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Exam 10: Partnerships: Formation, operation, and Basis

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Question 1

True/False

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

A) True
B) False

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Question 2

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Emma's basis in her BBDE LLC interest is $60,000 at the beginning of the tax year.Her allocable share of LLC items are as follows: $20,000 of ordinary income,$2,000 tax-exempt interest income,and a $6,000 long-term capital gain.In addition,the LLC distributed $12,000 of cash to Emma during the year.Assuming the LLC had no liabilities at the beginning or the end of the year,Emma's ending basis in her LLC interest is $88,000.

A) True
B) False

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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 subchapter C corporate form?

Alicia and Barry form the AB Partnership at the start of the current year with a land contribution by Barry and a cash contribution by Alicia.Barry's contributed property is subject to a recourse mortgage assumed by the partnership.Barry has an 80% interest in AB's profits and losses.The land has been held by Barry for the past 6 years as an investment.It will be used by AB as an operating asset in its parking lot business.Which of the following statements is correct?

A partnership cannot use the cash method of accounting if one of the partners is a C corporation.

Binita contributed property with a basis of $40,000 and a value of $50,000 to the BE Partnership in exchange for a 20% interest in partnership capital and profits.During the first year of partnership operations,BE had net taxable income of $30,000 and tax-exempt interest income of $10,000.The partnership distributed $10,000 cash to Binita.Binita's adjusted basis (outside basis) for her partnership interest at year-end is:

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

The sum of the partner's ending basis on Schedule K-1 equals the total of the partner's ending capital account on Schedule L.

TEC Partners was formed during the current tax year.It incurred $10,000 of organizational expenses,$80,000 of startup expenses,and $5,000 of transfer taxes to retitle property contributed by a partner.The property had been held as MACRS property for ten years by the contributing partner,and had an adjusted basis to the partner of $300,000 and fair market value of $400,000.Which of the following statements is correct regarding these items?

If a partnership allocates losses to the partners,the partners must first apply the passive loss limitations,then the basis limitation,and finally the at-risk limitations.If all three hurdles are met,the partner may deduct the loss.

Debt of a limited liability company is allocated among LLC members using the nonrecourse debt allocation rules unless an LLC member has personally guaranteed the debt.

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

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?

Allison is a 40% partner in the BAM Partnership.At the beginning of the tax year,Allison's basis in the partnership interest was $100,000,including her share of partnership liabilities.During the current year,BAM reported an ordinary loss of $60,000.In addition,BAM distributed $8,000 to Allison and paid partner Brian a $20,000 consulting fee (neither of these amounts was deducted in determining the $60,000 loss from operations) .At the end of the year,Allison's share of partnership liabilities decreased by $10,000.Assuming loss limitation rules do not apply,Allison's basis in the partnership interest at the end of the year is:

Tom and William are equal partners in the TW Partnership.Just before TW liquidated,Tom's capital account balance was $50,000 and William's capital account balance was $30,000.To meet the substantial economic effect requirements,any liquidating cash distribution must be allocated equally between the partners.

Seven years ago,Paul purchased residential rental estate that he has been depreciating as MACRS property over 27.5 years.This year,when his adjusted basis in the property was $250,000,Paul transferred the property to the newly formed PLA LLC in exchange for a one-third interest in the LLC.PLA incurred $10,000 of transfer taxes and fees related to the property.PLA must treat the $260,000 basis in the property,fees,and expenses,as new MACRS property depreciable over 27.5 years.

Mark and Addison formed a partnership.Mark received a 25% interest in partnership capital and profits in exchange for land with a basis of $40,000 and a fair market value of $60,000.Addison received a 75% interest in partnership capital and profits in exchange for $180,000 of cash.Three years after the contribution date,the land contributed by Mark is sold by the partnership to a third party for $76,000.How much taxable gain will Mark recognize from the sale?

At the beginning of the year,Heather's "tax basis" capital account balance in the HEP Partnership was $60,000.During the tax year,Heather contributed property with a basis of $10,000 and a fair market value of $30,000.Her share of the partnership's ordinary income and separately stated income and deduction items was $26,000.At the end of the year,the partnership distributed $10,000 of cash to Heather.Also,the partnership allocated $15,000 of recourse debt and $25,000 of nonrecourse debt to Heather.What is Heather's ending capital account balance determined using the "tax basis" method?

Which of the following partnership owners is personally liable for the entity's debts to general creditors?

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.