Question 1

Sharon and Sue are equal partners in the S&S Partnership. On January 1 of the current year, each partner's adjusted basis in S&S was $80,000 (including each partner's $20,000 share of the partnership's $40,000 of liabilities). During the current year, S&S repaid $30,000 of the debt and borrowed $20,000 for which Sharon and Sue are equally liable. In the current year ended December 31, S&S also sustained a net operating loss of $40,000 and earned $10,000 of interest income from investments. If liabilities are shared equally by the partners, on January 1 of the next year how much is each partner's basis in her interest in S&S?

Accepted Answer

$60,000. Each partner's initial basis in...

Question 2

In the current year, Derek formed an equal partnership with Cody. Derek contributed land with an adjusted basis of $110,000 and a fair market value of $200,000. Derek also contributed $50,000 cash to the partnership. Cody contributed land with an adjusted basis of $80,000 and a fair market value of $230,000. The land contributed by Derek was encumbered by a $60,000 nonrecourse debt. The land contributed by Cody was encumbered by $40,000 of nonrecourse debt. Assume the partners share debt equally. Immediately after the formation, what is the basis of Cody's partnership interest?

Accepted Answer

$90,000. C...

Question 3

Sharon contributed property to the newly formed QRST Partnership. The property had a $100,000 adjusted basis to Sharon and a $160,000 fair market value on the contribution date. The property was also encumbered by a $120,000 nonrecourse debt, which was transferred to the partnership on that date. Another partner, Rochelle, shares 30% of the partnership income, gain, loss, deduction, and credit. Under IRS regulations, Rochelle's share of the nonrecourse debt for basis purposes is:

Accepted Answer

A)   $20,000.
B)   $30,000.
C)   $36,000.
D)   $100,000.
E)   $120,000.F) A) and E)
G) All of the above

Question 4

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. She will also receive a 25% interest in future partnership profits. On July 1 of the current year, the unrestricted partnership capital 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?

Accepted Answer

A)   Nontaxable.
B)   $25,000 ordinary income.
C)   $25,000 short-term capital gain.
D)   $25,000 long-term capital gain.
E)   None of the above.F) C) and E)
G) C) and D)

Question 5

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 $1,000,000 of partnership debt under the liability sharing rules, giving him an initial adjusted basis for his partnership interest of $4,000,000. 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?

Accepted Answer

d. Palmer will likely recognize a $500,000 [($4,000,000 - $3,000,000) × 50% ] gain on the transaction. Palmer received a cash payment equal to one-half the value of the property he contributed. The IRS would likely treat this as a disguised sale of the property. A disguised sale is presumed to occur when a contractual agreement requires a contribution by a partner to be followed within two years by a specified distribution by the partnership, and the distribution is made without regard to partnership profits. Both these issues occur in this scenario. While Palmer could argue that the intent of this transaction is not to create a disguised sale, it is doubtful that he would be successful.
e. The partnership's total basis for the property is $3,500,000. Its basis for the purchased property is the $2,000,000 cost of the property (the partnership is deemed to have paid for the property). In addition, the partnership has a $1,500,000 carryover basis for the portion of the property that was not "purchased."
f. If Palmer can wait for more than two years to receive the distribution and if the distribution is not contractually guaranteed, the contribution and distribution transactions will be presumed not to be a disguised sale. The distribution will be treated as a normal distribution that will not create capital gain for Palmer unless the distribution amount exceeds the adjusted basis for his partnership interest when the distribution is made.

Question 6

Match each of the following statements with the terms below that provide the best definition.
a. Organizational choice of many large accounting firms.
b. Partner's percentage allocation of current operating income.
c. Might affect any two partners' tax liabilities in different ways.
d. Brokerage and registration fees incurred for promoting and marketing partnership interests.
e. Transfer of asset to partnership followed by immediate distribution of cash to partner.
f. Must have at least one general and one limited partner.
g. All partners are jointly and severally liable for entity debts.
h. Theory treating the partner and partnership as separate economic units.
i. Partner's basis in partnership interest after tax­free contribution of asset to partnership.
j. Partnership's basis in asset after tax­free contribution of asset to partnership.
k. Owners are "members."
l. Theory treating the partnership as a collection of taxpayers joined in an agency relationship.
m. Allows many unincorporated entities to select their Federal tax status.
n. No correct match provided.
-Entity concept

Accepted Answer

The answer of Match each of the following statements with...

Question 7

A partnership's allocations of income and deductions to the partners are required to be proportionate to the partners' percentage ownership of partnership capital in order to meet the substantial economic effect tests.

Accepted Answer

A) True 
 B)False

Question 8

Seven years ago, Paul purchased residential rental estate that he has been depreciating as MACRS property over 27.5 years. This year, when his adjusted basis in the property was $250,000, Paul transferred the property to the newly formed PLA LLC in exchange for a one-third interest in the LLC. PLA incurred $10,000 of transfer taxes and fees related to the property. PLA must treat the $260,000 basis in the property, fees, and expenses, as new MACRS property depreciable over 27.5 years.

Accepted Answer

A) True 
 B)False

Question 9

Alicia and Barry form the AB Partnership at the start of the current year with a land contribution by Barry and a cash contribution by Alicia. Barry's contributed property is subject to a recourse mortgage assumed by the partnership. Barry has an 80% interest in AB's profits and losses. The land has been held by Barry for the past 6 years as an investment. It will be used by AB as an operating asset in its parking lot business. Which of the following statements is correct?

Accepted Answer

A)   Immediately after formation, Alicia's basis in the partnership equals the cash contributed by Alicia.
B)   Immediately after formation, Alicia's basis in the partnership equals the cash she contributed plus her share of the recourse debt contributed by Barry.
C)   Because the debt is recourse, the constructive liquidation scenario is not applicable for determining the allocation of debt to the partners.
D)   AB's basis in the land contributed by Barry equals Barry's basis in the land immediately before the contribution date, less the amount of the recourse debt assumed by the partnership.
E)   None of the above.F) A) and B)
G) B) and C)

Question 10

JLK Partnership incurred $6,000 of organizational costs and $50,000 of startup costs in 2014. 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.

Accepted Answer

A) True 
 B)False

Question 11

In which of the following independent situations would the transaction most likely be characterized as a disguised sale?

Accepted Answer

A)   Partner George contributes appreciated property to the GM Partnership, and three years later GM distributes$100,000 proportionately to the partners.
B)   Brianna contributes property with a basis of $20,000 and a fair market value of $50,000 to the BGB Partnership in exchange for a 20% interest therein. The partnership agrees to distribute $20,000 to Brianna in fifteen months, if partnership cash flows from operations exceed $100,000 at that time. The partnership does not expect to produce operating cash flows of over $100,000 for at least five years.
C)   Luis contributes appreciated property to the BLP Partnership. Thirty months later, he receives a distribution from the partnership of $15,000 cash. None of the other partners received a distribution. There was no agreement that BLP would make the distribution, and Luis would have made the contribution whether or not the partnership made the distribution.
D)   None of the above transactions will be treated as a disguised sale.
E)   a., b., and c. are all treated as disguised sales.F) All of the above
G) B) and C)

Question 12

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?

Accepted Answer

g. Rachel's adjusted basis for her partn...

Question 13

Match each of the following statements with the terms below that provide the best definition.
a. Adjusted basis of each partnership asset.
b. Operating expenses incurred after entity is formed but before it begins doing business.
c. Each partner's basis in the partnership.
d. Reconciles book income to "taxable income."
e. Tax accounting election made by partnership.
f. Tax accounting calculation made by partner.
g. Tax accounting election made by partner.
h. Does not include liabilities.
i. Designed to prevent excessive deferral of taxation of partnership income.
j. Amount that may be received by partner for performance of services for the partnership.
k. Computation that determines the way recourse debt is shared.
l. Will eventually be allocated to partner making tax-free property contribution to partnership.
m. Partner's share of partnership items.
n. Must generally be satisfied by any allocation to the partners.
o. Justification for a tax year other than the required taxable year.
p. No correct match is provided.
-Guaranteed payment

Accepted Answer

The answer of Match each of the following statements with...

Question 14

Match each of the following statements with the terms below that provide the best definition.
a. Organizational choice of many large accounting firms.
b. Partner's percentage allocation of current operating income.
c. Might affect any two partners' tax liabilities in different ways.
d. Brokerage and registration fees incurred for promoting and marketing partnership interests.
e. Transfer of asset to partnership followed by immediate distribution of cash to partner.
f. Must have at least one general and one limited partner.
g. All partners are jointly and severally liable for entity debts.
h. Theory treating the partner and partnership as separate economic units.
i. Partner's basis in partnership interest after tax­free contribution of asset to partnership.
j. Partnership's basis in asset after tax­free contribution of asset to partnership.
k. Owners are "members."
l. Theory treating the partnership as a collection of taxpayers joined in an agency relationship.
m. Allows many unincorporated entities to select their Federal tax status.
n. No correct match provided.
-Syndication costs

Accepted Answer

The answer of Match each of the following statements with...

Question 15

Match each of the following statements with the terms below that provide the best definition.
a. Adjusted basis of each partnership asset.
b. Operating expenses incurred after entity is formed but before it begins doing business.
c. Each partner's basis in the partnership.
d. Reconciles book income to "taxable income."
e. Tax accounting election made by partnership.
f. Tax accounting calculation made by partner.
g. Tax accounting election made by partner.
h. Does not include liabilities.
i. Designed to prevent excessive deferral of taxation of partnership income.
j. Amount that may be received by partner for performance of services for the partnership.
k. Computation that determines the way recourse debt is shared.
l. Will eventually be allocated to partner making tax-free property contribution to partnership.
m. Partner's share of partnership items.
n. Must generally be satisfied by any allocation to the partners.
o. Justification for a tax year other than the required taxable year.
p. No correct match is provided.
-Outside basis

Accepted Answer

The answer of Match each of the following statements with...

Question 16

Match each of the following statements with the terms below that provide the best definition.
a. Organizational choice of many large accounting firms.
b. Partner's percentage allocation of current operating income.
c. Might affect any two partners' tax liabilities in different ways.
d. Brokerage and registration fees incurred for promoting and marketing partnership interests.
e. Transfer of asset to partnership followed by immediate distribution of cash to partner.
f. Must have at least one general and one limited partner.
g. All partners are jointly and severally liable for entity debts.
h. Theory treating the partner and partnership as separate economic units.
i. Partner's basis in partnership interest after tax­free contribution of asset to partnership.
j. Partnership's basis in asset after tax­free contribution of asset to partnership.
k. Owners are "members."
l. Theory treating the partnership as a collection of taxpayers joined in an agency relationship.
m. Allows many unincorporated entities to select their Federal tax status.
n. No correct match provided.
-Substituted

Accepted Answer

The answer of Match each of the following statements with...

Question 17

On a corporate Form 1120, Schedule M-1 (or M-3) is used to reconcile book and tax income, and Schedule M-2 reconciles retained earnings to the amounts shown on Schedule L. How are these reconciliations accomplished on a partnership return? What additional information must be provided?

Accepted Answer

A partnership is not a taxpaying entity and does not report taxable income, per se. On Form 1065, the Analysis of Income (Loss) schedule (page 5) accumulates the partnership's equivalent of taxable income based on the various income and deductions reported on the partnership's Schedule K (page 4). This taxable income equivalent is reconciled to book income on Schedules M-1 and M-3.
On Schedule L, the partnership reports partners' capital using a "book" method, such as GAAP, "§ 704(b) book," or the tax basis, depending on the method the partnership uses for any financial reporting. On Schedule M­2, the partnership reports partners' capital using the same method it uses to prepare the partners' capital accounts on the partners' Schedules K­1. If these methods differ, the partnership should provide a schedule reconciling the two methods of reporting partners' capital.

Question 18

On the formation of a partnership, when might a "disguised sale" occur? How can this treatment be avoided?

Accepted Answer

A disguised sale might occur when a part...

Question 19

Which of the following would be currently taxable as ordinary income to the service partner if received in exchange for services performed for the partnership? (In all cases, assume the interest is not sold within two years after the time it is granted to the service partner.)

Accepted Answer

A)   A 10% interest in the capital of the partnership that will vest in 3 years.
B)   A 20% interest in the future profits of the partnership received in exchange for future services to be performed for the partnership.
C)   A 25% interest in the capital of the partnership where there are no restrictions on transferability of the interest.
D)   A 30% interest in ongoing profits of the partnership where the partnership is not a publicly-traded partnership and the income stream is not assured.
E)   All of the above.F) A) and B)
G) A) and C) C

Question 20

Match each of the following statements with the terms below that provide the best definition.
a. Organizational choice of many large accounting firms.
b. Partner's percentage allocation of current operating income.
c. Might affect any two partners' tax liabilities in different ways.
d. Brokerage and registration fees incurred for promoting and marketing partnership interests.
e. Transfer of asset to partnership followed by immediate distribution of cash to partner.
f. Must have at least one general and one limited partner.
g. All partners are jointly and severally liable for entity debts.
h. Theory treating the partner and partnership as separate economic units.
i. Partner's basis in partnership interest after tax­free contribution of asset to partnership.
j. Partnership's basis in asset after tax­free contribution of asset to partnership.
k. Owners are "members."
l. Theory treating the partnership as a collection of taxpayers joined in an agency relationship.
m. Allows many unincorporated entities to select their Federal tax status.
n. No correct match provided.
-Separately stated item

Accepted Answer

The answer of Match each of the following statements with...

Exam 10: Partnerships: Formation, Operation, and Basis

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$60,000. Each partner's initial basis in...
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$90,000. C...
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A partnership's allocations of income and deductions to the partners are required to be proportionate to the partners' percentage ownership of partnership capital in order to meet the substantial economic effect tests.

Correct Answer
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JLK Partnership incurred $6,000 of organizational costs and $50,000 of startup costs in 2014. 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.

Correct Answer
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In which of the following independent situations would the transaction most likely be characterized as a disguised sale?

Correct Answer
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g. Rachel's adjusted basis for her partn...
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On a corporate Form 1120, Schedule M-1 (or M-3) is used to reconcile book and tax income, and Schedule M-2 reconciles retained earnings to the amounts shown on Schedule L. How are these reconciliations accomplished on a partnership return? What additional information must be provided?

On the formation of a partnership, when might a "disguised sale" occur? How can this treatment be avoided?

Correct Answer
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A disguised sale might occur when a part...
View Answer

Which of the following would be currently taxable as ordinary income to the service partner if received in exchange for services performed for the partnership? (In all cases, assume the interest is not sold within two years after the time it is granted to the service partner.)

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C

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Exam 10: Partnerships: Formation, Operation, and Basis

Correct Answerverified$60,000. Each partner's initial basis in...View AnswerShow Answer

Correct Answerverified$90,000. C...View AnswerShow Answer

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Correct AnswerverifiedShow Answer

A partnership's allocations of income and deductions to the partners are required to be proportionate to the partners' percentage ownership of partnership capital in order to meet the substantial economic effect tests.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

JLK Partnership incurred $6,000 of organizational costs and $50,000 of startup costs in 2014. 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.

Correct AnswerverifiedShow Answer

In which of the following independent situations would the transaction most likely be characterized as a disguised sale?

Correct AnswerverifiedShow Answer

Correct Answerverifiedg. Rachel's adjusted basis for her partn...View AnswerShow Answer

Correct AnswerverifiedShow Answer

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Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

On a corporate Form 1120, Schedule M-1 (or M-3) is used to reconcile book and tax income, and Schedule M-2 reconciles retained earnings to the amounts shown on Schedule L. How are these reconciliations accomplished on a partnership return? What additional information must be provided?

On the formation of a partnership, when might a "disguised sale" occur? How can this treatment be avoided?

Correct AnswerverifiedA disguised sale might occur when a part...View AnswerShow Answer

Which of the following would be currently taxable as ordinary income to the service partner if received in exchange for services performed for the partnership? (In all cases, assume the interest is not sold within two years after the time it is granted to the service partner.)

Correct AnswerverifiedC

Correct AnswerverifiedShow Answer

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$60,000. Each partner's initial basis in...
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$90,000. C...
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g. Rachel's adjusted basis for her partn...
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A disguised sale might occur when a part...
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C

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