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Exam 9: Forming and Operating Partnerships

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Question 41

True/False

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

A) True
B) False

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Question 42

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Which of the following does not adjust a partner's basis?

A) Ordinary business income (loss) .
B) Change in amount of partnership debt.
C) Tax-exempt income.
D) All of the choices adjust a partner's basis.

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

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Question 43

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Peter,Matt,Priscilla,and Mary began the year in the PMPM General Partnership sharing profits,losses,and capital equally.They each had a tax basis at the beginning of the year of $3,000,$10,000,$8,000,and $11,000 respectively.Early in the year,Mary provided general consulting services to the partnership and received an additional 15 percent profits,losses,and capital interest in the partnership.The liquidation value of her additional interest was $45,000.Later the same year,the partnership received cash contributions of $25,000 from Peter and Matt that it used to repay the partnership's $35,000 recourse debt.According to state law,the partners shared responsibility for this debt in accordance with their loss sharing ratios.What is each partner's tax basis after adjustment for these transactions?

On March 15,20X9,Troy,Peter,and Sarah formed Picture Perfect general partnership.This partnership was created to sell a variety of cameras,picture frames,and other photography accessories.When it was formed,the partners received equal profits and capital interests and the following items were contributed by each partner: • Troy - cash of $3,000,inventory with a FMV and tax basis of $5,000,and a building with a FMV of $22,000 and adjusted basis of $10,000.Additionally,the building was secured by a $10,000 nonrecourse mortgage. • Peter - cash of $5,000,accounts payable of $12,000 (recourse debt for which each partner becomes equally responsible),and land with a FMV of $27,000 and tax basis of $20,000. • Sarah - cash of $2,000,accounts receivable with a FMV and tax basis of $1,000,and equipment with a FMV of $40,000 and adjusted basis of $3,500.Sarah also contributed a $23,000 nonrecourse note payable secured by the equipment. What is each partner's outside basis and how much gain (loss)must the partners recognize in 20X9 when Picture Perfect was formed?

Actual or deemed cash distributions in excess of a partner's outside basis are generally taxable as capital gains.

Alfred,a one-third profits and capital partner in Pizzeria Partnership needs help in adjusting his tax basis to reflect the information contained in his most recent Schedule K-1 from the partnership.Unfortunately,the Schedule K-1 he recently received was for year 3 of the partnership,but Alfred only knows that his tax basis at the beginning of year 2 of the partnership was $23,000.Thankfully,Alfred still has his Schedule K-1 from the partnership for years 1 and 2. Using the following information from Alfred's year 1,year 2,and year 3 Schedule K-1,calculate his tax basis the end of year 2 and year 3.

Which of the following items will affect a partner's tax basis?

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

How does additional debt or relief of debt affect a partner's basis?

Jerry,a partner with 30% capital and profit interest,received his Schedule K-1 from Plush Pillows,LP.At the beginning of the year,Jerry's tax basis in his partnership interest was $50,000.His current year Schedule K-1 reported an ordinary loss of $15,000,long-term capital gain of $3,000,qualified dividends of $2,000,$500 of non-deductible expenses,a $10,000 cash contribution,and a reduction of $4,000 in his share of partnership debt.What is Jerry's adjusted basis in his partnership interest at the end of the year?

Which of the following statements exemplifies the entity theory of partnership taxation?

If partnership debt is reduced and a partner is deemed to receive a cash distribution,what impact does the deemed distribution have on the partner if it is in excess of her tax basis?

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.

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.

J&J,LLC was in its third year of operations when J&J decided to expand the number of members from two,A & B,with equal profits and capital interests to three members,A,B,and C.The third member,C,will contribute her financial expertise to the LLC in exchange for a 1/3 capital interest in J&J.Given the balance sheet below reflecting the financial position of J&J on the date member C is admitted,what are the tax consequences to members A,B,and C,and to J&J when C receives her capital interest? If,instead,member C receives a 1/3 profit interest,what would be the tax consequences to members A,B,and C,and to J&J?

TQK,LLC provides consulting services and was formed on 1/31/X5.Aaron and ABC,Inc.each hold a 50% capital and profits interest in TQK.If TQK averaged $7,000,000 in annual gross receipts over the last three years,what accounting method can TQK use for X9?

A partner's tax basis or at-risk amount can be increased by making capital contributions,by paying off partnership debt,or by increasing the profitability of the partnership.

This year,HPLC,LLC was formed by H Inc.,P Inc.,L Inc.,and C Inc.Each member had an equal share in the LLC's capital.H Inc.,P Inc.,and L Inc.each had a 30% profits interest in the LLC with C Inc.having a 10% profits interest.The members had the following tax year-ends: H Inc.[1/31],P Inc.[5/31],L Inc.[7/31],and C Inc.[10/31].What tax year-end must the LLC use?

In what order are the loss limitations for partnerships applied?

A partnership with a C corporation partner must always use the accrual method as its accounting method.