Section 5E - Partnership

Question 1

Which of the following elections are made at the partner level?

Taxable year and accounting method
Cost or percentage depletion for oil and gas wells
Cost recovery methods and assumptions
Treatment of research and development costs

Answer 1

Cost or percentage depletion for oil and gas wells

Question 2

There are three elections that are made at THE partner level:

Cost or percentage depletion for ___
Reduction of basis of depreciable property when excluding income from ____
Take a deduction or credit for __taxes paid

Answer 2

oil and gas wells
discharge of indebtedness
foreign

Question 3

Elections made by the partnership:

a. Taxable year and accounting ___
b. Cost recovery ___and assumptions
c. Treatment of research and ___
d. ____of organization costs and start-up costs

Answer 3

method
methods
development costs
Amortization

Question 4

The general rule is that when a partner contributes “property” to a partnership, no gain or loss is ___

The exception to the general rule is that when a partner contributes “services” to a partnership, the partner will recognize ordinary compensation income on the fair market value of the ___.

The basis of contributed property is the same ____in the hands of the partnership as it was in the hands of the partner who contributed it.

Answer 4

recognized.

services rendered

basis

Question 5

As to the contribution of personal assets (nonbusiness property) to the partnership, however, the partnership basis will be the lesser of:

the adjusted basis of the ___

the ___at the time the property was contributed to the partnership.

Answer 5

contributing partner

fair market value

Question 6

Except for triggering recognition of limited losses, no gain or loss is recognized by either the partner or the partnership when a partner increases an investment through the contribution of property. T/F

Income must be recognized by a partner who receives a \_\_\_in the partnership in exchange for services rendered.

The fair market value of the capital interest received shall be considered as ___

The fair market value of services contributed to a partnership by one of the partners is taxable to \_\_\_

A built-in gain or loss on the date of contribution must be allocated to the ___when the property is subsequently disposed of by the partnership in a taxable transaction.

Answer 6

True

capital interest (interest in partnership)

compensation (ordinary income)

that partner.

contributing partner

Question 7

A partner’s basis is increased by the investment of property or cash. T/F
The increase in a partner’s basis for contributed property is limited to the ___in that property,

In addition, the basis of a partner’s interest is increased by the distributive share of the following partnership items:

(a) ___income
(b) Tax-__income
(c) __depletion deductions

Answer 7

True
basis 
Taxable 
exempt 
Excess

Question 8

A partner’s basis is decreased by the partner’s ___of money and by the adjusted basis of all other property distributed to the partner.

partner’s basis is further decreased by nondeductible __

Losses and negative adjustments in excess of a partner’s basis are accounted for as “\_\_\_.” Such losses can offset future taxable income or can be claimed when basis is restored, for example, by a partner’s contribution of money or property.

Answer 8

withdrawals /distribution

partnership expenditures

limited losses

Question 9

D owned a 25% interest in the ABCD partnership. ABCD had operating income of $60,000 before guaranteed payments to partners. The only guaranteed payment made during the year was $10,000 to D. ABCD also had a net capital gain of $10,000. D should report income from the partnership of:

Answer 9

$25k

D should report 25% of ABCD operating income after deducting the guaranteed payment (($60,000 - $10,000) × 25% = $12,500). D reports the $10,000 guaranteed payment and 25% of the $10,000 net capital gain ($25,000 = $12,500 + $10,000 + (0.25 × $10,000)).

Question 10

Partnership Deduction
Included as allowable deductions are ___payments to the partners for salaries and interest.

Income from cancellation of debt elections is determined at the Partner or Partnership level

Answer 10

guaranteed

Partner

Question 11

At partnership inception, Black acquires a 50% interest in Decorators Partnership by contributing property with an adjusted basis of $250,000. Black recognizes a gain if:

the fair market value of the contributed property exceeds its adjusted basis.
the property is encumbered by a mortgage with a balance of $100,000.

Answer 11

Neither

General rule: No gain or loss is recognized, either by the partnership or the partner, when property is contributed in exchange for a partnership interest.

Question 12

The personal service partnership of Allen, Baker & Carr had the following cash-basis balance sheet at December 31, Year 1:

                             Adjusted Basis   Market Assets                             per Books      Value   Cash                                $102,000     $102,000 Unrealized accounts receivable            --      420,000 Totals                              $102,000     $522,000

Liability and Capital
Note payable $60,000 $ 60,000
Allen, capital 14,000 154,000
Baker, capital 14,000 154,000
Carr, capital 14,000 154,000
Totals $102,000 $522,000
Carr, an equal partner, sold his partnership interest to Dole, an outsider, for $154,000 cash on January 1, Year 2. In addition, Dole assumed Carr’s share of the partnership’s liability.

What was the total amount realized by Carr on the sale of his partnership interest?

Answer 12

$174k

When a partner sells his interest in a partnership and he is relieved from his share of partnership liabilities, then the amount realized is the amount of cash received plus his share of liabilities. Carr’s amount realized will be $174,000, computed as follows:

Amount realized: Cash received $154,000
+ Liability relief ($60,000 ÷ 3) 20,000
= Total amount realized $174,000

Question 13

Strom acquired a 25% interest in Ace Partnership by contributing land having an adjusted basis of $16,000 and a fair market value of $50,000. The land was subject to a $24,000 mortgage, which was assumed by Ace. No other liabilities existed at the time of the contribution. What was Strom’s basis in Ace?

Answer 13

$0
Carryover basis $16,000
Less: 75% x $24,000
The portion of the recourse
debt assumed by the other partners - 18,000
Strom has a recognized gain of $ 2,000
========
and Strom has a 0 basis in Ace
Carryover Basis $16,000
Add gain on transfer 2,000
Total 18,000
Less liability assumed (18,000)
Ending Basis $ 0
========

Question 14

Contributions from a partner to a partnership are generally tax-free T/f (

What is the tax consequence to a partner who contributes services in exchange for a partnership interest?

Taxable to partner
Ordinary income
Fair market value used in determining extent of income

Answer 14

True

All 3

Question 15

Curry’s adjusted basis in Vantage Partnership was $5,000 at the time he received a nonliquidating distribution of land. The land had an adjusted basis of $6,000 and a fair market value of $9,000 to Vantage. What was the amount of Curry’s basis in the land?

Answer 15

Any time a partner receives a noncash, nonliquidating distribution (in this case it is land), there is no gain or loss recognized by the partnership or the partner. The basis Curry has in the partnership interest is assigned to the land up to his total basis. So $5,000 is assigned as the basis of the land, leaving Curry’s basis in the partnership at zero.

Question 16

Any time a partner receives a noncash, nonliquidating distribution (in this case it is land), there is ___or __recognized by the partnership or the partner

Answer 16

no gain or loss

Question 17

Olson, Wayne, and Hogan are equal partners in the OWH partnership. Olson’s basis in the partnership interest is $70,000. Olson receives a liquidating distribution of $10,000 cash and land with a fair market value of $63,000, and a basis of $58,000. What is Olson’s basis in the land?

Answer 17

$60k

The basis of property distributed by a partnership to a partner in liquidation of the partner’s interest is equal to the adjusted basis of the partner’s interest in the partnership reduced by any money distributed in the same transaction. In this case:

Olson’s basis in partnership interest $70,000
Cash liquidating distribution (10,000)
——–
Basis in property liquidating distribution (land) $60,000

Question 18

The basis of property distributed by a partnership to a partner in liquidation is equal to the partner’s interest in the partnership reduced by any money distributed in the same transaction. T/F

Answer 18

True af

Question 19

When a partner’s share of partnership liabilities increases, that partner’s basis in the partnership:

increases by the partner’s share of the increase.
decreases by the partner’s share of the increase.
decreases, but not to less than zero.
is not affected.

Answer 19

increases by the partner’s share of the increase.

Example: AB Partnership borrows $12,000. Able is a 40% partner. Bob is a 60% partner.

Able’s partner’s basis increases by ($12,000 x 40%) = $4,800
Bob’s partner’s basis increases by ($12,000 x 60%) = $7,200

Question 20

If the partners have a different profit ratio than loss ratio and the liability is a recourse liability, the partners share the liability based on the __ratio, but…

If the partners have a different profit ratio than loss ratio and the liability is a nonrecourse liability, the partners share the liability based on the __ratio.

Answer 20

loss

Profit

Question 21

In the current year, when Hoben’s tax basis in Lynz Partnership interest was $10,000, Hoben received a liquidating distribution as follows:

                                       Adjusted    Fair Market
                                          Tax Basis      Value
                                        ----------   ----------- Marketable securities     $ 5,000      $ 5,000 Land                       25,000       27,000 Lynz had no appreciated inventory, unrealized receivables, or properties that had been contributed by its partners. What was Hoben's recognized gain on the distribution?

Answer 21

the partner’s adjusted basis is allocated to all other properties received based on their relative fair market values, as shown below:

Hoben’s tax basis prior to liquidating distribution $10,000
Less: Adj. basis allocated to the marketable
securities ($5,000 / $32,000) x $10,000 (1,563)
Less: Adj. basis allocated to the land
($27,000 / $32,000) x $10,000 (8,437)
——–
Hoben’s tax basis after liquidating distribution $ 0

Question 22

The only way a capital gain is recognized in a proportionate liquidating distribution from a partnership is if the cash received by the partner is ___the partner’s adjusted basis in his partnership interest.

After the adjusted basis of a partner’s interest in a partnership has been reduced by the cash, then the basis is reduced by any ___and ___. In this case, none were distributed.

Answer 22

greater than

unrealized receivables & Inventory

Question 23

When the AQR partnership was formed, partner Acre contributed land with a fair market value of $100,000 and a tax basis of $60,000 in exchange for a 1/3rd interest in the partnership. The AQR partnership agreement specifies that each partner will share equally in the partnership’s profits and losses. During its first year of operation, AQR sold the land to an unrelated third party for $160,000. What is the proper tax treatment of the sale?

Each partner reports a capital gain of $33,333.
The entire gain of $100,000 must be specifically allocated to Acre.
The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by the other two partners.
The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership.

Answer 23

The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership.

FMV of land on date of contribution $100,000
Less: Adjusted basis of land to Acre (60,000)
———
Precontribution gain to be allocated to
Acre upon subsequent sale of land $ 40,000
=========

Amount realized upon subsequent sale of
land contributed by Acre $160,000
Less: Adjusted basis of land to AQR partnership (60,000)
———
Realized gain $100,000
Less: Precontribution gain recognized by Acre (40,000)
———
Remaining gain to be recognized equally
by all 3 partners $ 60,000
========
A built-in gain or loss on the date of contribution must be allocated to the contributing partner when the property is subsequently disposed of by the partnership in a taxable transaction.

Question 24

When two or more partnerships merge, the resulting partnership is a continuation of the partnership whose members own more than _______ of the capital and profits in the resulting partnership.

. If this test cannot be satisfied, the resulting partnership will be a continuation of the partnership providing the _____ of assets to the resulting partnership.

If neither of these tests can be satisfied, all of the merged partnerships will be ___and a ___partnership will result.

Answer 24

50%

greatest dollar value

terminated and a new partnership

Question 25

Anderson's basis in the SBF Partnership is $80,000. Anderson received a nonliquidating distribution of $50,000 cash, and land with an adjusted basis of $40,000 and a fair market value of $50,000. What is Anderson's basis in the land?

Answer 25

The basis of property received in a nonliquidating distribution will ordinarily be the same as the basis in the hands of the partnership less cash distributed. In this case, Anderson's basis in the land is limited to $30,000 as follows: ``` Basis in partnership interest $80,000 Cash received (50,000) Remaining basis in partnership interest $30,000 ```

Question 26

Payments for interest in the partnership (IRC Section 736(b) payments) are payments made for a partner’s interest in partnership ___. These payments are for the interest in ___properties and are considered as a ___by the partnership.

Answer 26

property capital gain or loss distribution

Question 27

You are a partner in HiJack Partnership. The adjusted basis of your partnership interest at the end of the current year is zero. Your share of potential ordinary income from partnership depreciable property is $5,000. The partnership has no other unrealized receivables or substantially appreciated inventory items. You sell your interest in the partnership for $11,000 in cash. Which of the following statements is accurate? 1. You report the entire amount as a capital gain since your adjusted basis in the partnership is zero. 2. You report $5,000 as ordinary income from the sale of the partnership's depreciable property. 3. You report the remaining $6,000 gain as capital gain.

Answer 27

2 & 3 are right, but 1 is wrong. The $5,000 is reported under the ordinary income rules for depreciation recapture. The additional payment of $6,000 is a capital gain and reportable in the current year.

Question 28

The general rule for computing gross income for a partnership is that any item of gross income that receives _____on an individual’s return must be excluded from ____and shown as a separate item on Schedule K of IRS Form 1065. One exception is ___payments, which are both deductible by the partnership and included as a separately stated item on IRS Form 1065, Schedule K-1, Partner’s Share of Income, Deductions, Credits, Etc.

Answer 28

special consideration , ordinary gain or loss guaranteed

Question 29

NONSEPARATE ITEMS (ignore knowing the separate items) know this and you'll know what to exclude ``` gross receipts or sales less cost of goods sold plus other partnership income, less salaries and wages, repairs and maintenance, bad debts, rent, taxes and licenses, interest expense, depreciation, retirement plans, and guaranteed payment other deductions. ```

Answer 29

yep

Question 30

Adams, a general contractor, Brinks, an architect, and Carson, an interior decorator, formed the Dex Home Improvement General Partnership by contributing the assets as follows: Fair % of Partner Share Adjusted Market in Capital Asset Basis Value Profits and Losses --------- -------- ------- ------------------ Adams Cash $40,000 $40,000 50% Brinks Land $12,000 $21,000 20% Carson Inventory $24,000 $24,000 30% The land was a capital asset to Brinks, subject to a $5,000 mortgage, which was assumed by the partnership. Carson's initial basis in Dex is:

Answer 30

When a general partnership is formed and one of the partners contributes property to the partnership which is subject to a mortgage, the other partners increase their basis by the portion of the mortgage assumed. Carryover Basis of the Inventory $24,000 ADD: 30% x $5,000 Mortgage Assumed by the Partnership 1,500 ------- Carson's Initial Basis $25,500(answer) =======

Question 31

Baker acquired a 50% interest in Kode Partnership by contributing $20,000 cash and a building with an adjusted basis of $26,000 and a fair market value of $42,000. The building was subject to a $10,000 mortgage which was assumed by Kode. The other partners contributed cash only. What is the basis of Baker's interest in Kode?

Answer 31

$41k ``` Cash $20,000 Add carryover basis in the building 26,000 ------- $46,000 Less 1/2 of the mortgage assumed by the other partners - 5,000 ------- Bakers OUTSIDE basis $41,000 in Kode partnership ======= ```

Question 32

Peters has a 1/3rd interest in the Spano Partnership. During Year 7, Peters received a $16,000 guaranteed payment, which was deductible by the partnership, for services rendered to Spano. Spano reported a Year 7 operating loss of $70,000 before the guaranteed payment. What are the net effects of the guaranteed payment? The guaranteed payment increases Peters' tax basis in Spano by $16,000. The guaranteed payment increases Peters' ordinary income by $16,000.

Answer 32

II only The guaranteed payment is treated much like self-employment income. It is declared as ordinary income, and subject to self-employment taxes. Since this income is not reinvested in the company, it does not increase the investment basis.

Question 33

The “hot assets” of a partnership include the ___.

Answer 33

unrealized receivables and inventory

Question 34

Freeman, a single individual, reported the following income in the current year: Guaranteed payment from services rendered to a partnership: $50,000 Ordinary income from an S corporation: $20,000 What amount of Freeman’s income is subject to self-employment tax?

Answer 34

$50K A shareholder will report his share of the ordinary income from an S corporation whether it is distributed or not, and this income is not subject to self-employment tax at the shareholder level.

Question 35

When ownership has changed during the year, each owner must recognize a pro rata share of the income or loss allocated on a ___

Answer 35

daily basis

Question 36

Which of the following should be used in computing the basis of a partner’s interest acquired from another partner? Cash paid by transferee to transferor Transferee's share of partnership liabilities

Answer 36

The adjusted basis of a partnership interest includes any cash paid plus the new partner’s share of any partnership liabilities. Both

Question 37

Michael's adjusted basis in the MW Partnership was $20,000 at the time he received the following nonliquidating distribution: Cash of $5,000 Equipment with an adjusted basis to the partnership of $8,000 and a fair market value of $10,000. What is the gain/loss Michael will recognize on this transaction?

Answer 37

$0 The general rule for gain or loss recognition for nonliquidating partnership distributions is no gain or loss is recognized by the partner or the partnership in a nonliquidating distribution of cash or property.

Question 38

Partnership P has an operating loss of $10,000 for the year. Partner A had a 50% interest in the partnership, with a basis of $5,000 at the beginning of the year. P distributed $2,000 to A during the year. What amount of loss is deductible by A?

Answer 38

$3k Deductibility of losses for a general partnership is limited to the partner’s basis in the partnership

Question 39

Deductibility of losses for a general partnership is limited to the partner’s ____in the partnership If a partner sells the entire interest in the partnership, profits and losses _____________ must be considered.

Answer 39

basis up to the date of sale

Question 40

As a general partner in Greenland Associates, an individual's share of partnership income for the current tax year is $25,000 ordinary business income and a $10,000 guaranteed payment. The individual also received $5,000 in cash distributions from the partnership. What income should the individual report from the interest in Greenland?

Answer 40

$35K A partner reports his distributive share of partnership income whether it is received or not. A guaranteed payment is considered income to the partner receiving it. Therefore, ordinary income and guaranteed payments are included in the individual's income. Ordinary business income $25,000 Guaranteed payment 10,000 Interest in Greenland $35,000 Cash distributions from the partnership have no bearing on the income reported by the partner. The cash distribution will decrease the partner's basis in the partnership interest.

Question 41

Cash distributions from the partnership have no bearing on the ___reported by the partner.

Answer 41

income

Question 42

f property contributed to a partnership is distributed to a partner other than the contributing partner within seven years of its contribution to the partnership, all of the following will apply except: T/F the contributing partner will be required to recognize the built-in gain or loss at the time of the disqualified distribution. gain or loss is calculated as if the property was sold for the lesser of its basis or FMV at the date of distribution. the contributing partner's gain recognized is limited to the gain that would be recognized by the partnership. the basis in the property and partnership interests will be adjusted for the gain or loss recognized.

Answer 42

True False True True

Question 43

If property contributed to a partnership is distributed to a partner other than the contributing partner within seven years of its contribution to the partnership, all of the following will apply the contributing partner will be required to recognize the ___at the time of the disqualified distribution. the contributing partner's gain recognized is limited to the gain that would be recognized by ___. the basis in the property and ___will be adjusted for the gain or loss recognized. gain or loss is calculated as if the property was sold @ ___at the date of distribution.

Answer 43

built-in gain or loss by the partnership partnership interests FMV

Question 44

A partner received a partnership interest with a fair market value (FMV) of $55,000 in exchange for the following items: ``` Basis FMV Cash $20,000 $20,000 Property 10,000 30,000 Services rendered 0 5,000 What is the partner's basis in the partnership interest? ```

Answer 44

The basis of contributed property is the same in the hands of the partnership as it was in the hands of the partner who contributed it. The fair market value of services contributed to a partnership by one of the partners is taxable to that partner and is included in the basis. Therefore, the partner’s basis is $35,000 ($20,000 + $10,000 + $5,000).

Question 45

Nolan designed Timber Partnership's new building. He received an interest in the partnership for the services. Nolan's normal billing for these services would be $80,000 and the fair market value of the partnership interest he received is $120,000. What amount of income should Nolan report?

Answer 45

$120k Nolan has provided services to the new Timber Partnership building by designing the building. Nolan should report income for services based on the value of the assets received for his services. If the partnership interest is worth $120,000, then Nolan should report income of $120,000.

Question 46

All of the following statements with respect to a partner's sale or exchange of a partnership's interest are correct except: the sale or exchange of a partner's interest in a partnership usually results in a capital gain or loss. gain or loss is the difference between the amount realized and the adjusted basis of the partner's interest in the partnership. the selling partner must include, as part of the amount realized, any partnership liability he or she is relieved of. the installment method of reporting cannot be used by the partner who sells a partnership interest at a gain.

Answer 46

T T T F - A partner who sells a partnership interest at a gain may be able to report the sale on the installment method.

Question 47

The YZ partnership had the following income items during the year. Income from operations $10,000 Section 1231 gain 7,000 Dividend income 6,000 Recovery of bad debt previously written off 1,000 What amount should be reported as ordinary income by the partnership for the year?

Answer 47

$10k The recovery of bad debt previously written off of $1,000 is an item subject to the tax benefit rule and is specifically listed as a separately stated item in Regulation Section 1.702-1. Therefore, the bad debt would not be included as ordinary income.

Question 48

Able and Baker are equal members in Apple, an LLC. Apple has elected not to be treated as a corporation. Able contributes $7,000 cash and Baker contributes a machine with a basis of $5,000 and a fair market value of $10,000, subject to a liability of $3,000. What is Apple's basis for the machine?

Answer 48

$5k The basis of contributed property is the same in the hands of the partnership as it was in the hands of the partner who contributed it. The liability Apple assumes will decrease Baker's adjusted basis in his interest in Apple and will increase Able's adjusted basis in his interest in Apple.

Question 49

Kline and Salomon form the KS Partnership as 50/50 partners. Kline contributes equipment that has a fair market value of $60,000 and an adjusted basis of $45,000. In addition, the equipment is subject to a $10,000 loan that KS Partnership is assuming. What amount represents Kline's initial basis in the partnership?

Answer 49

$40k Any increase in a partner's individual liabilities because of an assumption of partnership liabilities is considered a contribution of money to the partnership by the partner. Likewise, the decrease in the partnership's liabilities is a decrease in the partner's basis. As a result, Kline's adjusted basis is $40,000, which is Kline’s contributed property’s adjusted basis of $45,000 less the partnership’s assumed liabilities of $5,000 (50% of $10,000).

Question 50

Ryan's adjusted basis in his Lux Partnership interest was $18,000 at the time Ryan received the following nonliquidating distributions of partnership property: ``` Cash $10,000 Land Adjusted basis 14,000 Fair market value 20,000 What is Ryan's tax basis in the land received from the partnership? ```

Answer 50

$8k Ryan's beginning basis of $18,000 is first reduced by any cash distributions ($10,000) to arrive at a new basis of $8,000. Next, Ryan's basis is reduced by the basis of the property received ($14,000), but not below zero. So, the land reduces Ryan's basis in the partnership by $8,000, which is then Ryan's substituted basis in the land.

Question 51

RC Section 732: Partner's basis in property received, distribution of property: a. The partner receives the same basis in property as the __

Answer 51

partnership

Question 52

Ola Associates is a limited partnership engaged in real estate development. Hoff, a civil engineer, billed Ola $40,000 for consulting services rendered. In full settlement of this invoice, Hoff accepted a $15,000 cash payment plus the following: Fair Carrying Amount Market Value on Ola’s Books 3% limited partnership interest in Ola $10,000 N/A Surveying equipment 7,000 $3,000 What amount should Hoff, a cash-basis taxpayer, report in his income tax return as income for the ser­vices rendered to Ola?

Answer 52

Because Hoff is a consultant, he is not an employee of Ola Associates. Therefore, his income consists of the cash received plus the fair market value (FMV) of property received. Hoff should report as income for services rendered to Ola Associates $32,000, computed as follows: Cash received $15,000 + FMV of partnership interest 10,000 + FMV of surveying equipment 7,000 Total income from services $32,000

Question 53

Adams, a general contractor, Brinks, an architect, and Carson, an interior decorator, formed the Dex Home Improvement General Partnership by contributing the assets as follows: Fair % of Partner Share Adjusted Market in Capital Asset Basis Value Profits and Losses --------- -------- ------- ------------------ Adams Cash $40,000 $40,000 50% Brinks Land $12,000 $21,000 20% Carson Inventory $24,000 $24,000 30% The land was a capital asset to Brinks, subject to a $5,000 mortgage, which was assumed by the partnership. Brinks' initial basis in Dex is:

Answer 53

$8k When a general partnership is formed and a partner contributes property to the partnership subject to a liability which is assumed by the partnership, the contributing partner's basis is calculated as follows: Carryover Basis of Land Contributed by Brinks $12,000 LESS: Mortgage Assumed by the Partnership - 5,000 ------- $ 7,000 ADD: 20% of Mortgage Kept by Brinks (.20 x $5,000) + 1,000 ------- Brink's Initial Basis $ 8,000

Question 54

Gulde's tax basis in Chyme Partnership was $26,000 at the time Gulde received a liquidating distribution of $12,000 cash and land with an adjusted basis to Chyme of $10,000 and a fair market value of $30,000. Chyme did not have unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. What was the amount of Gulde's basis in the land?

Answer 54

$14k ulde's adjusted basis in partnership interest $26,000 Less: Cash received (12,000) Remaining basis allocated to land $14,000 ======= When a liquidating distribution is received by a partner, the adjusted basis of the partnership interest is first reduced by any cash received, then reduced by any “hot” assets (unrealized receivables and/or inventory) received, and finally the remaining basis is allocated to any other property received.

Question 55

LIQUIDATING DISTRIBUTIONS Liquidating distributions are made to a partner in order to __the partner's entire interest in the partnership. __ may be recognized with a liquidating distribution. The distribution must consist only of cash & ___ Loss is recognized if the partner's ___is greater than the total of the cash and IRC Section 751 properties received. For liquidating distributions, the basis of property received is the adjusted basis of the partnership (NOT FMV) less any cash received. T/F

Answer 55

terminate Losses Hot assets basis True

Question 56

What is the treatment of guaranteed partner payments? Treated as ordinary income, with a deduction to the partnership Treated like any other item of income Treated like any other item of deduction Special treatment as a deduction

Answer 56

Treated as ordinary income, with a deduction to the partnership The general rule is any item of gross income that receives special consideration on an individual’s return must be excluded from ordinary gain or loss and shown as a separate item on Schedule K of IRS Form 1065. One exception is guaranteed payments, which are treated like salary. They are both deductible by the partnership and included as a separately stated item.

Question 57

On June 30, Year 14, Berk retired from his partnership. At that time, his basis was $80,000, which included his share of the partnership's liabilities of $30,000. Berk's retirement payments consisted of being relieved of his share of the partnership liabilities and receipt of cash payments of $5,000 per month for 18 months, commencing July 1, Year 14. Assuming that Berk makes no election with regard to the recognition of gain from the retirement payments, he should report income of:

Answer 57

Berk's capital account before retirement: Capital account $50,000 Share of liabilities 30,000 Berk's basis $80,000 Berk's retirement payment in Year 14: Relief of all liabilities in Year 14 - 30,000 $50,000 6 months x $5,000 in Year 14 - 30,000 Capital basis at 12/31/Yr. 14 $20,000 Beck's retirement payment in Year 15: 12 months x $5,000 in Year 15 - 60,000 Capital gain in Year 15 $40,000 ========

Question 58

A partner may deduct his share of partnership losses subject to three levels of limitations: Level 1: Any deductible loss is limited to the adjusted basis of the partner’s interest in the partnership. t/f Level 2: If there is enough adjusted basis to deduct a loss, then the partner is only allowed to deduct the amount of loss for which he is ___ Level 3: If there is enough adjusted basis and enough at risk, then the partner applies the ___

Answer 58

true at risk. passive activity limits.

Question 59

A newly-formed partnership generally must adopt a tax year that: is a calendar year. is of their choosing. conforms to the predominant tax year of their partners. ends one year from the start of business.

Answer 59

Predominant tax year of their partners Partnership must use a tax year that conforms to the majority (over 50%) interest partner. If one or more partners' interest is more than 50% of the profits and capital, the partnership must use the tax year of those partners.

Question 60

PDK, LLC, had three members with equal ownership percentages. PDK elected to be treated as a partnership. For the tax year ending December 31, Year 1, PDK had the following income and expense items: ``` Revenues $120,000 Interest income 6,000 Gain on sale of securities 8,000 Salaries 36,000 Guaranteed payments 10,000 Rent expense 21,000 Depreciation expense 18,000 Charitable contributions 3,000 What would PDK report as nonseparately stated income for Year 1 tax purposes? ```

Answer 60

$35K Revenues $120,000 Less: Salaries (36,000) Less: Guaranteed payments (10,000) Less: Rent expense (21,000) Less: Depreciation expense (18,000) --------- Nonseparately stated income $ 35,000 ========= Guaranteed payments to partners are included with the nonseparately stated items.

Question 61

Evan, a 25% partner in Vista Partnership, received a $20,000 guaranteed payment for deductible services rendered to the partnership. Guaranteed payments were not made to any other partner. Vista's partnership income consisted of: Net business income before guaranteed payments $80,000 Net long-term capital gains 10,000 What amount of income should Evan report from Vista Partnership on her tax return?

Answer 61

$37.5K Net business income before guaranteed payments $80,000 - Guaranteed payment - 20,000 Partnership net business income $60,000 ======= 25% × $60,000 Partnership net income $15,000 + Guaranteed payment + 20,000 + 25% × $10,000 Net long-term capital gain + 2,500 Income Evan should report from Vista on her tax return $37,500 =======

Question 62

Flagg and Miles are each 50% partners in Decor Partnership. Each partner had a $200,000 tax basis in the partnership on January 1, Year 5. Decor's Year 5 net business income before guaranteed payments was $45,000. During Year 5, Decor made a $7,500 guaranteed payment to Miles for deductible services rendered. What is Miles's tax basis in Decor on December 31, Year 5?

Answer 62

Guaranteed payments DO NOT affect basis 45000 - 7500 = 37,500 *.5=18,750 + 200k = 218,750

Question 63

Bailey contributed land with a fair market value of $75,000 and an adjusted basis of $25,000 to the ABC Partnership in exchange for a 30% interest. The partnership assumed Bailey's $10,000 recourse mortgage on the land. What is Bailey's basis for his partnership interest?

Answer 63

$18k Basis in land transferred $25,000 Less mortgage assumed by partnership (10,000) Plus share of mortgage Bailey continues to be liable for as a 30% general partner of the partnership ($10,000 x 30%) 3,000 -------- Basis in 30% partnership interest $18,000 ========

Question 64

Molloy contributed $40,000 in cash in exchange for a 1/3rd interest in the RST Partnership. In the first year of partnership operations, RST had taxable income of $60,000. In addition, Molloy received a $5,000 distribution of cash and, at the end of the partnership year, Molloy had a 1/3rd share in the $18,000 of partnership recourse liabilities. What was Molloy's basis in RST at year-end?

Answer 64

Molloy's basis in the RST Partnership: ``` Cash paid for 1/3rd interest $40,000 1/3rd share of taxable income 20,000 Distribution of cash (5,000) Molloy's share of liabilities 6,000 -------- Year-end basis $61,000 ```

Question 65

All of the following items will increase the basis of a partner's interest in a partnership except: contributions of cash or property to the partnership. assumption of liabilities for the purchase of equipment. distributive share of nontaxable income. partner's share of any Section 179 expenses.

Answer 65

partner's share of any Section 179 expenses. Deductions for Section 179 expenses decrease the basis of a partner.

Question 66

Walker transferred property used in a sole proprietorship to the WXYZ partnership in exchange for a 1/4th interest. The property had an original cost of $75,000, an adjusted tax basis to Walker of $20,000, and fair market value of $50,000. The partnership has no liabilities. What is Walker's basis in the partnership interest?

Answer 66

$20k The basis of a partner's interest acquired in exchange for his contribution to the partnership is the amount of the money contributed plus the adjusted basis to the contributing partner of any property contributed. In this case, Walker's basis in the partnership interest would be equal to the basis of the property contributed of $20,000.

Question 67

T/F Which of the following statements regarding partnerships is false? A partnership is a pure pass-through entity. Partnerships are taxable entities. Partners are subject to the passive loss rules. The standard deduction is not available to partnerships.

Answer 67

T F - They are NOT taxable entities T T

Question 68

The adjusted basis of Smith's interest in the EVA partnership was $230,000 immediately before receiving the following distribution in complete liquidation of EVA: ``` Basis Fair to EVA Market Value Cash $150,000 $150,000 Real estate 120,000 146,000 What is Smith's basis in the real estate? ```

Answer 68

Smith has an interest in the EVA partnership with an adjusted basis of $230,000. The receipt of $150,000 in cash reduces Smith's basis to $80,000 ($230,000 - $150,000 = $80,000).

Question 69

Which of the following items is included in ordinary income of a partnership when the two partners share profits and losses equally? Tax-exempt interest - Yes Tax-Exempt Interest - No

Answer 69

Tax-Exempt Interest - No Tax-exempt income is not included in ordinary income because it is not taxable.

Question 70

Dale was a 50% partner in D&P Partnership. Dale contributed $10,000 in cash upon the formation of the partnership. D&P borrowed $10,000 to purchase equipment. During the first year of operations, D&P had $15,000 net taxable income, $2,000 tax-exempt interest income, a $3,000 distribution to each partner, and a $4,000 reduction of debt. At the end of the first year of operation, what amount would be Dale's basis?

Answer 70

Dale's basis in D&P Partnership: ``` Cash invested $10,000 50% of D&P debt 5,000 50% of taxable income 7,500 50% of tax-exempt income 1,000 Cash distribution (3,000) 50% of reduction of debt (2,000) -------- $18,500 ```

Question 71

The adjusted basis of Ted's partnership interest is $30,000. In complete liquidation of his interest, he receives $10,000 in cash, his share of the inventory items having a basis to the partnership of $12,000, and two parcels of land having both fair market values and adjusted bases to the partnership of $12,000 and $4,000. What is Ted's basis in the two parcels of land?

Answer 71

Basis in partnership $30,000 Less: Cash received (10,000) Remaining basis $20,000 Less: Basis allocated to inventory items (12,000) Basis left to be allocated to land $ 8,000 $12,000 / $16,000 = 0.75; 0.75 x $8,000 = $6,000 for Parcel 1 (6,000) Basis in Parcel 2 $ 2,000 Since the fair market value is equal to the basis of the land parcels, the decrease is simply allocated based on the properties' adjusted bases.

Question 72

What are the tax consequences (generally) when a partner liquidates her interest? No gain or loss is recognized by the partnership on the distribution of money. A gain is recognized when the partnership’s basis in the property distributed is more than the partner’s investment. A loss is recognized when the partnership’s basis in the property distributed is less than the partner’s investment in the partnership.

Answer 72

All 3

Question 73

Fern received $30,000 in cash and an automobile with an adjusted basis and market value of $20,000 in a proportionate liquidating distribution from EF Partnership. Fern's basis in the partnership interest was $60,000 before the distribution. What is Fern's basis in the automobile received in the liquidation?

Answer 73

Fern started with a basis in EF Partnership of $60,000. The receipt of cash of $30,000 reduces the basis to $30,000. This basis is assigned to the automobile received as a distribution.

Question 74

Under the terms of a partnership agreement, Anna is entitled to a fixed annual payment of $10,000 without regard to the income of the partnership. Her distributive share of the partnership income is 10%. The partnership has $50,000 of ordinary income after deducting the guaranteed payment. Which of the following states the amount and character of Anna's income from the partnership? $15,000 of ordinary income $10,000 capital gain and $5,000 of ordinary income $15,000 of capital gain $10,000 of ordinary income and $5,000 capital gain

Answer 74

$15k in Ordinary Income Guaranteed payments are included in income in the partner's tax year in which the partnership's year ends. The calculation is: Guaranteed payment $10,000 Distributive share ($50,000 x 0.10) 5,000 $15,000

Question 75

Dean is a 25% partner in Target Partnership. Dean's tax basis in Target was $20,000. Dean received a nonliquidating cash distribution of $8,000 from Target. Target's accounts recorded the following items: Municipal bond interest income $12,000 Ordinary income 40,000 What was Dean's tax basis in Target at the end of the year?

Answer 75

$25k Dean's tax basis in Target Partnership is calculated as follows: Beginning basis $20,000 Less Distribution - 8,000 Add: 0.25 x $12,000 Municipal bond interest income + 3,000 Add: 0.25 x $40,000 Ordinary income + 10,000 -------- Dean's tax basis in Target at year-end $25,000

Question 76

The basis of a partner in her partnership interest is wholly different from her capital account. T/F The basis of a partner’s interest in a partnership must be computed without regard to the capital account balance as shown on the partnership books T/f Is the basis of a partner’s interest computed with regard to the capital account of the partner? Y/N

Answer 76

True True No

Question 77

Gavin, a 50% partner in the ABC Partnership, had a $4,000 basis at the beginning of the preceding year. During the preceding year, ABC incurred a $12,000 loss. In the current year, ABC reported $7,000 of ordinary income and made a $1,000 pro rata distribution. What is Gavin's basis at the end of the current year?

Answer 77

$1k Beginning of preceding year $4,000 50% of $12,000 loss (6,000) 50% of current-year income 3,500 50% of pro rata $1,000 distribution (500) $1,000

Question 78

Stone and Frazier decided to terminate the Woodwest Partnership as of December 31. On that date, Woodwest's balance sheet was as follows: ``` Cash $2,000 Equipment (adjusted basis) 2,000 Capital: Stone 3,000 Capital: Frazier 1,000 The fair market value of the equipment was $3,000. Frazier's outside basis in the partnership was $1,200. Upon liquidation, Frazier received $1,500 in cash. What gain should Frazier recognize? ```

Answer 78

$300 Although there is generally no gain or loss recognized by a partner upon the liquidation of a partnership interest, there are exceptions: Gain is recognized if cash distributed is in excess of the partner's basis in the partnership interest. Loss is recognized if no property other than cash is distributed and the cash is less than the partner's basis in the partnership interest.

Question 79

A limited partnership agreement provides for the following profit allocation formula: 20% of the first $1,000,000 of profit, 25% of the next $1,000,000 of profit, and 30% of profit over $2,000,000 shall be allocated to the general partner. Each limited partner and the general partner shall share equally in the remaining profit based on their relative percentages of ownership. What profit amount should be allocated to a limited partner with 3% ownership if the total profit to be allocated is $4,500,000?

Answer 79

Profit initially allocated to the general partner is $1,200,000 (20% of $1,000,000 + 25% of the next $1,000,000 + 30% of the remaining $2,500,000), leaving a profit to be split between the general and limited partners of $3,300,000 ($4,500,000 – $1,200,000). The limited partner’s share would be $99,000 ($3,300,000 × 3%).

Question 80

The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date: the partner is admitted to the partnership. the partner transfers the asset to the partnership. the partner’s holding period of the capital asset began. the partner is first credited with the proportionate share of partnership capital.

Answer 80

the partner’s holding period of the capital asset began. When a partner contributes property to a partnership, his adjusted basis in the partnership interest increases by the adjusted basis of the property contributed. This is called a carryover basis. Generally, the holding period will “attach” to the basis used for the property. Therefore, if the adjusted basis is carried forward, so is the holding period of the property.

Question 81

Jay Bird is a partner in Soundview Partnership. The adjusted basis of his interest is $19,000, of which $15,000 represents his share of partnership liabilities. Jay's share of the partnership's unrealized receivables is $6,000. The partnership has no substantially appreciated inventory items. Jay sold his partnership interest for $28,000 cash plus $15,000 of his liability relief. What is the amount and character of his gain?

Answer 81

$6,000 ordinary income; $18,000 capital gain The total gain on the sale of his partnership is $24,000 ($28,000 cash + $15,000 relief of his share of liabilities less basis of $19,000). Unrealized receivables of $6,000 are treated as ordinary income—the remaining $18,000 is capital gain.

Question 82

What is the consequence of the assumption of the liability of a partner’s personal liability? There is no tax consequence. The basis of the partner’s investment decreases. The basis of the investment increases by the amount of the liability assumed by the other partners. It is treated as a distribution of money to the partner.

Answer 82

It is treated as a distribution of money to the partner. The assumption by the partnership of a partner’s personal liability is treated as a distribution of money to the partner.

Question 83

The assumption by the partnership of a partner’s personal liability is treated as a ____of money to the partner. In a nonliquidating distribution, Marketable securities have NOT been considered cash. T/F

Answer 83

distribution False - they are considered cash

Question 84

For property contributed to a partnership after June 8, 1997, a partnership must hold contributed property how long before distributing it to avoid precontribution gain being taxed to the contributing partner?

Answer 84

7

Question 85

he CSU partnership distributed to each partner cash of $4,000, inventory with a basis of $4,000 and a fair market value (FMV) of $6,000, and land with an adjusted basis of $5,000 and an FMV of $3,000 in a liquidating distribution. Partner Chang had an outside basis in Chang's partnership interest of $12,000. In the second year after receiving the liquidating distribution, Chang sold the inventory for $5,000 and the land for $3,000. What income must Chang report upon the sale of these assets?

Answer 85

$1,000 ordinary gain and $1,000 capital loss Outside basis $12,000 Less: Cash received (4,000) Remaining basis $ 8,000 Less: Basis allocated to inventory (4,000) Basis allocated to land $ 4,000 Partner Chang's outside basis is $12,000, which is reduced to $8,000 with the distribution of the cash. Chang sells the inventory for $5,000, resulting in an ordinary gain of $1,000 ($5,000 sale - $4,000 basis). This reduces Chang's outside basis to $4,000, which becomes the basis of the land to Chang. When Chang sells the land for $3,000, the result is a $1,000 capital loss ($3,000 - $4,000). Chang's basis is now zer

Question 86

What are some of the unincorporated entities which can be taxed as partnerships? Pool Group Joint venture Syndyicates

Answer 86

All 4

Question 87

Reid, Welsh, and May are equal partners in the RWM partnership. Reid's basis in the partnership interest is $60,000. Reid receives a liquidating distribution of $61,000 cash and land with a fair market value of $14,000 and an adjusted basis of $12,000. What gain must Reid recognize upon the liquidation of his partnership interest?

Answer 87

$1k generally no gain or loss is recognized by a partner upon the liquidation of a partnership interest, there are exceptions: Gain is recognized if cash distributed is in excess of the partner's basis in the partnership interest. Loss is recognized if no property other than cash, unrealized receivables, and inventory is distributed and the cash and basis of the unrealized receivables and inventory received are less than the partner's basis in the partnership interest.

Question 88

George and Martha are equal partners in G&M Partnership. At the beginning of the current tax year, the adjusted basis of George's partnership interest was $32,500, which included his share of $40,000 of partnership liabilities. During the tax year, the following information applied to G&M: Operating loss $30,000 Interest and dividend income 8,000 Partnership liabilities at end of year 24,000 What was the basis of George's partnership interest at year-end?

Answer 88

$13k George's adjusted basis at beginning of year $32,500 Add: George's share of interest and dividend income 4,000 Less: George's share of operating loss (15,000) Less: Decrease in George's share of partnership liabilities ($40,000 - $24,000 = $16,000; $16,000 / 2) (8,000) -------- George's adjusted basis at end of year $13,500

Question 89

The at-risk limitation provisions of the Internal Revenue Code (IRC) may limit: a partner's deduction for his or her distributive share of partnership losses. a partnership's net operating loss carryover.

Answer 89

Only I A partnership is not allowed a deduction for net operating losses (NOLs). A net operating loss (and any related carryforward) is determined at the partner level, taking into account all of the partner's applicable items of income and expense.

Question 90

T/F in terms of distributions to retiring or deceased partners? The death of a partner does not terminate the partnership. A retiring partner is recognized as a partner as of the date of the retirement announcement. Winding-down payments reduce the other partners’ distributive shares of income. A deceased partner’s successor is a partner until the interest is liquidated.

Answer 90

T F- A retiring partner is recognized as a partner until his/her retirement is complete. T T

Question 91

T/F of a partnership All recourse debt of the partnership is allocated to the partners in calculating the tax basis of their partnership investment. A limited partner is allowed to increase partnership basis for their share of recourse debt if they share in partnership losses. A general partner is allowed to increase partnership basis by his or her share of all recourse debt. A general partner is not allowed to increase partnership basis by his or her share of all recourse debt.

Answer 91

T T T F - A general partner is allowed to increase partnership basis by his or her share of all recourse debt.

Question 92

On January 3, Year 5, the partners' interests in the capital, profits, and losses of Able Partnership were: ``` % of Capital, Profits, and Losses Dean 25% Poe 30% Ritt 45% On February 4, Year 5, Poe sold her entire interest to an unrelated party. Dean sold his 25% interest in Able to another unrelated party on December 20, Year 5. No other transactions took place in Year 5. For tax purposes, which of the following statements is correct with respect to Able? ``` Able terminated as of February 4, Year 5. Able terminated as of December 20, Year 5. Able terminated as of December 31, Year 5. Able did not terminate.

Answer 92

Able did not terminate The technical termination provision under IRC Section 708 has been repealed. A partnership now only terminates when it ceases business; therefore, Able did not terminate.

Question 93

A partnership now only terminates when it ___ guaranteed payments are payments to partners for services or the use of capital without regard to partnership income. t/f Guaranteed payments for a partner's services or capital are treated like salary payments to an employee or interest payments to a creditor rather than partnership distributions. T/F

Answer 93

ceases business True true

Question 94

On June 1, Kelly received a 10% interest in Rock Co., a partnership, for services contributed to the part­nership. Rock’s net assets at that date had a basis of $70,000 and a fair market value of $100,000. In Kelly’s income tax return, what amount must Kelly include as income from transfer of partnership interest? $7,000 ordinary income $7,000 capital gain $10,000 ordinary income $10,000 capital gain

Answer 94

10k Ordinary Income When a partner contributes services for a partnership interest, the partner must include the fair market value (FMV) of the services rendered as ordinary income. Kelly will include $10,000 as ordinary income, which is 10% of the FMV of the partnership’s net assets ($100,000).

Question 95

In the current year, a partnership reported the following items: ``` Fees earned $500,000 Salary expense 100,000 Utility expense 5,000 Charitable contributions 8,000 Long-term capital gain 2,000 Office supplies 500 What is the partnership's ordinary income? ```

Answer 95

500k - 100k - 5k - 500 = $394,500

Question 96

The method used to depreciate partnership property is an election made by: the partnership and must be the same method used by the “principal partner.” the partnership and may be any method approved by the IRS. the “principal partner.” each individual partner.

Answer 96

the partnership and may be any method approved by the IRS.

Question 97

Baker is a partner in BDT with a partnership basis of $60,000. BDT made a liquidating distribution of land with an adjusted basis of $75,000 and a fair market value of $40,000 to Baker. What amount of gain or loss should Baker report?

Answer 97

. A partner realizes a gain only if the cash received exceeds the basis of the partnership interest. Where the partner receives property other than cash, unrealized receivables, and inventory, no loss is recognized. Since Baker did not receive cash, no gain is recognized. Since Baker received only land, no loss is recognized.

Question 98

Mutt and Jeff each have a 50% interest in Keni Partnership. The partnership and the individuals file on a calendar-year basis. For its Year 4 tax year, Keni had a $30,000 loss. Mutt's adjusted basis in the partnership interest on January 1, Year 4, was $8,000. In Year 5, Keni partnership had a profit of $28,000. Assuming that there were no other adjustments to Mutt's basis in the partnership in Year 4 and Year 5, what amount of partnership income (loss) would Mutt show on his Year 4 and Year 5 individual income tax returns?

Answer 98

Year 4 Year 5 Mutt's share of profit(loss) at 50% ($15,000) $14,000 Basis 8,000 0 Unallowed loss (carryover) ($ 7,000) ($ 7,000) Taxable income(loss) allowed ($ 8,000) $ 7,000

Question 99

Max sold his 10% interest in the Ajax partnership for $60,000. Ajax had $150,000 of unrealized receivables. Max had an adjusted basis in the partnership of $40,000. As the result of the sale, Max should report:

Answer 99

$150k * 10% = $15k ordinary income. $40k+$15k = $55k. $60k sold & $55k adj basis = $5k gain $15,000 ordinary income, $5,000 capital gain.

Question 100

Danson and Ellerby are equal partners in DE Partnership, which is in the business of selling fine art. DE owns assets with a tax basis and fair market value of $240,000. In January of the current year, Finley contributes to the partnership some personal investment art with a fair market value of $120,000 (tax basis $80,000) to become a one-third partner in the new DEF partnership. In October of the current year, DEF sells the art received from Finley for $141,000. What amount of gain from the sale of the artwork should be allocated to Finley?

Answer 100

A built-in gain on the date of contribution of $40,000 ($120,000 – $80,000) must be allocated to Finley when the property is subsequently disposed of by the partnership in a taxable transaction. In addition to the built-in gain, Finley is allocated an additional gain of $7,000 [($141,000 – $120,000) ÷ 3] on the date of sale of the artwork, for a total gain of $47,000 ($40,000 + $7,000).

Question 101

A partnership may elect to have a tax year other than the generally required tax year, if the deferral period for the tax year elected does not exceed ___

Answer 101

three months.

Question 102

Manny, Moe, Matilda, and Shep are partners in a manufacturing business. The partnership is on a calendar tax year. They were so busy making money that they forgot to file their year 16 personal and partnership tax returns on a timely basis. They finally filed them on June 30, year 17. What is the correct penalty the partnership will be assessed for late filing of the partnership return? $195 per partner times three months $195 per partner times two months $195 per partner times four months Penalties are assessed against the partners, not the partnership.

Answer 102

$195 per partner times 4 months domestic partnership must file Form 1065 by the 15th day of the 3rd month following the date its tax year ended. The partnership return was due on March 15, year 17. The penalty for late filing is $195 per partner for each month, or part of a month, that the return is late, up to 12 months. The total penalty in this case would be $3,120 ($195 × 4 partners = $780; $780 × 4 months = $3,120).

Question 103

The personal service partnership of Allen, Baker & Carr had the following cash-basis balance sheet at December 31, Year 1: Adjusted Basis Market Assets per Books Value Cash $102,000 $102,000 Unrealized accounts receivable -- 420,000 Totals $102,000 $522,000 Liability and Capital Note payable $ 60,000 $ 60,000 Allen, capital 14,000 154,000 Baker, capital 14,000 154,000 Carr, capital 14,000 154,000 Totals $102,000 $522,000 Carr, an equal partner, sold his partnership interest to Dole, an outsider, for $154,000 cash on January 1, Year 2. In addition, Dole assumed Carr’s share of the partnership’s liability. What amount of ordinary income should Carr report in his Year 2 income tax return on the sale of his part­nership interest?

Answer 103

$140k Carr’s share of the $420,000 is $140,000 ($420,000 ÷ 3). Carr will have ordinary income of $140,000. If they asked about the gain, here is the gain calculation Amount realized: Cash received $154,000 + Liability relief ($60,000 ÷ 3) 20,000 = Total amount realized $174,000 Less: Adjusted basis: Carr, capital accounr $ 14,000 + Carr’s share of partnership liabilities 20,000 = Carr’s adjusted basis in the partnership (34,000) Realized gain $140,000

Question 104

On December 31, after receipt of his share of partnership income, Clark sold his interest in a limited partnership for $30,000 cash and relief of all liabilities. On that date, the adjusted basis of Clark's partnership interest was $40,000, consisting of his capital account of $15,000 and his share of the partnership liabilities of $25,000. The partnership has no unrealized receivables or substantially appreciated inventory. What is Clark's gain or loss on the sale of his partnership interest?

Answer 104

The sale or exchange of a partnership interest is generally treated as the sale or exchange of a capital asset except for amounts associated with unrealized receivables and inventory items. The question states that there are no unrealized receivables or inventory items, so Clark's capital gain is calculated as follows: Cash received $30,000 Liability relief 25,000 -------- Amount realized $55,000 Basis (40,000) -------- Capital gain $15,000

Question 105

Owen's tax basis in Regal Partnership was $18,000 at the time Owen received a nonliquidating distribution of $3,000 cash and land with an adjusted basis of $7,000 to Regal and a fair market value of $9,000. Regal did not have unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. Disregarding any income, loss, or any other partnership distribution for the year, what was Owen's tax basis in Regal after the distribution?

Answer 105

Nonliquidating distributions of money and/or property from a partnership to a partner reduce the partner's basis in his partnership interest, but not below zero. The partner's basis is reduced by the amount of money distributed. A distribution of property reduces the partner's basis by the adjusted basis that the partnership had in the property distributed, but not below zero. ``` Basis before distribution $18,000 Less cash distribution (3,000) Less land distributed (7,000) -------- Basis after distribution $ 8,000 ```

Question 106

uaranteed payments made by a partnership to partners for services rendered to the partnership, that are deductible business expenses under the Internal Revenue Code, are: deductible expenses on the U.S. Return of Partnership Income, Form 1065, in order to arrive at partnership income (loss). included on Schedules K-1 to be taxed as ordinary income to the partners.

Answer 106

Both Guaranteed payments are deductible by the partnership in arriving at taxable income. Then, the guaranteed payments are separately stated on the Form 1065 Schedule K-1 so that each partner can include his or her guaranteed payment as ordinary income on his tax return.