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Exam 14: Forming and Operating Partnerships

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Question 41

Multiple Choice

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

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Question 42

Multiple Choice

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What form does a partnership use when filing an annual informational return?

A) Form 1040.
B) Form 1041.
C) Form 1065.
D) Form 1120.

E) A) and C)
F) C) and D)

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Question 43

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A partner can generally apply passive activity losses against passive activity income for the year.

Jordan,Inc.,Bird,Inc.,Ewing,Inc.,and Barkley,Inc.formed Nothing-But-Net Partnership on June 1ˢᵗ,20X9.Now,Nothing-But-Net must adopt its required tax year-end.The partners' year-ends,profits interests,and capital interests are reflected in the table below.Given this information,what tax year-end must Nothing-But-Net use and what rule requires this year-end?   $\begin{array} { l c c c } & \text { Nothing-But-Net Partrership } & \\& \text { Year-End } & \text { Profits } & \text { Capital } \\\text { Jordar, Inc. } & 4 / 30 & 45 \% & 25 \% \\\text { Bird, Inc. } & 9 / 30 & 25 \% & 25 \% \\\text { Ewing, Inc. } & 10 / 31 & 0 \% & 25 \% \\\text { Barkley, Irce } & 12 / 31 & 30 \% & 25 \%\end{array}$  

In what order are the loss limitations for partnerships applied?

Illuminating Light Partnership had the following revenues,expenses,gains,losses,and distributions: $\begin{array}{lcc}\text { Sales } & \$ 60,000 \\\text { Long-Term Capital Gain } & \$ 8,000 \\\text { Qualified Dividends } & \$ 5,000 \\\text { Cost of Goods Sold } & \$ 60,000 \\\text { Employee Wages } & \$ 15,000 \\\text { Guaranteed Payment to Managing Partner } & \$ 25,000 \\\text { Municipal Bond Interest } & \$ 5,000 \\\text { Section 179 Expense } & \$ 10,000 \\\text { MACRS Depreciation } & \$ 8,000 \\\text { Section 1231 Gains } & \$ 3,000 \\\text { Fines and Penalties } & \$ 1,500\end{array}$ Given these items,what is Illuminating Light's ordinary business income (loss)for the year?

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?

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 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?

What is the correct order for applying the following three items to adjust a partner's tax basis in his partnership interest: (1) Increase for share of ordinary business income,(2) Decrease for share of separately stated loss items,and (3) Decrease for distributions?

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

Which of the following statements regarding the process for determining a partnership's tax year-end is true?

What is the difference between the aggregate and entity theory of partnership taxation? Provide two examples of how partnership tax rules reflect the aggregate theory and two examples of how they reflect the entity theory.

KBL,Inc.,AGW,Inc.,Blaster,Inc.,Shiny Shoes,Inc.,and a group of 24 individuals form Shoes Galore General Partnership on October 11,20X9.Now,Shoes Galore must adopt its required tax year-end.The partners' year-ends,profits interests,and capital interests are reflected in the table below.Given this information,what tax year-end must Shoes Galore use and what rule requires this year-end? $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Shoes Galore Partnership }$ $\begin{array}{llcc} & \text { Year-End } & \text { Profits } & \text { Capital } \\\text { KBL, Inc. } & 1 / 31 & 25 \% & 25 \% \\\text { AGW, Inc. } & 1 / 31 & 20 \% & 20 \% \\\text { Blaster, Inc } & 3 / 31 & 4 \% & 4 \% \\\text { Shiny Shoes, Inc. } & 6 / 30 & 3 \% & 3 \%\\24 \text { Individuals }&12 / 31& 2 \% \text { each (48\% total) }& 2 \% \text { each }(48 \% \text { total })\\\end{array}$

How does a partnership make a tax election for the current year?

Under general circumstances,debt is allocated from the partnership to each partner in the following manner:

In X1,Adam and Jason formed ABC,LLC,a car dealership in Kansas City.In X2,Adam and Jason realized they needed an advertising expert to assist in their business.Thus,the two members offered Cory,a marketing expert,a 1/3 capital interest in their partnership for contributing his expert services.Cory agreed to this arrangement and received his capital interest in X2.If the value of the LLC's capital equals $180,000 when Cory receives his 1/3 capital interest,which of the following tax consequences does not occur in X2?

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 $27,000,000 in annual gross receipts over the last three years,what accounting method can TQK use for X9?

At the end of year 1,Tony had a tax basis of $40,000 in Tall Ladders,Limited Partnership.Tony has a 20 percent profits interest in Tall Ladders.For year 2,Tall Ladders will pay Tony a $10,000 guaranteed payment for extra services he provides to the partnership.Given the following Income Statement and Balance Sheet from Tall Ladders,what is Tony's adjusted tax basis at the end of year 2? $\begin{array}{l}\begin{array}{lcl}&\text {TALL LADDERS, LP}\\&\text {Income Statement}\\&\text {Year 2}\\\text {Sales}&\\\text {COGS}&\\\text {Gross Profit}&\\\text {Interest Income}&\\\text {Dividends}&\\\text {Long Term Capital Gain}&\\\text {Other Income}&\\\text {Total Other Income}&\\\text {MACRS Depreciation}&\\\text {Guaranteed Payments}&\\\text {Charitable Contribution}&\\\text {Fines and Penalties}&\\\text {Other Expenses}&\\\text {Total other Expenses}&\\\text {Net Income (Loss)}&\\\end{array}\begin{array}{lll}\\\\\\65,000\\47,000\\18,000\\ 3,000\\5,000\\10,006\\33000\\20,000\\10,000\\10,000 \\4,500 \\8,500 \\53,000 \\2,000 \\\end{array}\end{array}$ $\begin{array}{lcr}&\text { TALL LADDERS, LP}\\&\text { Balance Sheet}\\&&\text { Year 1 } & \text { Year 2 } \\ \text { Assets}&&120,000& 270,000 \\ \text { Nonrecourse Liabilities }&&50,000 & 180,000 \\ \text { Partner's Capital}&&70,000 & 90,000\end{array}$

Lloyd and Harry,equal partners,form the Ant World Partnership.During the year,Ant World had the following revenue,expenses,gains,losses,and distributions: $\begin{array} { l l r } \text { Cost of Goods Sold } & \$ 85,000 \\\text { Cash Distribution to Harry } & \$15,000 \\\text { Municipal Bond Interest } & \$1,500 \\\text { Short-Tern Capital Gairs } & \$ 4,500 \\\text { Errployee Wages } & \$40,000 \\\text { Rent } & \$10,000 \\\text { Charitable Contributions } & \$ 25,000 \\\text { Sales } & \$ 175,000 \\\text { Repairs and Maintenance } & \$ 5,000 \\\text { Long-Tern Capital Gains } & \$ 12,000 \\\text { Fines and Penalties } & \$5,000 \\\text { Guararteed Payment to Lloyd } & \$ 25,000\end{array}$ Given these items,what amount of ordinary business income (loss)and what separately-stated items should be allocated to each partner for the year?