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Exam 15: Forming and Operating Partnerships

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Question 1

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Which requirement must be satisfied in order to specially allocate partnership income or losses to partners?

A) Special allocations must have economic effect
B) At least one partner must agree to the special allocations
C) Special allocations must be insignificant
D) Special allocations must reduce the combined tax liability of all the partners

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

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Question 2

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On January 1, 20X9, Mr. Blue and Mr. Grey each contributed $100,000 to form the B&G general partnership. Their partnership agreement states that they will each receive a 50% profits and loss interest. The partnership agreement also provides that Mr. Blue will receive an annual $36,000 guaranteed payment. B&G began business on January 1, 20X9. For its first taxable year, its accounting records contained the following information. $\begin{array}{|l|r|r|r|r|r|r|r|}\hline&& \text { Jane } & 25 \% & \text { Joe } & 45 \% & \text { Jack } & 30 \% \\\hline\text { Initial Basis}&&& 5,000&& 10,000 && 2,000 \\\hline \text { Ordinary Inc. } & 100,000 & & 25,000 & & 45,000 & & 30,000 \\\hline 1231 \text { gain } & 15,000 & & 3,750 & & 6,750 & & 4,500 \\\hline \text { Tax-exempt income } & 3,000 & & 750 & & 1,350 & & 900 \\\hline \text { Additional Debt } & 12,000 & & 3,000 & & 5,400 & & 3,600 \\\hline \text { Charitable contribution } & (25,000) & & (6,250) & & (11,250) & & (7,500) \\\hline \text { Total } & 105,000 & & 31,250 & & 57,250 & & 33,500 \\\hline\end{array}$ The $3,000 of interest was paid on a $60,000 loan made to B&G by Key Bank on June 30, 20X9. B&G repaid $10,000 of the loan on December 15, 20X9. Neither of the partners received a cash distribution from B&G in 20X9. Complete the following table related to Mr. Blue's interest in B&G partnership: $\begin{array}{l}\text { PARTNERS' OUTSIDE BASIS }\\\begin{array} { | l | r | l | r | l | r | } \hline { \text { Troy } } && { \text { Peter } } & &{ \text { Sarah } } \\\hline \text { Cash } & 3,000 & \text { Cash } & 5,000 & \text { Cash } & 2,000 \\\hline \text { Inventory } & 5,000 & \text { Land } & 20,000 & \text { Equipment } & 3,500 \\\hline \text { Building } & 10,000 & \text { Relief of Debt } & ( 12,000 ) & \text { AR } & 1,000 \\\hline \text { Relief of Debt } & ( 10,000 ) & \text { Debt } & 8,500 & \text { Reliet of Debt } & ( 23,000 ) \\\hline \text { Debt } & 8,500 & & & \text { Debt } & 28,000 \\\hline \text { Preliminary Basis } & 16,500 & \text { Preliminary Basis } & 21,500 & \text { Preliminary Basis } & 11,500 \\\hline \text { Gain(Loss) } & - & \text { Gain(Loss) } & & \text { Gain(Loss) } &- \\\hline \text { Outside Basis } & 16,500 & \text { Outside Basis } & 21,500 & \text { Outside Basis } & 11,500 \\\hline\end{array}\end{array}$

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See table below: Tax basis = Initial co...

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Question 3

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On January 1, X9, Gerald received his 50% profits and capital interest in High Air, LLC in exchange for $2,000 in cash and real property with a $3,000 tax basis secured by a $2,000 nonrecourse mortgage. High Air reported a $15,000 loss for its X9 calendar year. How much loss can Gerald deduct, and how much loss must he suspend if he only applies the tax basis loss limitation?

In each of the independent scenarios below, how does the partner or partnership determine its holding period in the property received? a. A partner contributes property in exchange for a partnership interest b. The partnership receives contributed property c. A partner contributes services in exchange for a partnership interest d. A partner purchases a partnership interest from an existing partner

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

Which of the following items will affect a partner's tax basis?

Adjustments to a partner's outside basis are made annually to prevent double taxation on the sale of a partnership interest or at the time of a partnership distribution.

Kim received a 1/3 profits and capital interest in Bright Line, LLC in exchange for legal services she provided. In addition to her share of partnership profits or losses, she receives a $30,000 guaranteed payment each year for ongoing services she provides to the LLC. For X4, Bright Line reported the following revenues and expenses: Sales - $150,000, Cost of Goods Sold - $90,000, Depreciation Expense - $45,000, Long-Term Capital Gains - $15,000, Qualified Dividends - $6,000, and Municipal Bond Interest - $3,000. How much ordinary business income (loss) will Bright Line allocate to Kim on her Schedule K-1 for X4?

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

A general partner's share of ordinary business income is similar to investment income; thus, a general partner only includes their guaranteed payments as self-employment income.

Nonrecourse debt is generally allocated according to the profit-sharing ratios of the partnership.

A partnership with a C corporation partner must always use the accrual method as its accounting method.

KBL, Inc., AGW, Inc., Blaster, Inc., Shiny Shoes, Inc., and a group of 24 individuals form Shoes Galore General Partnership on October 11, 20X9. Now, Shoes Galore must adopt its required tax year-end. The partners' year-ends, profits interests, and capital interests are reflected in the table below. Given this information, what tax year-end must Shoes Galore use and what rule requires this year-end? $\begin{array} { | l | r | } \hline \text { Sales } & \$ 60,000 \\\hline \text { Long-Term Capital Gain } & \$ 8,000 \\\hline \text { Qualified Dwidends } & \$ 5,000 \\\hline \text { Cost of Goods Sold } & \$ 40,000 \\\hline \text { Employee Wages } & \$ 15,000 \\\hline \text { Guaranteed Pay ment to Managing Partner } & \$ 25,000 \\\hline \text { Municipal Bond Interest } & \$ 5,000 \\\hline \text { Section 179 Expense } & \$ 10,000 \\\hline \text { MACRS Depreciation } & \$ 8,000 \\\hline \text { Section 1231 Gains } & \$ 3,000 \\\hline \text { Fines and Penalties } & \$ 1,500\end{array}$

Sue and Andrew form SA general partnership. Each person receives an equal interest in the newly created partnership. Sue contributes $10,000 of cash and land with a FMV of $55,000. Her basis in the land is $20,000. Andrew contributes equipment with a FMV of $12,000 and a building with a FMV of $33,000. His basis in the equipment is $8,000, and his basis in the building is $20,000. How much gain must the SA general partnership recognize on the transfer of these assets from Sue and Andrew?

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

Which of the following items are subject to the Net Investment Income tax when an individual partner is a material participant in the partnership?

Tim, a real estate investor, Ken, a dealer in securities, and Hardware, Inc., a retail lumber store form a partnership called HKT, LP. HKT is in the home building business. Tim recently purchased his interest in HKT while the other partners purchased their interest several years ago. During X3, HKT reports a $12,000 gain from the sale of a stock in a wholesale lumber company it purchased in X1 for investment purposes. Which of the following statements best represents how their portion of the gain should be reported to the partner?

Ruby's tax basis in her partnership interest at the beginning of the partnership's tax year was $13,000. The following items were included in her Schedule K-1 from the partnership for the year: $\begin{array}{l}\text { TALL LADDERS, LP }\\\text { Balance Sheet }\\\begin{array}{|l|r|r|}\hline & \text { Yea 1 } & \text { Year 2 } \\\hline \text { Assets } & 120,000 & 270,000 \\\hline \text { Nonrecourse } \\\text { Liabilities } & 50,000 & 180,000 \\\hline \text { Partner's Capital } & 70,000 & 90,000 \\\hline\end{array}\end{array}$ Determine what amounts related to these items Ruby will report on her tax return assuming her tax basis and at risk amount are equal and that she is a material participant in the partnership's activities.

Which of the following does not adjust a partner's basis?

The term "outside basis" refers to the partnership's basis in its assets; whereas, the term "inside basis" refers an individual partner's basis in her partnership interest.