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Exam 21: Partnerships

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Question 31

True/False

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One of the disadvantages of the partnership form is that the partner's share of the partnership's taxable income is taxed to the partner,regardless of whether or not distributed.

A) True
B) False

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Question 32

Multiple Choice

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Michelle receives a proportionate liquidating distribution when the basis of her partnership interest is $50,000.The distribution consists of $58,000 cash and noninventory property (adjusted basis to the partnership of $10,000 and fair market value of $12,000) .The partnership has no hot assets.How much gain or loss does Michelle recognize,and what is her basis in the distributed property?

A) $0 gain or loss; $0 basis in property.
B) $0 gain or loss; $50,000 basis in property.
C) $8,000 ordinary income; $0 basis in property.
D) $8,000 capital gain; $10,000 basis in property.
E) $8,000 capital gain; $0 basis in property.

F) A) and D)
G) B) and D)

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Question 33

Multiple Choice

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Michelle and Jacob formed the MJ Partnership.Michelle contributed $20,000 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 $10,000; Michelle received a distribution of $8,000 cash from the partnership; and Michelle had a 50% share in the partnership's $16,000 of recourse liabilities on the last day of the partnership year.Michelle's adjusted basis for her partnership interest at year end is:

Greg and Justin are forming the GJ Partnership.Greg contributes $500,000 cash and Justin contributes nondepreciable property with an adjusted basis of $200,000 and a fair market value of $550,000.The property is subject to a $50,000 liability,which is also transferred into the partnership and is shared equally by the partners for basis purposes.Greg and Justin share in all partnership profits equally except for any precontribution gain,which must be allocated according to the statutory rules for built-in gain allocations.

Nick sells his 25% interest in the LMNO Partnership to new partner Katrina for $57,500.The partnership's assets consist of cash ($100,000),land (basis of $90,000; fair market value of $70,000),and inventory (basis of $40,000; fair market value of $60,000).Nick's basis in his partnership interest was $57,500.On the sale,Nick will recognize ordinary income of $5,000 and a capital loss of $5,000.

Joseph is the managing general partner of JKL,in which he owns a 40% interest.For the year,JKL reported income of $300,000 (after deducting all guaranteed payments) .Joseph received a guaranteed payment of $20,000 for capital that he had loaned the partnership,and he received a guaranteed payment of $100,000 for services he performed for JKL.How much income from self-employment did Joseph earn from JKL?

Josh has a 25% capital and profits interest in the calendar-year GDJ Partnership.His adjusted basis for his partnership interest on October 15 of the current year is $300,000.On that date,the partnership liquidates and makes a proportionate distribution of the following assets to Josh.

PaulCo,DavidCo,and Sean form a partnership with cash contributions of $80,000,$50,000 and $30,000,respectively,and agree to share profits and losses in the ratio of their original cash contributions.PaulCo uses a January 31 fiscal year-end,while DavidCo and Sean use a November 30 and December 31 year-end,respectively.The partnership must use the least aggregate deferral method to determine its year end.

Which of the following is not an adjustment to the partners' basis in the partnership interest?

Partner Tom transferred property (basis of $20,000; fair market value of $50,000) to the TUV Partnership in exchange for a partnership interest.At a later date,when Tom's outside basis for his partnership interest was $70,000,Tom received a $50,000 cash distribution from the partnership.Which one of the following statements is not true?

Julie owns property that is treated as a capital asset in her hands.She contributed a parcel of land (basis $60,000; fair market value $58,000)to a real estate partnership,which will hold it as inventory.After three years,the partnership sells the land for $56,000.The partnership will recognize a $4,000 ordinary loss on sale of the property.

Which of the following statements about the transfer of a partnership interest is not true?

An example of the "entity concept" underlying partnership taxation is the fact that the partners (rather than the partnership)pay tax on partnership income.

Henry contributes property valued at $60,000 (basis $50,000)in exchange for a 25% interest in the HIKE Partnership.If the property is later sold for $80,000,gain of $7,500 will be allocated to Henry.

Fern,Inc.,Ivy Inc.,and Jason formed a general partnership.Fern owns a 50% interest and Ivy and Jason each own 25% interests.Fern,Inc.files its tax return on a July 1 - June 30 fiscal year; Ivy Inc.files on a September 1 - August 31 fiscal year; and Jason is a calendar year taxpayer.Which of the following statements is true regarding the taxable year the partnership can choose?

A property distribution from a partnership to a partner is generally taxable to the partner.

For Federal income tax purposes,a distribution from a partnership to a partner is treated the same as a distribution from a C corporation to its shareholders.

Rick is a 30% partner in the ROC Partnership.At the beginning of the tax year,Rick's basis in the partnership interest was $60,000,including his share of partnership liabilities.During the current year,ROC reported net ordinary income of $40,000.In addition,ROC distributed $5,000 to each of the partners ($15,000 total) .At the end of the year,Rick's share of partnership liabilities increased by $20,000.Rick's basis in the partnership interest at the end of the year is:

At the beginning of the year,Elsie's basis in the E&G Partnership interest is $60,000.She receives a proportionate nonliquidating distribution from the partnership consisting of $10,000 of cash,unrealized accounts receivable (basis of $0,fair market value $30,000) ,and inventory (basis of $10,000,fair market value of $20,000) .After the distribution,Elsie's bases in the accounts receivable,inventory,and partnership interest are:

During the current year,John and Ashley form the JA Partnership and agree to share profits and losses equally.Ashley contributes land with a fair market value of $80,000 (subject to a $30,000 nonrecourse mortgage).On the contribution date,Ashley's adjusted basis in the land is $40,000.Immediately after formation,Ashley's partnership outside basis is $25,000.