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Exam 10: Partnerships: Formation, operation, and Basis

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Question 21

True/False

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Blaine contributes property valued at $50,000 (basis of $40,000)in exchange for a 25% interest in the BIKE Partnership.If the property is later sold for $70,000,gain of $15,000 will be allocated to Blaine.

A) True
B) False

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Question 22

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Stephanie is a calendar year cash basis taxpayer.She owns a 50% profit and loss interest in a cash basis partnership with a September 30 year-end.The partnership's operating income (after deducting guaranteed payments) was $120,000 ($10,000 per month) and $144,000 ($12,000 per month) ,respectively,for the partnership tax years ended September 30,2012 and 2013.The partnership paid guaranteed payments to Stephanie of $2,000 and $3,000 per month during the fiscal years ended September 30,2012 and 2013.How much will Stephanie's adjusted gross income be increased by these partnership items for her tax year ended December 31,2012?

A) $60,000.
B) $72,000.
C) $84,000.
D) $90,000.
E) $108,000.

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

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Question 23

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Kaylyn is a 40% partner in the KKM Partnership.During the current year,KKM reported gross receipts of $160,000 and a charitable contribution of $10,000.The partnership paid office expenses of $100,000.In addition,KKM distributed $10,000 each to partners Kaylyn and Kristie,and the partnership paid partner Megan $20,000 for administrative services.Kaylyn reports the following income from KKM during the current tax year:

Which one of the following statements regarding partnership taxation is incorrect?

Samuel is the managing general partner of STU,in which he owns a 30% interest.For the year,STU reported income of $260,000 (after deducting all guaranteed payments) .Samuel received a guaranteed payment of $40,000 for capital that he had loaned the partnership,and he received a guaranteed payment of $120,000 for services he performed for STU.How much income from self-employment did Samuel earn from STU?

In the current year,Derek formed an equal partnership with Cody.Derek contributed land with an adjusted basis of $110,000 and a fair market value of $200,000.Derek also contributed $50,000 cash to the partnership.Cody contributed land with an adjusted basis of $80,000 and a fair market value of $230,000.The land contributed by Derek was encumbered by a $60,000 nonrecourse debt.The land contributed by Cody was encumbered by $40,000 of nonrecourse debt.Assume the partners share debt equally.Immediately after the formation,what is the basis of Cody's partnership interest?

PaulCo,DavidCo,and Sean form a partnership with cash contributions of $80,000,$50,000 and $30,000,respectively,and agree to share profits and losses in the ratio of their original cash contributions.PaulCo uses a January 31 fiscal year-end,while DavidCo and Sean use a November 30 and December 31 year-end,respectively.The partnership must use the least aggregate deferral method to determine its year end.

Paul sells one parcel of land (basis of $100,000) for its fair market value of $160,000 to a partnership in which he owns a 60% capital interest.Paul held the land for investment purposes.The partnership is in the real estate development business,and will build residential housing (for sale to customers) on the land.Paul will recognize:

BCD Partners reported the following items on the partnership's Schedule K: ordinary income,$72,000;interest income,$5,000;long-term capital gain,$8,000;charitable contributions,$3,000;post-1986 depreciation adjustment,$4,000;and cash distributions to partners,$20,000.How much will BCD show as net income (loss) on its Analysis of Income (Loss) ?

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 the land to the partnership for $75,000.The partnership immediately started using the land as a parking lot for its employees.Maria's recognized gain of $15,000 on the sale is capital-not ordinary.

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 $1,000,000 of partnership debt under the liability sharing rules,giving him an initial adjusted basis for his partnership interest of $4,000,000.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 Palmer's share of partnership liabilities will not change as a result of this distribution.

An example of the "entity concept" underlying partnership taxation is the fact that the partners (rather than the partnership)pay tax on partnership income.

Michelle and Jacob formed the MJ Partnership.Michelle contributed $20,000 of cash in exchange for her 50% interest in the partnership capital and profits.During the first year of partnership operations,the following events occurred: the partnership had a net taxable income of $10,000;Michelle received a distribution of $8,000 cash from the partnership;and Michelle had a 50% share in the partnership's $16,000 of recourse liabilities on the last day of the partnership year.Michelle's adjusted basis for her partnership interest at year end is:

Allison and Taylor form a partnership by each making contributions of $90,000 cash to partnership capital.The partnership purchases an asset for $600,000,using the cash and financing the rest with a $420,000 recourse note.Allison is allocated 75% of partnership profits and losses until the date when the total partnership profits exceed total partnership losses.After that date,the profits and losses are shared equally between the two partners.The partners expect the partnership to have losses for the first three years of operations and profits thereafter.How will the recourse debt be shared between the partners for basis purposes immediately after the property is acquired? The recourse debt will be allocated $360,000 to Allison and $60,000 to Taylor.According to the constructive liquidation scenario,the $600,000 partnership asset is deemed worthless.The asset is deemed to be sold for the $0 value and the loss is allocated $450,000 to Allison and $150,000 to Taylor.This reduces Allison's capital account to a deficit of ($360,000)and Taylor's to a deficit of ($60,000).Each partner is then deemed to contribute cash to the partnership to eliminate this capital account deficit (Allison contributes $360,000;Taylor contributes $60,000).The partnership is deemed to use these cash contributions to pay the $420,000 partnership liability.

When property is contributed to a partnership for a capital and profits interest,the holding period of the contributing partner's interest:

The amount of a partnership's income and loss from operating activities is combined with separately stated income and expenses in determining the partnership's net income (loss).This amount is reconciled to book income on the partnership's Schedule M-1 or Schedule M-3.

The primary purpose of the partnership agreement is to document the various tax elections made by the partners regarding depreciation methods,treatment of research and experimental costs,calculation of the § 199 deduction,and the § 754 election.

Justin and Kevin formed the equal JK Partnership during the current year,with Justin contributing $60,000 in cash and Kevin contributing land (basis of $40,000,fair market value of $30,000)and equipment (basis of $0,fair market value of $30,000).Kevin recognizes a $20,000 gain on the contribution and his basis in his partnership interest is $60,000.

In the current year,the CAR Partnership received revenues of $400,000 and paid the following amounts: $160,000 in rent,utilities,and salaries;a $40,000 guaranteed payment to partner Ryan;$20,000 to partner Amy for consulting services;and a $40,000 distribution to 25% partner Cameron.In addition,the partnership realized a $12,000 net long-term capital gain.Cameron's basis in his partnership interest was $60,000 at the beginning of the year,and included his $25,000 share of partnership liabilities.At the end of the year,his share of partnership liabilities was $15,000.

William is a general partner in the WST partnership.During the current year,he receives a guaranteed payment of $10,000 for services he provides to the partnership,and his distributive share of partnership income is $30,000.William is required to pay self-employment tax on the $10,000 guaranteed payment,but not on his distributive share of partnership income.