match each of the following statements with the terms below that provide the best definition. -Foreign tax credit vs. deduction


A) Adjusted basis of each partnership asset.
B) Operating expenses incurred after entity is formed but before it begins doing business.
C) Each partner's basis in the partnership.
D) Reconciles book income to "taxable income."
E) Tax accounting election made by partnership.
F) Tax accounting calculation made by partner.
G) Tax accounting election made by partner.
H) Does not include liabilities.
I) Designed to prevent excessive deferral of taxation of partnership income.
J) Amount that may be received by partner for performance of services for the partnership.
K) Computation that determines the way recourse debt is shared.
L) Will eventually be allocated to partner making tax-free property contribution to partnership.
M) Partner's share of partnership items.
N) Must generally be satisfied by any allocation to the partners.
O) Justification for a tax year other than the required taxable year.
P) No correct match is provided.

Q) C) and F)
R) E) and K)

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G

Binita contributed property with a basis of $40,000 and a value of $50,000 to the BE Partnership in exchange for a 20% interest in partnership capital and profits. During the first year of partnership operations, BE had net taxable income of $30,000 and tax-exempt interest income of $10,000. The partnership distributed $10,000 cash to Binita. Binita's adjusted basis (outside basis) for her partnership interest at year-end is:


A) $36,000.
B) $38,000.
C) $60,000.
D) $70,000.
E) None of the above.

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

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Match each of the following statements with the terms below that provide the best definition. -Guaranteed payment


A) Adjusted basis of each partnership asset.
B) Operating expenses incurred after entity is formed but before it begins doing business.
C) Each partner's basis in the partnership.
D) Reconciles book income to "taxable income."
E) Tax accounting election made by partnership.
F) Tax accounting calculation made by partner.
G) Tax accounting election made by partner.
H) Does not include liabilities.
I) Designed to prevent excessive deferral of taxation of partnership income.
J) Amount that may be received by partner for performance of services for the partnership.
K) Computation that determines the way recourse debt is shared.
L) Will eventually be allocated to partner making tax-free property contribution to partnership.
M) Partner's share of partnership items.
N) Must generally be satisfied by any allocation to the partners.
O) Justification for a tax year other than the required taxable year.
P) No correct match is provided.

Q) L) and P)
R) A) and G)

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J

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.

A) True
B) False

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At the beginning of the year, Heather's "tax basis" capital account balance in the HEP Partnership was $85,000. During the tax year, Heather contributed property with a basis of $6,000 and a fair market value of $10,000. Her share of the partnership's ordinary income and separately stated income and deduction items was $40,000. At the end of the year, the partnership distributed $15,000 of cash to Heather. Also, the partnership allocated $12,000 of recourse debt and $10,000 of nonrecourse debt to Heather. What is Heather's ending capital account balance determined using the "tax basis" method?


A) $116,000
B) $120,000
C) $126,000
D) $128,000
E) $138,000

F) None of the above
G) A) and B)

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At the beginning of the tax year, Zach's basis for his partnership interest and his amount at risk in the partnership was $30,000. His share of partnership items for the year consisted of tax-exempt interest income of $2,000 and an ordinary loss of $44,000. He also received a distribution from the partnership of $20,000 cash during the year. For the tax year, Zach will report:


A) A nontaxable distribution of $20,000, an ordinary loss of $10,000, and a suspended loss carryforward of $34,000.
B) An ordinary loss of $32,000, a suspended loss carryforward of $12,000, and a taxable distribution of $20,000.
C) A nontaxable distribution of $20,000, an ordinary loss of $12,000, and a suspended loss carryforward of $32,000.
D) An ordinary loss of $44,000 and a nontaxable distribution of $20,000.

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

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Ryan is a 25% partner in the ROCC Partnership. At the beginning of the tax year, Ryan's basis in the partnership interest was $90,000, including his share of partnership liabilities. During the current year, ROCC reported net ordinary income of $100,000. In addition, ROCC distributed $10,000 to each of the partners ($40,000 total) . At the end of the year, Ryan's share of partnership liabilities increased by $10,000. Ryan's basis in the partnership interest at the end of the year is:


A) $90,000.
B) $100,000.
C) $115,000.
D) $125,000.
E) None of the above.

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

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Match each of the following statements with the terms below that provide the best definition. -Startup costs


A) Adjusted basis of each partnership asset.
B) Operating expenses incurred after entity is formed but before it begins doing business.
C) Each partner's basis in the partnership.
D) Reconciles book income to "taxable income."
E) Tax accounting election made by partnership.
F) Tax accounting calculation made by partner.
G) Tax accounting election made by partner.
H) Does not include liabilities.
I) Designed to prevent excessive deferral of taxation of partnership income.
J) Amount that may be received by partner for performance of services for the partnership.
K) Computation that determines the way recourse debt is shared.
L) Will eventually be allocated to partner making tax-free property contribution to partnership.
M) Partner's share of partnership items.
N) Must generally be satisfied by any allocation to the partners.
O) Justification for a tax year other than the required taxable year.
P) No correct match is provided.

Q) G) and H)
R) E) and P)

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Syndication costs arise when partnership interests are being marketed to investors. These costs cannot be amortized or deducted.

A) True
B) False

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Your client owns a parcel of land that has depreciated in value. He wants to know if there is a way he can contribute the property to his partnership, have the partnership sell the property, and convert the existing capital loss into an ordinary loss. He also wants to know if part of the loss would be allocated to his other partners. What is your reaction?

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In the short run, it would not be possib...

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Match each of the following statements with the terms below that provide the best definition. -Check the box regulations


A) Organizational choice of many large accounting firms.
B) Partner's percentage allocation of current operating income.
C) Might affect any two partners' tax liabilities in different ways.
D) Brokerage and registration fees incurred for promoting and marketing partnership interests.
E) Transfer of asset to partnership followed by immediate distribution of cash to partner.
F) Must have at least one general and one limited partner.
G) All partners are jointly and severally liable for entity debts.
H) Theory treating the partner and partnership as separate economic units.
I) Partner's basis in partnership interest after tax-free contribution of asset to partnership.
J) Partnership's basis in asset after tax-free contribution of asset to partnership.
K) Owners are "members."
L) Theory treating the partnership as a collection of taxpayers joined in an agency relationship.
M) Allows many unincorporated entities to select their Federal tax status.
N) No correct match provided.

O) B) and F)
P) I) and K)

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M

Partners' capital accounts should be determined using the same method on Form 1065 Schedule L, Form 1065 Schedule M-2, and the Schedules K-1 prepared for the partners.

A) True
B) False

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Match each of the following statements with the terms below that provide the best definition. -Limited partnership


A) Organizational choice of many large accounting firms.
B) Partner's percentage allocation of current operating income.
C) Might affect any two partners' tax liabilities in different ways.
D) Brokerage and registration fees incurred for promoting and marketing partnership interests.
E) Transfer of asset to partnership followed by immediate distribution of cash to partner.
F) Must have at least one general and one limited partner.
G) All partners are jointly and severally liable for entity debts.
H) Theory treating the partner and partnership as separate economic units.
I) Partner's basis in partnership interest after tax-free contribution of asset to partnership.
J) Partnership's basis in asset after tax-free contribution of asset to partnership.
K) Owners are "members."
L) Theory treating the partnership as a collection of taxpayers joined in an agency relationship.
M) Allows many unincorporated entities to select their Federal tax status.
N) No correct match provided.

O) E) and G)
P) A) and E)

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


A) A partnership typically has easier administrative and filing requirements than does a C corporation.
B) Partnership income is subject to a single level of taxation; corporate income is double taxed.
C) Partnerships may specially allocate income and expenses among the partners, provided the substantial economic effect requirements are met; corporate dividends must be proportionate to shareholdings.
D) Partners in a general partnership have less personal liability for entity claims than shareholders of a C corporation.
E) All of the above are advantages of partnership taxation.

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

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A partnership must provide any information to the partners that the partners would need to calculate deductions not permitted at the partnership level, such as for oil and gas depletion or the corporate dividends received deduction.

A) True
B) False

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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?


A) $25,000
B) $30,000
C) $40,000
D) $60,000
E) None of the above

F) A) and B)
G) D) and E)

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

A) True
B) False

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A limited partnership (LP) offers all partners protection from claims by the LP's creditors.

A) True
B) False

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