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Exam 11: Partnerships and Limited Liability Entities

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Question 1

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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) None of the above
F) All of the above

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C

Question 2

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Section 721 provides that no gain or loss is recognized on a contribution of property to a partnership in exchange for an interest in the partnership.An exception might apply if the taxpayer receives a cash distribution from the partnership soon after the property contribution is made.

A) True
B) False

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Question 3

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

Fern,Inc.,Ivy,Inc.,and Jeremy formed a general partnership.Fern owns a 50% interest and Ivy and Jeremy each own 25% interests.Fern,Inc.files its tax return on an October 31 year-end; Ivy,Inc.,files with a July 31 year-end,and Jeremy is a calendar year taxpayer.Which of the following statements is true regarding the taxable year the partnership can choose?

When property is contributed to a partnership in exchange for a capital and profits interest,when does the partner's holding period begin for the partnership interest?

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?

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 the land 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.

What is the difference between a partner's basis in the partnership interest and a partner's capital account? What are the purposes of these two amounts? Why are these amounts typically different?

Which of the following would be currently taxable as ordinary income to the service partner if received in exchange for services performed for the partnership? (In all cases,assume the interest is not sold within two years after the time it is granted to the service partner.)

The LN partnership reported the following items of income and deduction during the current tax year: revenues,$300,000; cost of goods sold,$180,000; tax-exempt interest income,$2,000; salaries to employees,$80,000; and long-term capital gain,$10,000.In addition,the partnership distributed $20,000 of cash to 50% partner Nina and $10,000 of cash to 50% partner Len.What is Nina's share of ordinary partnership income and separately stated items?

Which one of the following is not shown on the partnership's Schedule K on Page 4 of Form 1065?

Each partner's profit-sharing,loss-sharing,and capital-sharing ownership percentages are always the same.

Harry's basis in his partnership interest was $10,000 at the beginning of the tax year.For the year,his share of the partnership's loss was $8,000,and he also received a distribution of $4,000.Harry can deduct an $8,000 loss,and he recognizes a gain of $2,000 on the distribution of cash in excess of his remaining basis.

Section 721 provides that,in general,no gain or loss is recognized by the partnership or the partner on contribution of appreciated or depreciated property to a partnership in exchange for an interest in the partnership.

Morgan and Kristen formed an equal partnership on August 1 of the current year.Morgan contributed $60,000 cash and land with a basis of $18,000 and a fair market value of $40,000.Kristen contributed equipment with a basis of $42,000 and a value of $100,000.Kristen and Morgan each have a basis of $100,000 in their partnership interests.

If the partnership properly makes an election for treatment of a specific tax item,the partner is bound by that treatment.

In the current year,the CAR Partnership received revenues of $400,000 and paid the following amounts: $160,000 in rent,utilities,and salaries; a $40,000 guaranteed payment to partner Ryan; $20,000 to partner Amy for consulting services; and a $40,000 distribution to 25% partner Cameron.In addition,the partnership realized a $12,000 net long-term capital gain.Cameron's basis in his partnership interest was $60,000 at the beginning of the year,and included his $25,000 share of partnership liabilities.At the end of the year,his share of partnership liabilities was $15,000.

If a partnership receives tax-exempt income,this should not affect its partners' basis in their partnership interest.Do you agree with this statement? Explain.

Which of the following statements is always correct regarding assets acquired by a newly formed partnership? If a partner contributes:

Molly is a 30% partner in the MAP Partnership.During the current tax year,the partnership reported ordinary income of $200,000 before payment of guaranteed payments and distributions to partners.The partnership made an ordinary cash distribution of $20,000 to Molly,and paid guaranteed payments to partners Molly,Amber,and Pat of $20,000 each ($60,000 total) .How much will Molly's adjusted gross income increase as a result of the above items?