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Exam 14: Forming and Operating Partnerships

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Question 31

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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 32

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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) True
B) False

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Question 33

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An additional allocation of partnership debt or relief of partnership debt is considered to be a deemed cash contribution or cash distribution respectively.

A partnership may use the cash method despite having a corporate partner when the partnership's average gross receipts for the prior three taxable years don't exceed ________.

Kim received a 1/3 profits and capital interest in Bright Line,LLC in exchange for legal services she provided.In addition to her share of partnership profits or losses,she receives a $30,000 guaranteed payment each year for ongoing services she provides to the LLC.For X4,Bright Line reported the following revenues and expenses: Sales - $150,000,Cost of Goods Sold - $90,000,Depreciation Expense - $45,000,Long-Term Capital Gains - $15,000,Qualified Dividends - $6,000,and Municipal Bond Interest - $3,000.How much ordinary business income (loss) will Bright Line allocate to Kim on her Schedule K-1 for X4?

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?

If a partner participates in partnership activities on a regular,continuous,and substantial basis,then the partnership's activities with respect to this individual partner are not considered passive.

Which of the following items are subject to the Net Investment Income tax when a partner is not a material participant in the partnership?

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? $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { J\&J Limited Liability Company }$ $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Balance Sheet }$ $\begin{array}{l}\begin{array}{lll}&\text { Basis}& \text { FMV }\\\text { Cash } & 20,000 & 20,000 \\\text { Inventory } & 5,000 & 5,000 \\\text { Equipment } & 10,000 & 17,000 \\\text { Building } & 30,000 & 45,000 \\& & \\\text { Total Assets } & 65,000 & 87,000\end{array}\begin{array}{lll}&\text { Basis}& \text { FMV }\\\text { Account Payable } & 7,000& 7,000 \\\text { Mortgage Payable } & 20,000 & 20,000 \\\\\text { A - Capital } & 22,000 & 30,000 \\\text { B - Capital } & 16,000& 30,000 \\\text { Total Liab. \& OE } & 65,000& 87,000\end{array}\end{array}$

Under proposed regulations issued by the Treasury Department,in which of the following situations should an LLC member be treated as a general partner for self-employment tax purposes?

Gerald received a one-third capital and profit (loss) interest in XYZ Limited Partnership (LP) .In exchange for this interest,Gerald contributed a building with a FMV of $30,000.His adjusted basis in the building was $15,000.In addition,the building was encumbered with a $9,000 nonrecourse mortgage that XYZ,LP assumed at the time the property was contributed.What is Gerald's outside basis immediately after his contribution?

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

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.

This year,Reggie's distributive share from Almonte Partnership includes $8,000 of interest income,$4,000 of dividend income,and $60,000 ordinary business income. A.Assume that Reggie materially participates in the partnership.How much of his distributive share from Almonte Partnership is potentially subject to the Medicare contribution tax? B.Assume that Reggie does not materially participate in the partnership.How much of his distributive share from Almonte Partnership is potentially subject to the Medicare contribution tax?

Bob is a general partner in Fresh Foods Partnership and is trying to determine if the income reported on his K-1 should be classified as passive or active trade or business income.List three different criteria that,if met,would allow Bob to treat the income from Fresh Foods as active trade or business income.

XYZ,LLC has several individual and corporate members.Abe and Joe,individuals with 4/30 year-ends,each have a 23% profits and capital interest.RST,Inc.,a corporation with a 6/30 year end,owns a 4% profits and capital interest while DEF,Inc.,a corporation with an 8/30 year end,owns a 4.9% profits and capital interest.Finally,thirty other calendar year-end individual partners (each with less than a 2% profits and capital interest) own the remaining 45% of the profits and capital interests in XYZ.What tax year-end should XYZ use and which test or rule requires this year-end?

A purchased partnership interest has a holding period beginning on the date of purchase regardless of the type of property held by the partnership.

On January 1,X9,Gerald received his 50% profits and capital interest in High Air,LLC in exchange for $2,000 in cash and real property with a $3,000 tax basis secured by a $2,000 nonrecourse mortgage.High Air reported a $15,000 loss for its X9 calendar year.How much loss can Gerald deduct,and how much loss must he suspend if he only applies the tax basis loss limitation?

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

Partnerships may maintain their capital accounts according to which of the following rules?