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Exam 14: Partnerships and Limited Liability Entities

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Question 51

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

A) The partnership acquires the asset through a § 1031 like-kind exchange.
B) A partner owning 25% of partnership capital and profits sells the asset to the partnership.
C) The partnership leases the asset from a partner on a one-year lease.
D) The partnership acquires the asset from a partner as a contribution to partnership capital under § 721(a) .
E) None of the above.

F) A) and D)
G) All of the above

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Question 52

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Binita contributed property with a basis of $40,000 and a value of $50,000 to the BE Partnership in exchange for a 20% interest in partnership capital and profits. During the first year of partnership operations, BE had net taxable income of $30,000 and tax-exempt interest income of $10,000. The partnership distributed $10,000 cash to Binita. Binita's adjusted basis (outside basis) for her partnership interest at year-end is:

A) $36,000.
B) $38,000.
C) $60,000.
D) $70,000.
E) None of the above.

F) B) and E)
G) A) and E)

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Question 53

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Palmer contributes property with a fair market value of $4,000,000 and an adjusted basis of $3,000,000 to AP Partnership. Palmer shares in $3,000,000 of partnership debt under the liability sharing rules, giving him an initial adjusted basis for his partnership interest of $6,000,000. One month after the contribution, Palmer receives a cash distribution from the partnership of $2,000,000. Palmer would not have contributed the property if the partnership had not contractually obligated itself to make the distribution. Assume Palmer's share of partnership liabilities will not change as a result of this distribution. a.​Under the IRS's likely treatment of this transaction, what is the amount of gain or loss that Palmer will recognize because of the $2,000,000 cash distribution? b.What is the partnership's basis for the property after the distribution? c.​If Palmer is unhappy with this result, can you suggest a possible alternative that may provide him with a better answer?

William is a general partner in the WST partnership. During the current year, he receives a guaranteed payment of $10,000 for services he provides to the partnership, and his distributive share of partnership income is $30,000. William is required to pay self-employment tax on the $10,000 guaranteed payment, but not on his distributive share of partnership income.

Morgan is a 50% managing member in the calendar year, cash basis MKK LLC. The LLC received $150,000 income from services and paid the following other amounts: ​ How much will Morgan's adjusted gross income increase as a result of the above items? What amount will be included in Morgan's self-employment tax calculation?

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?

Which of the following entity owners cannot participate in management of the entity?

An examination of the RB Partnership's tax books provides the following information for the current year: ​ Rachel is a 30% general partner in partnership capital, profits, and losses. Assume the adjusted basis of her partnership interest is $60,000 at the beginning of the year, and she shares in 30% of the partnership's liabilities for basis purposes. a.What is Rachel's adjusted basis for the partnership interest at the end of the year? b.​How much income must Rachel report on her tax return for the current year? What is the character of the income and what types of tax might apply to it?

Ken and Lars formed the equal KL Partnership during the current year, with Ken contributing $100,000 in cash and Lars contributing land (basis of $60,000, fair market value of $40,000) and equipment (basis of $0, fair market value of $60,000). Lars recognizes a $40,000 gain on the contribution and his basis in his partnership interest is $100,000.

Tara and Robert formed the TR Partnership four years ago. Because they decided the company needed some expertise in multimedia presentations, they offered Katie a 1/3 interest in partnership capital if she would come to work for the partnership. On July 1 of the current year, the unrestricted partnership interest (fair market value of $25,000) was transferred to Katie. How should Katie treat the receipt of the partnership interest in the current year?

Which of the following statements is not a requirement of the substantial economic effect test?

The amount of a partnership's income and loss from operating activities is combined with separately stated income and expenses to determine the partnership's equivalent of "taxable income." This amount is reconciled to book income on the partnership's Schedule M-1 or Schedule M-3.

Partners' capital accounts should be determined using the same method on Form 1065 Schedule L, Form 1065 Schedule M-2, and the Schedules K-1 prepared for the partners.

Rebecca is a limited partner in the RST Partnership, which is not publicly traded. Her allocable share of RST's passive ordinary losses from a nonrealty activity for the current year is ($60,000) . Rebecca has a $40,000 adjusted basis (outside basis) for her interest in RST (before deduction of any of the passive losses) . Her amount "at risk" under § 465 is $30,000 (before deduction of any of the passive losses) . She also has $25,000 of passive income from other sources. How much of her ($60,000) allocable loss can Rebecca deduct on her current year's tax return?

JLK Partnership incurred $6,000 of organizational costs and $50,000 of startup costs in 2016. JKL may deduct $5,000 each of organizational and startup costs, and the remaining costs ($1,000 of organizational costs and $45,000 of startup costs) may be amortized over 60 months.

The taxable income of a partnership flows through to the partners, who report the income on their tax returns.

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

Harry and Sally are considering forming a partnership. Both taxpayers use the calendar year and are cash basis taxpayers. The partnership will not be a tax shelter. The partners are uncertain as to whether the partnership should use the cash or accrual method of accounting. Also, the idea of a tax deferral in the first year of operations has led them to consider using a June 30 fiscal year-end for the partnership. ​ As their tax adviser, identify the issues that must be considered in selecting an accounting method and tax year for the partnership.

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

If a partnership earns tax-exempt income, the income should not affect the partners' bases in their partnership interests. Do you agree with this statement? Explain.