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Exam 21: Partnerships

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Question 51

True/False

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A partnership's allocations of income and deductions to the partners are required to be proportionate to the partners' percentage ownership of partnership capital in order to meet the substantial economic effect tests.

A) True
B) False

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Question 52

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​Which one of the following allocations is most likely to meet the "substantial" test in the "substantial economic effect" rules? (Assume all the "economic effect" tests are met.)

A) ​The ROY LLC specially allocates $20,000 of income each year to partner Red with no offsetting loss allocations in other years.
B) ​The YGB LLC specially allocates $30,000 of ordinary income this year to partner Green with an offsetting allocation of loss in that same amount next year.
C) ​The BPV LLC specially allocates $10,000 of capital gains to Violet and $10,000 of interest income to Purple because Purple is in a lower tax bracket.
D) ​The PIR LLC specially allocates $60,000 of income to Indigo with no offsetting allocations. Indigo has expiring net operating losses.

E) All of the above
F) B) and C)

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Question 53

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In the current year,the POD Partnership received revenues of $200,000 and paid the following amounts: $50,000 in rent and utilities,and $20,000 as a distribution to partner Olivia.In addition,the partnership earned $6,000 of long-term capital gains during the year.Partner Donald owns a 50% interest in the partnership.How much income must Donald report for the tax year?

Match each of the following statements with the terms below that provide the best definition. Match each of the following statements with the terms below that provide the best definition. 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. Theory under which a partnership's recourse debt is shared among the partners. 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. -Domestic production activities deduction

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. To satisfy the economic effect test,how much of the $160,000 cash (from the sale) is allocated each to Jeordie and Kendis?

Steve's basis in his SAW Partnership interest is $200,000 at the beginning of the tax year,including all adjustments.His allocable share of partnership items are as follows: ($120,000) of ordinary loss,$6,000 tax-exempt interest income,and a $14,000 long-term capital gain.In addition,the LLC distributed $20,000 of cash to Steve during the year.During the year,Steve's share of partnership debt increased by $10,000.Steve's ending basis in his LLC interest is $80,000.

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

The MOG Partnership reports ordinary income of $60,000,long-term capital gain of $12,000,and tax-exempt income of $12,000.The partnership agreement provides that Molly will receive all long-term capital gains and George will receive all tax-exempt interest income.Their allocation of ordinary income will be reduced accordingly,and Olivia will be allocated a proportionately greater share of ordinary income.(In other words,each partner will receive allocations totaling 1/3 of the total $84,000 of partnership income.) This allocation was agreed upon because Molly and George are in a high marginal tax bracket and Olivia is in a low marginal tax bracket. a.Describe the elements that must be included in a partnership agreement in order for an allocation to have "economic effect." b.Discuss whether or not the MOG allocation would be permitted and provide your reasoning.

Brooke and John formed a partnership.Brooke received a 40% interest in partnership capital and profits in exchange for contributing land (basis of $30,000 and fair market value of $120,000) .John received a 60% interest in partnership capital and profits in exchange for contributing $180,000 of cash.Three years after the contribution date,the land contributed by Brooke is sold by the partnership to a third party for $150,000.How much taxable gain will Brooke recognize from the sale?

On January 1 of the current year,Anna and Jason form an equal partnership.Anna contributes $50,000 cash and a parcel of land (adjusted basis of $100,000; fair market value of $150,000) in exchange for her interest in the partnership.Jason contributes property (adjusted basis of $180,000; fair market value of $200,000) in exchange for his partnership interest.Which of the following statements is true concerning the income tax results of this partnership formation?

During the current year,MAC Partnership reported the following items of receipts and expenditures: $600,000 sales,$80,000 utilities and rent,$200,000 salaries to employees,$20,000 guaranteed payment to partner Antonio,investment interest income of $4,000,a charitable contribution of $8,000,and a distribution of $30,000 to partner Carl.Antonio is a 25% general partner.Based on this information,what items will be reflected on Antonio's Schedule K-1?

MNO Partnership has three equal partners.Moon,Inc.and Neptune,Inc.each have fiscal years ending March 31.Omega uses the calendar year.MNO's taxable year end must be determined using the least aggregate deferral method,and is December 31. ​

Belinda owns a 30% profit and loss interest in the BOW LLC and her basis in the interest is $30,000,excluding her share of the LLC's liabilities.Belinda guarantees a $40,000 LLC debt.Remaining liabilities (not guaranteed by any of the LLC members) are $100,000.Belinda's basis in the LLC is $100,000.

Nicholas,a 1/3 partner,received a guaranteed payment in the current year of $50,000.Partnership income before consideration of the guaranteed payment was $20,000.Assuming no loss limitation rules apply,Nicholas reports a $10,000 ordinary loss from partnership operations,and the $50,000 guaranteed payment as ordinary income.

Sharon and Sue are equal partners in the S&S Partnership.On January 1 of the current year,each partner's adjusted basis in S&S was $80,000 (including each partner's $20,000 share of the partnership's $40,000 of liabilities).During the current year,S&S repaid $30,000 of the debt and borrowed $20,000 for which Sharon and Sue are equally liable.In the current year ended December 31,S&S also sustained a net operating loss of $40,000 and earned $10,000 of interest income from investments.If liabilities are shared equally by the partners,on January 1 of the next year how much is each partner's basis in her interest in S&S?

​Brad is a 40% member in the BB LLC.At the beginning of the tax year,Brad's capital account showed a balance of $120,000.In this case,his capital account equals his basis in the LLC interest excluding his share of the LLC's debts.His Schedule K-1 showed recourse debt (guaranteed by Brad) and nonrecourse debt of $10,000 and $20,000,respectively.During the current year,BB reported net ordinary income of $200,000 and non-deductible expenses of $2,000.There were no distributions during the year.At the end of the year,Brad's share of recourse (guaranteed) and nonrecourse liabilities were $20,000 and $30,000,respectively.How much is Brad's basis in the LLC interest at the end of the year? ​

Sarah contributed fully depreciated ($0 basis) property valued at $50,000 to the RSTU Partnership in exchange for a 25% interest in partnership capital and profits.During the first year of partnership operations,RSTU had net taxable income of $200,000 and tax-exempt income of $4,000.The partnership distributed $10,000 cash to Sarah.Her share of partnership recourse liabilities on the last day of the partnership year was $20,000.What is Sarah's adjusted basis (outside basis) for her partnership interest at the end of the tax year?

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

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

A partnership will take a carryover basis in an asset it acquires when: