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Exam 14: Partnerships and Limited Liability Entities

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Question 1

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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) $0

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

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Question 2

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Misty and John formed the MJ Partnership.Misty contributed $50,000 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 $20,000;Misty received a distribution of $12,000 cash from the partnership;and Misty had a 50% share in the partnership's $60,000 of recourse liabilities on the last day of the partnership year.Misty's adjusted basis for her partnership interest at year end is:

A) $48,000.
B) $60,000.
C) $78,000.
D) $88,000.
E) $90,000.

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

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Question 3

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

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.

Which one of the following is not shown on the partnership's Schedule K on Page 4 of Form 1065?

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

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

Which of the following statements is correct regarding the manner in which partnership liabilities are reflected in the partners' bases in their partnership interests?

On the formation of a partnership,when might a "disguised sale" occur? How can this treatment be avoided?

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?

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.

Tim,Al,and Pat contributed assets to form the equal TAP Partnership.Tim contributed cash of $40,000 and land with a basis of $80,000 (fair market value of $60,000) .Al contributed cash of $60,000 and land with a basis of $50,000 (fair market value of $40,000) .Pat contributed cash of $60,000 and a fully depreciated property ($0 basis) valued at $40,000.Which of the following tax treatments is not correct?

If the partnership properly makes an election for treatment of a specific tax item,the partner is bound by that treatment.

At the beginning of the year,Heather's "tax basis" capital account balance in the HEP Partnership was $85,000.During the tax year,Heather contributed property with a basis of $6,000 and a fair market value of $10,000.Her share of the partnership's ordinary income and separately stated income and deduction items was $40,000.At the end of the year,the partnership distributed $15,000 of cash to Heather.Also,the partnership allocated $12,000 of recourse debt and $10,000 of nonrecourse debt to Heather.What is Heather's ending capital account balance determined using the "tax basis" method?

Section 721 provides that no gain or loss is recognized on a contribution of property to a partnership in exchange for an interest in the partnership.An exception might apply if the taxpayer receives a cash distribution from the partnership soon after the property contribution is made.

The taxable income of a partnership flows through to the partners,who report the income on their tax returns.

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.

Which of the following statements is not a requirement of the substantial economic effect test?

Samuel is the managing general partner of STU,in which he owns a 25% interest.For the year,STU reported ordinary income of $400,000 (after deducting all guaranteed payments) .In addition,the LLC reported interest income of $12,000.Samuel received a guaranteed payment of $120,000 for services he performed for STU.How much income from self-employment did Samuel earn from STU?

Harry and Sally are considering forming a partnership.Both taxpayers use the calendar year and are cash basis taxpayers.The partnership will not be a tax shelter.The partners are uncertain as to whether the partnership should use the cash or accrual method of accounting.Also,the idea of a tax deferral in the first year of operations has led them to consider using a June 30 fiscal year-end for the partnership. ​ As their tax adviser,identify the issues that must be considered in selecting an accounting method and tax year for the partnership.