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Exam 21: Partnerships

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Question 101

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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" is $30,000 (before deduction of any of the passive losses) . She also has $25,000 of passive income from other sources. She has no business losses for the year from other sources. How much of her ($60,000) allocable RST loss can Rebecca deduct on her current-year tax return?

A) $25,000
B) $30,000
C) $40,000
D) $60,000

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

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Question 102

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Loss cannot be recognized on a current (nonliquidating) distribution from a partnership unless cash, unrealized receivables, and/or § 1231 assets are the only items distributed.

A) True
B) False

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Question 103

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Carli contributes land to the newly formed CD Partnership in exchange for a 30% interest. The land has an adjusted basis and fair market value of $300,000 and is subject to a liability of $100,000, which the partnership assumes. None of this liability is repaid at year-end. At the end of the year, the partnership owes payables of $20,000. Assume that all liabilities are allocated proportionately to the partners. Total partnership income for the year is $400,000. What is Carli's basis in her partnership interest at the end of the year?

Lori, a partner in the JKL partnership, received a proportionate current (nonliquidating) distribution of $10,000 cash, unrealized receivables with a basis of $0 and a fair market value of $15,000, and land with a basis of $6,000 and a fair market value of $10,000. Her basis in the partnership interest immediately before the distributions was $14,000. She will recognize $0 gain on the distribution, and her basis in the receivables and land will be $0 and $4,000, respectively.

Paul sells one parcel of land (basis of $100,000) for its fair market value of $160,000 to a partnership in which he owns a 60% capital interest. Paul held the land for investment purposes. The partnership is in the real estate development business and will build residential housing (for sale to customers) on the land (the land is inventory to the partnership) . Paul will recognize:

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

Anna and Brad are equal partners in the AB LLC. If AB distributes $10,000 of cash to Anna and a capital asset valued at $10,000 to Brad, and if both Anna and Brad continue to be members of the LLC, the distribution is classified as a proportionate current distribution.

Meredith is a passive 30% member of the MNO LLC. She is not a managing member and she does not participate in any activities of the LLC. Her interest is more in the nature of an investment. In the current year, Meredith's distributive share of income from the LLC was $50,000. In addition, she received a guaranteed payment of $40,000 for the use of her capital. Assume that her income from other sources exceeds $500,000. How much of Meredith's LLC income will be subject to the self-employment (SE) tax and the net investment income (NII) tax? (Disregard the additional Medicare tax on upper-income taxpayers.)

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

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

Emma's basis in her BBDE LLC interest is $60,000 at the beginning of the tax year. Her allocable share of LLC items are as follows: $20,000 of ordinary income, $2,000 tax-exempt interest income, and a $6,000 long-term capital gain. In addition, the LLC distributed $12,000 of cash to Emma during the year. Assuming that the LLC had no liabilities at the beginning or the end of the year, Emma's ending basis in her LLC interest is $76,000.

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

The MOP Partnership is involved in construction activities. On January 1 of the current year, Patricia has an adjusted basis of $600,000 for her partnership interest consisting of the following. $\begin{array} { l r } \text { Capital account } & \$ 350,000 \\\text { Share of partnership recourse debt } & 50,000 \\\text { Share of partnership nonrecourse debt } & \underline { 200,000 } \\& \underline { \underline { \$ 600,000 } }\end{array}$ During the year, the partnership has an operating loss of $1.2 million and distributes $60,000 of cash to Patricia. Partnership liabilities were the same at the end of the tax year, and the nonrecourse debt is not qualified nonrecourse debt. If she owns a 60% share of partnership profits, capital, and losses, and is an active (material) participant in the partnership, how much of her share of the operating loss can Patricia deduct? (Assume that Patricia is a single taxpayer and has no business losses from other sources.) What Code provisions could cause a suspension of the loss? How would your answer change if MOP were an LLC and Patricia had not personally guaranteed any of the debt?

Which of the following is an election or calculation made by the partner rather than the partnership?

Sharon contributed property to the newly formed QRST Partnership. The property had a $100,000 adjusted basis to Sharon and a $160,000 fair market value on the contribution date. The property was also encumbered by a $90,000 nonrecourse debt, which was transferred to the partnership on that date. Sharon is treated as a general partner. She is allocated 30% of QRST's profits and 20% of QRST's losses. Sharon's basis in the partnership interest after the formation transaction is:

In the current year, the DOE LLC received revenues of $200,000 and paid the following amounts: $50,000 of business expenses (rent, utilities, wages, depreciation, etc.), a $40,000 guaranteed payment (for services) to 50% member Dave, $10,000 to member Ethan for consulting services, and $10,000 as a distribution to member Olivia. In addition, the LLC earned $2,000 of tax-exempt interest income during the year. Dave is the managing member of the LLC. His basis in his LLC interest was $50,000 at the beginning of the year, which includes a $12,000 share of LLC liabilities. At the end of the year, his share of the LLC's liabilities was $20,000. a. How much income must Dave report for the tax year and what is the character of the income? b. What is Dave's basis in his LLC interest at the end of the tax year? c. On what income will Dave's self-employment tax be calculated? d. What is the maximum amount Dave might be able to deduct for this business under § 199A? What additional information would Dave need to make this calculation?

Maria owns a 60% interest in the KLM Partnership. Four years ago, her father gave her a parcel of land. The gift basis of the land to Maria is $60,000. In the current year, Maria had still not figured out how to use the land for her own personal or business use; consequently, she sold it to the partnership for $50,000. The partnership immediately started using the land as a parking lot for its employees. Maria may recognize her $10,000 loss on the sale.

Misty and John formed the MJ Partnership. Misty contributed $50,000 of cash in exchange for her 50% interest in the partnership capital and profits. During the first year of partnership operations, the following events occurred: the partnership had a net taxable income of $20,000; Misty received a distribution of $12,000 cash from the partnership; and Misty had a 50% share in the partnership's $60,000 of recourse liabilities on the last day of the partnership year. Misty's adjusted basis for her partnership interest at year end is:

Match each of the following statements with the terms below that provide the best definition. -Schedule M-1

A partnership reports each partner's share of income to the partner on a Form 1099-MISC.