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Exam 21: Partnerships

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Question 21

Multiple Choice

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Match each of the following statements with the numbered terms below that provide the best definition. -Interest expense

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 N)
T) J) and Q)

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Question 22

Multiple Choice

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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) J) and M)
T) F) and J)

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Question 23

Essay

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Your client owns a parcel of land that has depreciated in value. He wants to know if there is a way he can contribute the property to his partnership, have the partnership sell the property, and convert the existing capital loss into an ordinary loss. He also wants to know if part of the loss would be allocated to his other partners. What is your reaction?

A cash distribution from a partnership to a partner generally is taxable to the partner.

Which one of the following statements is true regarding a partner's personal liability for partnership assets?

The BMR LLC conducted activities that were eligible for a $20,000 credit for increasing research activities. In addition, the LLC paid foreign taxes of $1,200. On the partners' Schedules K-1, BMR will allocate the $20,000 credit, and it will provide the necessary information so the partners can calculate the foreign tax credit if they so choose.

Karli owns a 25% capital and profits interest in the calendar year KJDV Partnership. Her adjusted basis for her partnership interest on July 1 of the current year is $200,000. On that date, she receives a proportionate current (nonliquidating) distribution of the following assets. $\begin{array}{lcc}&\text { Partnership's Basis in }&\text { Asset Asset's Fair Market Value }\\\text { Cash } & \$ 120,000 & \$ 120,000 \\\text { Inventory } & 50,000 & 60,000 \\\text { Land (held for investment) } & 70,000 & 100,000\end{array}$ a. Calculate Karli's recognized gain or loss on the distribution if any. b. Calculate Karli's basis in the inventory received. c. Calculate Karli's basis in land received. The land is a capital asset. d. Calculate Karli's basis for her partnership interest after the distribution.

In a proportionate liquidating distribution, WYX Partnership distributes to partner William cash of $40,000, cash basis accounts receivable (basis of $0, fair market value of $10,000), and land (basis of $30,000, fair market value of $50,000). William's basis was $80,000 before the distribution. On the liquidation, William recognizes a $20,000 gain, and he takes a basis of $10,000 in the accounts receivable and $50,000 in the land.

Harry's basis in his partnership interest was $10,000 at the beginning of the tax year. For the year, his share of the partnership's loss was $8,000, and he also received a distribution of $4,000. Harry can deduct an $8,000 loss, and he recognizes a gain of $2,000 on the distribution of cash in excess of his remaining basis.

Which of the following is not a specific adjustment to the partners' basis in the partnership interest?

Match each of the following statements with the numbered terms below that provide the best definition. -§704(b) book

The partnership agreement might provide, for example, that the first $40,000 of ordinary income is allocated to Partner A. Allocating income in this manner is an example of a separately stated item.

The QBI for each business is subject to the greater of two limitations: (1) 50% of W-2 wages ($20,000, or $40,000 x 50%) or (2) 25% of W-2 wages plus 2.5% of unadjusted basis {$40,000, or [($40,000 x 25%) = $10,000 + ($1.2 million x 2.5%) = $30,000]}. The greater of the two limitations is $40,000. Because this $40,000 is less than Patricia's tentative $50,000 QBI, the lower amount must be used. Patricia's QBI for this trade or business, then, is $40,000. -Dan receives a proportionate current (nonliquidating) distribution when the basis of his partnership interest is $30,000. The distribution consists of $10,000 in cash and property with an adjusted basis to the partnership of $24,000 and a fair market value of $26,500. Dan's basis in the noncash property is:

Belinda owns a 30% profit and loss interest in the BOW LLC, and her basis in the interest is $30,000 excluding her share of the LLC's liabilities. Belinda guarantees a $40,000 LLC debt. Remaining liabilities (not guaranteed by any of the LLC members) are $100,000. Belinda's basis in the LLC is $100,000.

Sarah contributed fully depreciated ($0 basis) property valued at $50,000 to the RSTU Partnership in exchange for a 25% interest in partnership capital and profits. During the first year of partnership operations, RSTU had net taxable income of $200,000 and tax-exempt income of $4,000. The partnership distributed $10,000 cash to Sarah. Her share of partnership recourse liabilities on the last day of the partnership year was $20,000. What is Sarah's adjusted basis (outside basis) for her partnership interest at the end of the tax year?

Jeremy is an active partner who owns a 30% interest in the JS LLP (in which capital is not a material income- producing factor). Partnership assets consist of land (fair market value of $200,000, basis of $140,000), accounts receivable (fair market value of $200,000, basis of $0), and cash of $400,000. JS distributes $220,000 of the cash to Jeremy in liquidation of his interest. In addition, Jeremy is relieved of his $40,000 share of the LLP's liabilities. The total payment includes $20,000 for Jeremy's share of JS goodwill (not stated in the partnership agreement). Jeremy's basis in the partnership interest (including his share of the partnership's liabilities) is $120,000 immediately before the distribution. How much gain or loss does Jeremy recognize and what is its character? How much can the partnership deduct? Are any planning opportunities available to the LLP?

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

What is the difference between a partner's basis in the partnership interest and a partner's § 704(b) book capital account? What are the purposes of these two amounts? Why are these amounts typically different?

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

George is a limited partner in the GLH Partnership. His basis is $40,000 before considering the current year operations and includes a $20,000 recourse debt share and a $10,000 nonrecourse debt share. The nonrecourse debt is not treated as qualified nonrecourse financing. GLH reported a $200,000 loss for the year of which George's 40% share is $80,000. George has passive income of $50,000 from another activity (not eligible for the special real estate deduction) . He has no business losses for the year from other sources. How much of the $80,000 GLH loss can George deduct this year?