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Exam 14: Partnerships and Limited Liability Entities

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Question 1

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Tara and Robert formed the TR Partnership four years ago.Because they decided the company needed some expertise in multimedia presentations, they offered Katie a one-third interest in partnership capital if she would come to work for the partnership.On July 1 of the current year, the unrestricted partnership interest (fair market value of $25,000) was transferred to Katie.How should Katie treat the receipt of the partnership interest in the current year?

A) Nontaxable.
B) Carried interest.
C) $25,000 ordinary income.
D) $25,000 long-term capital gain.
E) $25,000 short-term capital gain.

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

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Question 2

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Which one of the following is an example of a special allocation of partnership income?

A) The partnership's capital gains and losses are shown separately on Schedule K-1.
B) Distributions from the partnership to the partner are shown on Schedule K-1 line 20.
C) The partnership agreement provides that a partner will report all charitable contributions rather than his 20% distributive share.
D) The Schedule K-1 reports each partner's share of the information they need to calculate the § 199A (qualified business income) deduction.

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

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C

Question 3

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Which of the following is not a correct statement regarding the advantage of the partnership entity form over the C corporation form?

Sharon contributed property to the newly formed QRST Partnership.The property had a $100,000 adjusted basis to Sharon and a $160,000 fair market value on the contribution date.The property was also encumbered by a $90,000 nonrecourse debt, which was transferred to the partnership on that date.Sharon is treated as a general partner.She is allocated 30% of QRST's profits and 20% of QRST's losses.Sharon's basis in the partnership interest after the formation transaction is:

Match each of the following statements with the terms below that provide the best definition. 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. -Partner's capital account

Match each of the following statements with the terms below that provide the best definition. 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. -§ 179 deduction

Match each of the following statements with the terms below that provide the best definition. 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. -Outside basis

Which of the following statements is correct regarding partnership or C corporation tax rates?

Maria owns a 60% interest in the KLM Partnership.Four years ago, her father gave her a parcel of land.The gift basis of the land to Maria is $60,000.In the current year, Maria had still not figured out how to use the land for her own personal or business use; consequently, she sold it to the partnership for $50,000.The partnership immediately started using the land as a parking lot for its employees.Maria may recognize her $10,000 loss on the sale.

Rebecca is a limited partner in the RST Partnership, which is not publicly traded.Her allocable share of RST's passive ordinary losses from a nonrealty activity for the current year is ($60,000) .Rebecca has a $40,000 adjusted basis (outside basis) for her interest in RST (before deduction of any of the passive losses) .Her amount "at risk" is $30,000 (before deduction of any of the passive losses) .She also has $25,000 of passive income from other sources.She has no business losses for the year from other sources.How much of her ($60,000) allocable RST loss can Rebecca deduct on her current-year tax return?

Match each of the following statements with the terms below that provide the best definition. 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. -Guaranteed payment

The qualified business income deduction is calculated at the partner level.The partnership reports information the partner needs to calculate the deduction, such as W-2 wages and the unadjusted basis of the partnership's depreciable property.

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?

An examination of the RB Partnership's tax books provides the following information for the current year. Rachel is a 30% general partner in partnership capital, profits, and losses.Assume that the adjusted basis of her partnership interest is $60,000 at the beginning of the year, and she shares in 30% of the partnership's liabilities for basis purposes. a.What is Rachel's adjusted basis for the partnership interest at the end of the year? How much income must Rachel report on her tax return for the current year? What deductions b.might be available? What is the character of the income and what types of tax might apply to it?

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 partnership reports each partner's share of income to the partner on a Form 1099-MISC.

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.§ 1.704-1(b) (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?

In a limited liability partnership, all members may participate in management and have personal liability for entity debts except for malpractice committed by the other partners.

A partnership is an association formed by two or more taxpayers (which may be any type of entity) to carry on a trade or business.

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.