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Exam 15: Forming and Operating Partnerships

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Question 1

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Sarah, Sue, and AS Inc.formed a partnership on May 1, 20X9, called SSAS, LP.Now that the partnership is formed, they must determine its appropriate year-end.Sarah has a 30 percent profits and capital interest while Sue has a 35 percent profits and capital interest.Both Sarah and Sue have calendar year-ends.AS Inc.holds the remaining profits and capital interest in the LP, and it has a September 30 year-end.What tax year-end must SSAS, LP, use for 20X9, and which test or rule requires this year-end?

A) 12/31, least aggregate deferral test.
B) 9/30, majority interest taxable year.
C) 12/31, majority interest taxable year.
D) 12/31, principal partners test.

E) A) and B)
F) All of the above

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Question 2

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Zinc, LP was formed on August 1, 20X9.When the partnership was formed, Al contributed $10,000 in cash and inventory with an FMV and tax basis of $40,000.In addition, Bill contributed equipment with an FMV of $30,000 and adjusted basis of $25,000 along with accounts receivable with an FMV and tax basis of $20,000.Also, Chad contributed land with an FMV of $50,000 and tax basis of $35,000.Finally, Dave contributed a machine, secured by $35,000 of debt, with an FMV of $15,000 and a tax basis of $10,000.What is the total inside basis of all the assets contributed to Zinc, LP?

A) $140,000.
B) $165,000.
C) $175,000.
D) $200,000.

E) All of the above
F) C) and D)

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Question 3

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

John, a limited partner of Candy Apple, LP, is allocated $30,000 of ordinary business loss from the partnership.Before the loss allocation, his tax basis is $20,000 and his at-risk amount is $10,000.John also has ordinary business income of $20,000 from Sweet Pea, LP, as a general partner and ordinary business income of $5,000 from Red Tomato as a limited partner.How much of the $30,000 loss from Candy Apple can John deduct currently?

Explain why partners must increase their tax basis for their share of partnership taxable and nontaxable income or gain and reduce their basis by their share of partnership deductible and nondeductible expenses or losses.

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?

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

Peter, Matt, Priscilla, and Mary began the year in the PMPM General Partnership sharing profits, losses, and capital equally.They 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?

In each of the independent scenarios below, how does the partner or partnership determine its holding period in the property received? a.A partner contributes property in exchange for a partnership interest b.The partnership receives contributed property c.A partner contributes services in exchange for a partnership interest d.A partner purchases a partnership interest from an existing partner

Partnership tax rules incorporate both the entity and aggregate approaches.

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.

If a taxpayer sells a passive activity with suspended passive activity losses from prior years, what type of income can generally be offset by the suspended passive losses in the year of sale?

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 partnership can elect to amortize organization and start-up costs; however, syndication costs are not deductible.

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

Which of the following statements regarding the rationale for adjusting a partner's basis is false?

Adjustments to a partner's outside basis are made annually to prevent double taxation on the sale of a partnership interest or at the time of a partnership distribution.

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

Which of the following entities is not considered a flow-through entity?

Tim, a real estate investor, Ken, a dealer in securities, and Hardware, Inc., a retail lumber store, form a partnership called HKT, LP.HKT is in the home-building business.Tim recently purchased his interest in HKT, while the other partners purchased their interests several years ago.During X3, HKT reports a $12,000 gain from the sale of a stock in a wholesale lumber company it purchased in X1 for investment purposes.Which of the following statements best represents how their portion of the gain should be reported to the partner?