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Exam 20: Forming and Operating Partnerships

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Question 21

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A partner can apply any passive activity losses against any passive activity income for the year.

A) True
B) False

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Question 22

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Actual or deemed cash distributions in excess of a partner's outside basis are generally taxable as capital gains.

A) True
B) False

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Question 23

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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?

Zinc, LP was formed on August 1, 20X9. When the partnership was formed, Al contributed $10,000 in cash and inventory with a FMV and tax basis of $40,000. In addition, Bill contributed equipment with a FMV of $30,000 and adjusted basis of $25,000 along with accounts receivable with a FMV and tax basis of $20,000. Also, Chad contributed land with a FMV of $50,000 and tax basis of $35,000. Finally, Dave contributed a machine, secured by $35,000 of debt, with a FMV of $15,000 and a tax basis of $10,000. What is the total inside basis of all the assets contributed to Zinc, LP?

Lincoln, Inc., Washington, Inc., and Adams, Inc. form Presidential Suites Partnership on February 15, 20X9. Now, Presidential Suites 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 Presidential Suites use and what rule requires this year-end? $\begin{array}{l}\quad\quad\quad\quad\quad\quad\text { Presidential Suites Partnership }\\\begin{array} { | c | c | c | c | } \hline & \text { Year-End } & \text { Profits } & \text { Capital } \\\hline \text { Lincoln, Inc. } & 3 / 31 & 35 \% & 30 \% \\\hline \text { IVashington, Inc. } & 7 / 31 & 30 \% & 40 \% \\\hline \text { Adams, Inc. } & 11 / 30 & 35 \% & 30 \% \\\hline\end{array}\end{array}$

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

Clint noticed that the Schedule K-1 he just received from ABC Partnership included a $20,000 ordinary business loss allocation. His tax basis in ABC at the beginning of ABC's most recent tax year was $10,000. Comparing the Schedule K-1 he recently received from ABC with the Schedule K-1 he received from ABC last year, Clint noted that his share of ABC partnership debt changed as follows: recourse debt increased from $0 to $2,000, qualified nonrecourse debt increased from $0 to $3,000, and nonrecourse debt increased from $0 to $3,000. Finally, the Schedule K-1 Clint recently received from ABC reflected a $1,000 cash contribution he made to ABC during the year. Clint is not a material participant in ABC partnership, and he received $10,000 of passive income from another investment during the same year he received the loss allocation from ABC. How much of the $20,000 loss from ABC can Clint deduct currently, and how much of the loss is suspended because of the tax basis, the at-risk, and the passive activity loss limitations?

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

On March 15, 20X9, Troy, Peter, and Sarah formed Picture Perfect General Partnership. This partnership was created to sell a variety of cameras, picture frames, and other photography accessories. The following items were contributed by each partner in exchange for a 1/3 capital and profits interest: • Troy - cash of $3,000, inventory with a FMV and tax basis $5,000, and a building with a FMV of $8,000 and adjusted basis of $10,000. Additionally, the building is secured by a $10,000 mortgage. • Peter - cash of $5,000, accounts payable with a FMV and tax basis of $19,000, and land with a FMV and tax basis of $20,000. • Sarah - cash of $2,000, accounts receivable with a FMV and tax basis of $1,000, and equipment with a FMV of $26,000 and adjusted basis of 4,000. Also, the equipment is secured by a $23,000 note payable. What is the partnership's inside basis in each asset? How much gain or loss must Picture Perfect recognize? Prepare Picture Perfect's balance sheet reflecting the partners' capital accounts on both a tax basis and 704(b)/FMV basis.

An additional allocation of partnership debt or relief of partnership debt is considered to be a deemed cash contribution or cash distribution respectively.

Fred has a 45% profits interest and 30% capital interest in the SAP Partnership and his tax basis before considering his share of SAP's current year loss is $11,000. Included in his tax basis is a $2,600 share of recourse debt and $5,300 share of nonrecourse debt. Fred is a limited partner in SAP. He is not involved in any other activities. If SAP has a $15,000 ordinary loss for the year, how much of the loss can be deducted currently, and how much of the loss is suspended because of the tax basis, the at-risk, and the passive activity loss limitations?

Which of the following would not be classified as a separately-stated item?

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? $\begin{array}{c}\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\text{Shoes Galore Partnership}\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\end{array}$ $\begin{array} { | c | c | c | c | } \hline & \text { Year-End } & \text { Profits } & \text { Capital } \\\hline \text { KBL, Inc. } & 1 / 31 & 25 \% & 25 \% \\\hline \text { AGIV, Inc. } & 1 / 31 & 20 \% & 20 \% \\\hline \text { Blaster, Inc. } & 3 / 31 & 4 \% & 4 \% \\\hline \text { Shiny Shoes, Inc. } & 6 / 30 & 3 \% & 3 \% \\\hline 24 \text { Individuals }&12/31& \begin{array} { c } 2 \% \text { each } \\( 48 \% \text { total } )\end{array} & \begin{array} { c } 2 \% \text { each } \\( 48 \% \text { total } )\end{array} \\\hline\end{array}$

A purchased partnership interest has a holding period beginning on the date of purchase regardless of the type of property held by the partnership.

What form does a partnership use when filing an annual informational return?

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

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

J&J, LLC was in its third year of operations when J&J decided to expand the number of members from two, A & B, with equal profits and capital interests to three members, A, B, andC. The third member, C, will contribute her financial expertise to the LLC in exchange for a 1/3 capital interest in J&J. Given the balance sheet below reflecting the financial position of J&J on the date member C is admitted, what are the tax consequences to members A, B, and C, and to J&J when C receives her capital interest? If, instead, member C receives a 1/3 profit interest, what would be the tax consequences to members A, B, and C, and to J&J? $\begin{array}{|c|}\hline\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\text{JEJ Limited Liability Company}\quad\quad\quad\quad\quad\quad\quad\\\hline\text{Balance Sheet}\\\end{array}$ $\begin{array}{|l|r|r|l|r|r|}\hline & {\text { Basis }} & {\text { FMV }} & & {\text { Basis }} & {F M V} \\\hline \text { Cash } & 20,000 & 20,000 & \text { Accounts Payable } & 7,000 & 7,000 \\\hline \text { Inventory } & 5,000 & 5,000 & \text { Mortgage Payable } & 20,000 & 20,000 \\\hline \text { Equipment } & 10,000 & 17,000 & & & \\\hline \text { Building } & 30,000 & 45,000 & \text { A - Capital } & 22,000 & 30,000 \\\hline & & & \text { B - Capital } & 16,000 & 30,000 \\\hline\\\hline \text{Total Assets} & \text{65,000} & \text{87,000} & \text {Total Liab. \& OE} & \text{65,000}& \text{87,000} \\\hline\end{array}$

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

What general accounting methods may be used by a partnership and how and by whom are they selected?