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Exam 20: Forming and Operating Partnerships

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Question 41

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

A) To prevent partners from being double taxed when they sell their partnership interests
B) To ensure that partnership tax-exempt income is not ultimately taxed
C) To prevent partners from being double taxed when they receive cash distributions
D) To ensure that partnership non-deductible expenses are never deductible
E) None of these rationales are false

F) C) and E)
G) C) and D)

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Question 42

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On June 12, 20X9, Kevin, Chris, and Candy Corp. came together to form Scrumptious Sweets General Partnership. Now, Scrumptious Sweets must decide which tax year-end to use. Kevin and Chris have calendar year-ends and each holds a 35% profits and capital interest. However, Candy Corp. has a September 30th year-end and holds the remaining 30% profits and capital interest. What tax year-end must Scrumptious Sweets adopt and what rule mandates this year-end?

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Scrumptious Sweets must use a calendar y...

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Question 43

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A partnership can elect to amortize organization and startup costs; however, syndication costs are not deductible.

Alfred, a 33% profits and capital partner in Pizzeria Partnership, needs help in adjusting his tax basis to reflect the information contained in his most recent Schedule K-1 from the partnership. Unfortunately, the Schedule K-1 he recently received was for year 3 of the partnership, but Alfred only knows that his tax basis at the beginning of year 2 of the partnership was $23,000. Thankfully, Alfred still has his Schedule K-1 from the partnership for years 1 and 2. Using the following information from Alfred's year 1, year 2, and year 3 Schedule K-1, calculate his tax basis the end of year 2 and year 3. $\begin{array}{c}\begin{array}{lll}\text{Year 1:}\\\text{Ordinary business income}\\\text{Cash distribution}\\\text{Alfred's share of partnership debt}\\\text{Guaranteed payment}\\\text{Nondeductible expense}\\\text{Tax-exempt income}\\\\\text{Year 2:}\\\text{Ordinary business loss}\\\text{Cash contribution}\\\text{Alfred's share of partnership debt}\\\text{Guaranteed payment}\\\text{Nondeductible expense}\\\text{Tax-exempt income}\\\\\text{Year 3:}\\\text{Ordinary business loss}\\\text{Alfred's share of partnership debt}\\\text{Nondeductible expenses}\\\text{Guaranteed payment}\\\end{array}\begin{array}{lll}&&\end{array}\begin{array}{l}\\\mathbf{\$ 1 0 , 0 0 0} \\\mathbf{\$ 7 , 0 0 0} \\\mathbf{\$ 8 5 , 0 0 0} \\(\$ 4,500) \\\mathbf{( \$ 1 , 0 0 0 )} \\\$ 1,200 \\\\\\\text { (\$5,000) } \\ \mathbf{\$ 1 0 , 0 0 0} \\\mathbf{\$ 7 3 , 0 0 0} \\(\$ 7,500) \\(\$ 3,000) \\\$ 1,500 \\\\\\\text { (\$13,000) } \\\text { \$58,000 } \\\mathbf{( \$ 3 , 0 0 0 )} \\(\$ 7,500) \\\end{array}\end{array}$

Partnerships can use special allocations to shift built-in gains and built-in losses on contributed property from a partner who contributed the property to other partners.

Tom is talking to his friend Bob, who has an interest in Freedom, LLC, about purchasing his LLC interest. Bob's outside basis in Freedom, LLC is $10,000. This includes his $2,500 one-fourth share of the LLC's debt. Bob's 704(b) capital account is $17,000. If Tom bought Bob's LLC interest for $17,000, what would Tom's outside basis be in Freedom, LLC?

Which of the following statements regarding capital and profit interests received for services contributed to a partnership is false?

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

Ruby's tax basis in her partnership interest at the beginning of the partnership's tax year was $13,000. The following items were included in her Schedule K-1 from the partnership for the year: Cash Distribution $\mathbf {\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad \$ 2 , 0 0 0 }$ Ordinary Business Loss $\mathbf { \quad\quad\quad\quad\quad\quad\quad\quad\quad( \$ 1 4 , 0 0 0 ) }$ Short-Term Capital Gains $\mathbf {\quad\quad\quad\quad\quad\quad\quad\quad\quad \$ 2 , 0 0 0 }$ Reduction in Ruby's Share of Partnership Debt $\mathbf { \quad\quad\$ 4 , 0 0 0 }$

Income earned by flow-through entities is usually taxed once at the entity level.

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.

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

Frank and Bob are equal members in Soxy Socks, LLC. When forming the LLC, Frank contributed $50,000 in cash and $50,000 worth of equipment. Frank's adjusted basis in the equipment was $35,000. Bob contributed $50,000 in cash and $50,000 worth of land. Bob's adjusted basis in the land was $30,000. On 3/15/X4, Soxy Socks sells the land Bob contributed for $60,000. How much gain (loss) related to this transaction will Bob report on his X4 return?

Jay has a tax basis of $14,000 in his partnership interest at the beginning of the partnership tax year. The following amounts of partnership debt were allocated to Jay and are included in his beginning of the year tax basis: (1) recourse debt - $3,000, (2) qualified nonrecourse debt - $1,000, and (3) nonrecourse debt - $500. If Jay is allocated a $15,000 loss for the current year, how much of the loss will be suspended under the tax basis and at-risk limitations?

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

Partners adjust their outside basis by adding non-deductible expenses and subtracting any tax-exempt income to avoid being double taxed.

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

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, Qualifying 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?

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?

A partner's outside basis must first be decreased by any negative basis adjustments and then increased by any positive basis adjustments.