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Emma's basis in her BBDE LLC interest is $60,000 at the beginning of the tax year. Her allocable share of LLC items are as follows: $20,000 of ordinary income, $2,000 tax-exempt interest income, and a $6,000 long-term capital gain. In addition, the LLC distributed $12,000 of cash to Emma during the year. Assuming that the LLC had no liabilities at the beginning or the end of the year, Emma's ending basis in her LLC interest is $76,000.

A) True
B) False

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In a limited liability company, all members are protected from all debts of the LLC unless they personally guaranteed the debt.

A) True
B) False

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Matching Match each of the following statements with the numbered terms below that provide the best definition. -Profits interest


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) Partnership in which partners are liable only for any partner's malpractice.
E) Amount that might be reported on either form 1065, page 1 or, on Schedule K.
F) Transfer of asset to partnership followed by immediate distribution of cash to partner.
G) Must have at least one general and one limited partner.
H) Long-term capital gain might be recharacterized as ordinary income.
I) All partners are jointly and severally liable for entity debts.
J) Theory treating the partner and partnership as separate economic units.
K) Partner's basis in partnership interest after tax-free contribution of asset to partnership.
L) Partnership's basis in asset after tax-free contribution of asset to partnership.
M) One way to calculate a partner's economic interest in the partnership.
N) Owners are members.
O) Theory treating the partnership as a collection of taxpayers joined in an agency relationship.
P) Participates in management.
Q) Not liable for entity debts.
R) No correct match provided.

S) B) and I)
T) L) and N)

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Matching Match each of the following statements with the numbered terms below that provide the best definition. -Limited partner


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) Partnership in which partners are liable only for any partner's malpractice.
E) Amount that might be reported on either form 1065, page 1 or, on Schedule K.
F) Transfer of asset to partnership followed by immediate distribution of cash to partner.
G) Must have at least one general and one limited partner.
H) Long-term capital gain might be recharacterized as ordinary income.
I) All partners are jointly and severally liable for entity debts.
J) Theory treating the partner and partnership as separate economic units.
K) Partner's basis in partnership interest after tax-free contribution of asset to partnership.
L) Partnership's basis in asset after tax-free contribution of asset to partnership.
M) One way to calculate a partner's economic interest in the partnership.
N) Owners are members.
O) Theory treating the partnership as a collection of taxpayers joined in an agency relationship.
P) Participates in management.
Q) Not liable for entity debts.
R) No correct match provided.

S) N) and O)
T) A) and C)

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Kristie is a 25% member in the KLM LLC. At the end of the year, KLM has accounts payable of $60,000 recourse to the LLC but not guaranteed by the LLC members) , and a nonrecourse debt related to real estate of $300,000 meets the at risk limitation requirements) . In addition, Kristie personally guaranteed a $50,000 liability for KLM's equipment purchases. Which of the following indicates the information that should be reported on Kristie's Schedule K-1 for the year?


A) $15,000 recourse debt, $75,000 qualified nonrecourse financing.
B) $90,000 nonrecourse debt.
C) $90,000 nonrecourse debt, $12,500 recourse financing.
D) $65,000 recourse debt, $75,000 qualified nonrecourse financing.
E) $50,000 recourse debt, $15,000 nonrecourse debt, $75,000 qualified nonrecourse financing.

F) B) and D)
G) A) and C)

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ABC, LLC is equally owned by three corporations. Two corporations have June 30 fiscal year-ends and the third is a calendar year taxpayer. ABC will use the least aggregate deferral method to determine its taxable year-end.

A) True
B) False

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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 $3,000,000 of partnership debt under the liability sharing rules, giving him an initial adjusted basis for his partnership interest of $6,000,000. 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 that 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?

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a. Palmer will likely recognize a $500,0...

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Match each of the following statements with the terms below that provide the best definition. -Startup costs


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) Theory under which a partnership's recourse debt is shared among the partners.
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.

Q) E) and L)
R) E) and O)

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Which of the following entity owners cannot participate in the management of an entity?


A) A general partner in a general partnership.
B) A member of a limited liability company.
C) A partner in a limited liability partnership.
D) A limited partner in a limited partnership.

E) A) and B)
F) A) and C)

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Kristie is a 30% partner in the KKM Partnership. During the current year, KKM reported gross receipts of $280,000 and a charitable contribution of $30,000. The partnership paid office expenses of $80,000. In addition, KKM distributed $20,000 each to partners Kaylyn and Megan, and paid partner Kaylyn $20,000 for administrative services. Kristie reports the following income from KKM during the current tax year.


A) $54,000 ordinary income; $9,000 charitable contribution.
B) $60,000 ordinary income; $9,000 charitable contribution.
C) $33,000 ordinary income.
D) $54,000 ordinary income.

E) A) and B)
F) C) and D)

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Which of the following statements is always true regarding accounting methods available to a partnership?


A) If a partnership is a tax shelter, it can use the cash method of accounting.
B) If a nontax-shelter partnership had average annual gross receipts of less than $25 million in for the last three tax years, it can use the cash method.
C) If a partnership has a partner that is a personal service corporation, it cannot use the cash method.
D) If a partnership has a partner that is a C corporation, it cannot use the cash method.
E) All of these statements are always true.

F) C) and D)
G) A) and E)

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Micah's beginning capital account on his Schedule K-1 is $60,000. During the year, he is allocated $20,000 of partnership income, $8,000 of nondeductible expenses, and a $12,000 share of tax-exempt income. His Schedule K- 1s show allocations of nonrecourse debt of $20,000 last year) and $30,000 this year). Micah's ending capital account is $94,000.

A) True
B) False

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Matching Match each of the following statements with the numbered terms below that provide the best definition. -Carried interest


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) Partnership in which partners are liable only for any partner's malpractice.
E) Amount that might be reported on either form 1065, page 1 or, on Schedule K.
F) Transfer of asset to partnership followed by immediate distribution of cash to partner.
G) Must have at least one general and one limited partner.
H) Long-term capital gain might be recharacterized as ordinary income.
I) All partners are jointly and severally liable for entity debts.
J) Theory treating the partner and partnership as separate economic units.
K) Partner's basis in partnership interest after tax-free contribution of asset to partnership.
L) Partnership's basis in asset after tax-free contribution of asset to partnership.
M) One way to calculate a partner's economic interest in the partnership.
N) Owners are members.
O) Theory treating the partnership as a collection of taxpayers joined in an agency relationship.
P) Participates in management.
Q) Not liable for entity debts.
R) No correct match provided.

S) F) and L)
T) A) and F)

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Match each of the following statements with the terms below that provide the best definition. -Economic risk of loss


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) Theory under which a partnership's recourse debt is shared among the partners.
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.

Q) J) and O)
R) A) and O)

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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 that the interest is not sold within two years after the time it is granted to the service partner.)


A) A 10% interest in the capital of the partnership that will vest if the partner remains in the partnership for three 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 when there are no restrictions on transferability of the interest.
D) A 30% interest in the capital of the partnership when the partner contributes intangible property with a $0 basis that the partner developed.
E) All of these.

F) None of the above
G) A) and B)

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Jeordie and Kendis created the JK Partnership by contributing $100,000 each. The $200,000 cash was used by the partnership to acquire a depreciable asset. The partnership agreement provides that the partners' capital accounts will be maintained in accordance with Reg. § 1.704-1b) the economic effect Regulations) and that any partner with a deficit capital account will be required to restore that capital account when the partner's interest is liquidated. The partnership agreement provides that MACRS will be allocated 20% to Jeordie and 80% to Kendis. All other items of partnership income, gain, loss, deduction, and credit will be allocated equally between the partners. In the first year, MACRS is $40,000 and no other operating transactions occur. The property is sold at the end of the year for $160,000 which, coincidentally, corresponds to JK's basis in the property), and the partnership is liquidated immediately thereafter. To satisfy the economic effect test, how much of the $160,000 cash from the sale) is allocated each to Jeordie and Kendis?

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Jeordie will receive $92,000 and Kendis ...

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Brooke and John formed a partnership. Brooke received a 40% interest in partnership capital and profits in exchange for contributing land basis of $30,000 and fair market value of $120,000) . John received a 60% interest in partnership capital and profits in exchange for contributing $180,000 of cash. Three years after the contribution date, the land contributed by Brooke is sold by the partnership to a third party for $150,000. How much taxable gain will Brooke recognize from the sale?


A) $102,000
B) $90,000
C) $48,000
D) $36,000
E) $12,000

F) B) and E)
G) None of the above

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Laura is a real estate developer and owns property that is treated as inventory not a capital asset) in her business. She contributes a parcel of this land basis of $15,000) to a partnership, also to be held as inventory. The fair market value of the property is $12,000 at the contribution date. After three years, the partnership sells the land for $10,000. The partnership will recognize a $5,000 ordinary loss on sale of the property.

A) True
B) False

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Matching Match each of the following statements with the numbered terms below that provide the best definition. -General partnership


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) Partnership in which partners are liable only for any partner's malpractice.
E) Amount that might be reported on either form 1065, page 1 or, on Schedule K.
F) Transfer of asset to partnership followed by immediate distribution of cash to partner.
G) Must have at least one general and one limited partner.
H) Long-term capital gain might be recharacterized as ordinary income.
I) All partners are jointly and severally liable for entity debts.
J) Theory treating the partner and partnership as separate economic units.
K) Partner's basis in partnership interest after tax-free contribution of asset to partnership.
L) Partnership's basis in asset after tax-free contribution of asset to partnership.
M) One way to calculate a partner's economic interest in the partnership.
N) Owners are members.
O) Theory treating the partnership as a collection of taxpayers joined in an agency relationship.
P) Participates in management.
Q) Not liable for entity debts.
R) No correct match provided.

S) A) and J)
T) G) and Q)

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Debt of a limited liability company is allocated among its members using the nonrecourse debt allocation rules unless an LLC member has personally guaranteed the debt.

A) True
B) False

Correct Answer

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