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Flashcards in Partnership 1 - Formation and Basis Deck (37)
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1

Who has unlimited liability?

General partner.

2

Which role must all partnership have?

One general partner.

3

What does general partner do?

Participate in management.

4

What are limited partners liable for?

Only up to their investment.

5

What happens when limited partners participate in management?

Lose the status

6

What liability do LLC Members have? What do they do?

Limited liability.
Participate in management.

7

What are 4 entities that are taxed as partnership?

*General partnerships (all GPs).
*Limited partnerships (at least one GP and at least one LP.
*Limited liability companies (all members have limited liability).
*Limited liability partnerships (liability protection may be more limited than for LLC members.

8

Check-the-Box Regulations: Non-incorporated entities: what is the classification for tax purpose if there is only one business owner?

The entity is disregarded and taxed as solo proprietorship on Schedule C.

9

Check-the-Box Regulations: Non-incorporated entities: what is the classification for tax purpose if there is more than one business owner? What can they elect to be taxed?

Partnership.
As corporation if they wish.

10

What are advantages of partnerships?

*Substantial flexibility.
*Limited liability/management ability (for LLC).
*Can usually get into and out of a partnership without recognizing a gain.
*Single taxation.

11

Formation: what does a partner and partnership recognize from the contribution of property in exchange for a partnership interest.?

No gain or loss.

12

Formation: what does a partner and partnership recognize when contributing services?

Wage income is recognized equal to the FMV of the partnership interest.

13

Who elect almost all tax elections?

By partnership as opposed to by the partners.

14

What are the basis of partnership interest? For the partnership in the asset? - when liability is attached?

The basis of an asset contributed.
The carryover basis.
The carryover basis still.

15

What happens to the partners' basis once the partnership begins operation?

Adjusted to reflect the results of operations.

16

What will be the holding period in partnership interest?

*Holding period of assets tacks on for capital assets and Sec. 1231 assets.
*Holding period starts new for other assets.

17

What will be the holding period in property received by the partnership?

The holding period partner had in property.

18

What increases the partner's initial basis?

*The partner's share of taxable and nontaxable income
*Increases in the partner's share of partnership debt.
*Additional contribution

19

What decreases the partner's initial basis?

*Share of the deductions, losses, nondeductible and noncapitalizable expenditures of the partnership
*Decrease in the partner's share of partnership debt
*Any distributions from the partnership to the partner

20

Where is the information of share of income, losses, deductions and credits found?

Form K-1.

21

When is the partner's basis computed?

At the last day of the tax year.

22

What is the order for adjusting the partner's basis?

1. Increase for all income items (including tax-exempt income).
2. Decrease for distributions.
3. Decrease by deductions and losses (including nondeductible items not charged to capital).

23

Question:
A partner with a basis of $50 for the partnership interest receives a $30 cash distribution, is allocated a $60 distributive share of partnership ordinary loss, and an $8 distributive share of capital gain.
Ending basis?

1. 50+8=58
2. 58-30=28
3. Although loss is $60, he can deduct only the amount of basis he has. Therefore, 28-28=0

24

What are 2 cases of liability that increases the partner's basis?

*An increase in the partnership's liabilities.
*An increase in a partner's individual liability by assuming the partnership liabilities.

25

What are 2 cases of liability that decreases the partner's basis?

*A decrease in the partnership's liabilities.
*A decrease in a partner's individual liability by assuming the partnership liabilities.

26

What is recourse? If the question does not state, which one should be assumed; recourse or non-recourse?

The legal right to demand compensation or payment.
Recourse.

27

What is non-recourse debt?

The lender has no right to demand pmt except to take the property back when the borrower defaults.

28

For recourse debt, how is the partner's share of debt measured?

By his economic risk of loss, assuming a "constructive liquidation scenario" occurred.

29

What is the amount of recourse debt allocated to limited partners?

Limited partners are not allocated any share of recourse debt.

30

How is the non-recourse debt is allocated to partners?

Based on the partners' profit sharing ratio.

31

What is the amount of non-recourse debt allocated to limited partners?

Based on the partners' profit sharing ratio.

32

Question: A contributed land (FMV: $75,000, AB: $25,000) to a partnership in exchange for a 30% interest. The partnership assumed A's $10,000 recourse mortgage on the land.
What is A's basis for his partnership interest?

Beginning basis: 25,000
- Debt assumed by the partnership: 10,000
+ Partner's share of debt: 10,000x30%
= Basis in partnership interest: $18,000

33

When is the tax year end for partnership?

1. Same as ALL majority interest partner(s) (more than 50% capital interest and profits interest).
2. If the partnership has no single year for the majority test, then the partnership uses same year-end as all of ALL principal partners (5% or more profits interest).
3. If test 1 and 2 are not met, Least Aggregate Deferral method is used to determine.

34

What is an alternative to 3 steps of determining the year end?

Section 444 election: allows a year-end different from required year-end as long as deferral does not exceed 3 months.

35

When an existing partner sells a partnership interest, what must be considered in computing the basis of a partner's interest acquired from another partner?

The consideration received by the transferor partner, and the basis of the transferee's partnership interest includes both the cash actually paid by the transferee to the transferor, as well as the transferee's assumption of the transferor's share of partnership liabilities.

36

When an asset contributed has liability that is greater than the AB of the asset, what is the implication?

Gain recognized and AB in the partnership interest is $0.

37

When providing service in exchange of partnership interest, what value must be used to determine the income for the service?

FMV.