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Exam 20: Forming and Operating Partnerships

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Question 51

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Why are guaranteed payments deducted in calculating the ordinary business income (loss) of partnerships and treated as a separately-stated item for the partners that receive the payment?

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Guaranteed payments are conceptually sim...

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Question 52

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Does adjusting a partner's basis for tax-exempt income prevent double taxation?

A) Yes, if this basis adjustment is not made the partner will be taxed once when the income is allocated to him and a second time when he sells his partnership interest
B) Yes, if this basis adjustment is not made the partner will be taxed on the tax-exempt income twice when he sells his partnership interest because he was not taxed on this income when it was earned
C) No, making this adjustment to the partner's basis prevents the tax-exempt income from being converted to taxable income
D) No, the partner should not adjust his tax basis by his share of tax-exempt income

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

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Question 53

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Frank and Bob are equal members in Soxy Socks, LLC. When forming the LLC, Frank contributed $50,000 in cash and $50,000 worth of equipment. Frank's adjusted basis in the equipment was $35,000. Bob contributed $50,000 in cash and $50,000 worth of land. Bob's adjusted basis in the land was $30,000. On 3/15/X4, Soxy Socks sells the land Bob contributed for $60,000. How much gain (loss) related to this transaction will Bob report on his X4 return?

On April 18, 20X8, Robert sold his 35 percent partnership interest in Fruit Wonder, LLC to Richard for $120,000. Prior to selling his interest, Robert had a basis in Fruit Wonder of $80,000. Robert's basis included $5,000 of recourse debt and $15,000 of nonrecourse debt that had been allocated to him. Immediately after the purchase, what is Richard's tax basis in Fruit Wonder?

Any losses that exceed the tax basis of a partner in their partnership interest are suspended and carried forward for 20 years.

What is the difference between a partner's tax basis and at-risk amount?

The main difference between a partner's tax basis and at-risk amount is that qualified nonrecourse financing is not included in the at-risk basis amount.

Guaranteed payments are included in the calculation of a partnership's ordinary business income (loss) and are also treated as separately-stated items.

Nonrecourse debt is generally allocated according to the profit-sharing ratios of the partnership.

Hilary had an outside basis in LTL, General Partnership of $10,000 at the beginning of the year. LTL reported the following items on Hilary's K-1 for the year: ordinary business income of $5,000, a $10,000 reduction in Hilary's share of partnership debt, a cash distribution of $20,000, and tax-exempt income of $3,000. What is Hilary's adjusted basis at the end of the year?

Partnerships tax rules incorporate both the entity and aggregate approaches.

In what order should the tests to determine a partnership's year end be applied?

Tax elections are rarely made at the partnership level.

Which of the following statements is true when property is contributed in exchange for a partnership interest?

Partners adjust their outside basis by adding non-deductible expenses and subtracting any tax-exempt income to avoid being double taxed.

What type of debt is not included in calculating a partner's at-risk amount?

A general partner's share of ordinary business income is similar to investment income; thus, a general partner only includes their guaranteed payments as self-employment income.

Which of the following statements regarding the process for determining a partnership's tax year-end is true?

A partner's self-employment earnings (loss) may be affected by her share of ordinary business income (loss) and any guaranteed payments she receives. The impact of these amounts typically depends on the status of the partner. Which of the following statements correctly describes the effect these items have on the partner's self-employment earnings (loss) ?

A partner's outside basis must first be decreased by any negative basis adjustments and then increased by any positive basis adjustments.