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Exam 9: Forming and Operating Partnerships

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Question 41

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Partners must generally treat the value of profits interests they receive in exchange for services as ordinary income. Partners must treat the value of capital interests they receive in exchange for services as ordinary income. Because there is no immediate liquidation value associated with a profits interest, the partner providing the services will not recognize income.

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Question 42

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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.

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The inside basis of the assets to the pa...

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Question 43

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Styling Shoes, LLC filed its 20X8 Form 1065 on March 15, 20X9. Styling had three members with the following ownership interests and tax basis at the beginning of the 20X8: (1) Jane, a member with a 25% profits and capital interest and a $5,000 outside basis, (2) Joe, a member with a 45% profits and capital interest and a $10,000 outside basis, and (3) Jack, a member with a 30% profits and capital interest and a $2,000 outside basis. The following items were reported on Styling's Schedule K for the year: ordinary income of $100,000, Section 1231 gain of $15,000, charitable contributions of $25,000, and tax-exempt income of $3,000. In addition, Styling received an additional bank loan of $12,000 during 20X8. What is Jane's tax basis after adjustment for her share of these items?

In what order are the loss limitations for partnerships applied?

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

Any losses that exceed the tax basis of a partner in their partnership interest are suspended and carried forward for 20 years. Excess losses are carried forward indefinitely until there is sufficient basis to utilize the losses.

Which of the following does not represent a tax election available to either partners or partnerships?

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

XYZ, LLC has several individual and corporate members. Abe and Joe, individuals with 4/30 year-ends, each have a 23% profits and capital interest. RST, Inc., a corporation with a 6/30 year end, owns a 4% profits and capital interest while DEF, Inc., a corporation with an 8/30 year end, owns a 4.9% profits and capital interest. Finally, thirty other calendar year-end individual partners (each with less than a 2% profits and capital interest) own the remaining 45% of the profits and capital interests in XYZ. What tax year-end should XYZ use and which test or rule requires this year-end?

Tom is talking to his friend Bob, who has an interest in Freedom, LLC, about purchasing his LLC interest. Bob's outside basis in Freedom, LLC is $10,000. This includes his $2,500 one-fourth share of the LLC's debt. Bob's 704(b) capital account is $17,000. If Tom bought Bob's LLC interest for $17,000, what would Tom's outside basis be in Freedom, LLC?

For partnership tax years ending after December 31, 2015, when must a partnership file its return?

What is the correct order for applying the following three items to adjust a partner's tax basis in his partnership interest: (1) Increase for share of ordinary business income, (2) Decrease for share of separately stated loss items, and (3) Decrease for distributions?

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

Which of the following statements is true when property is contributed in exchange for a partnership interest?

Alfred, a one-third profits and capital partner in Pizzeria Partnership needs help in adjusting his tax basis to reflect the information contained in his most recent Schedule K-1 from the partnership. Unfortunately, the Schedule K-1 he recently received was for year 3 of the partnership, but Alfred only knows that his tax basis at the beginning of year 2 of the partnership was $23,000. Thankfully, Alfred still has his Schedule K-1 from the partnership for years 1 and 2. Using the following information from Alfred's year 1, year 2, and year 3 Schedule K-1, calculate his tax basis the end of year 2 and year 3. $\begin{array}{l}\text { Year 1: }\\\begin{array}{|l|r|}\hline \text { Ordinary business income } & \$ 10,000 \\\hline \text { Cash distribution } & \$ 7,000 \\\hline \text { Altred s share of partnership debt } & (\$ 85,000) \\\hline \text { Guaranteed payment } & (\$ 4,500) \\\hline \text { Nondeductible expense } & (\$ 1,000) \\\text { Tax-exempt income } & \$ 1,200 \\\hline\end{array}\end{array}$$\begin{array}{l}\text { Year } 2 \text { : }\\\begin{array}{|l|r|}\hline \text { Ordinary business loss } & (\$ 5,000) \\\hline \text { Cash contribution } & \$ 10,000 \\\hline \text { Altred s share of partnership debt } & \$ 73,000 \\\hline \text { Guaranteed payment } & (\$ 7,500) \\\hline \text { Nondeductible expense } & (\$ 3,000) \\\hline \text { Tax-exempt income } & \$ 1,500 \\\hline\end{array}\end{array}$$\begin{array}{l}\text { Year } 3\\\begin{array}{|l|r|}\hline \text { Ordinary business loss } & (\$ 13,000) \\\hline \text { Altred s share of partnership debt } & \$ 58,000 \\\hline \text { Nondeductible expenses } & (\$ 3,000) \\\hline \text { Guaranteed payment } & (\$ 7,500) \\\hline\end{array}\end{array}$

In what order should the tests to determine a partnership's year end be applied?

Under proposed regulations issued by the Treasury Department, in which of the following situations should an LLC member be treated as a general partner for self-employment tax purposes?

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

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?

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