of 22
Taxation Partnerships and Partners
Test Bank
True or False
1. Owners of investment property can elect that Subchapter K not apply to their ventures if each owner retains a separate and undivided ownership interest in the acquisition, operation, and disposition of the property. 2. It is possible for a business to be taxed as a partnership even though one of its partners is a corporation. 3. General partnerships are owned solely by two or more general partners, and limited partnerships are owned solely by two or more limited partners. 4. A limited partner, by definition, may not participate in the management of the limited partnership. 5. A contributing partner's holding period for an interest in a partnership begins on the date the partnership interest is acquired. 6. B contributes her business property to AB Partnership. This property has a market value of $2,000 and a basis to B of $1,500. The entity theory applies in this situation. Accordingly, the basis of the property to the partnership is $2,000, and B recognizes a $500 gain. 7. When noncash assets are contributed to a partnership, the entity theory usually applies and, therefore, gain or loss is recognized. 8. The partnership's holding period for assets contributed to the partnership by a partner begins with the date the assets are contributed. 9. A partner's share of liabilities is generally based on her or his economic risk of loss in the case of recourse debt and loss-sharing ratio in the case of nonrecourse debt. 10. When a partner's share of debt is decreased, the reduction is treated as a cash distribution from the partnership to the partner.
22-1
22-2
Chapter 22
Taxation of Partnerships and Partners
11.
Partners may agree to specially allocate any existing revenue, expense, or other partnership item in any way they wish when (a) they have owned their interest in the partnership for the entire year, and (b) the allocation has a substantial economic effect. (Assume all partners contributed cash for their capital interests.) Special allocations of depreciation, depletion, gain, and loss accrued at the date property is transferred to a partnership is optional. An individual who contributes services in exchange for an unrestricted capital interest in a partnership has includible ordinary income equal to the fair market value of the capital interest. Organization costs of a partnership can be deducted when incurred or paid, or they can be amortized on a straight-line basis over a period not to exceed 60 months, provided the partnership files the proper election. Syndication fees paid by a partnership may be amortized on a straight-line basis over a period of 60 months or longer. Form 1065 and Schedule K-1 are prepared according to the aggregate concept; however, special elections often require entity concept treatment. An individual who contributes services in exchange for an interest in the future profits of a newly formed partnership does not recognize current year income on the receipt of the interest. S owns a 30 percent interest in the capital and profits of ST partnership. S sold land ($5,000 basis) to ST for its fair market value of $3,000. S's $2,000 loss will be disallowed to him. A has been a partner in the ABC Partnership for only four months. During the current year, the partnership sold investment land that it purchased six years ago and recognized a $100,000 gain. A's distributive share of this gain is long-term capital gain. A 70 percent partner has a $5,000 recognized loss when he sells equipment with a basis of $35,000 to the partnership at its FMV of $30,000. In most instances, a new partnership should use a January 31 year-end in order to maximize deferral of partnership income for calendar year partners. W, B, and G, the sole owners of a partnership, use different tax years for their individual returns. They agree to adopt concurrent tax years for their personal returns. The partnership may also change its tax year to coincide with those of the partners without approval from the IRS. For purposes of determining a year-end for the partnership, a principal partner is defined as one who owns 50 percent or more of the partnership. The portion of a partner's distributive share of losses that exceeds the partner's basis may be carried forward indefinitely and deducted in a later year or years when that partner's basis is increased. The flow-through of partnership losses is considered to be the last event to occur during a partnership's taxable year. A guaranteed payment from a partnership always represents current ordinary income to the recipient partner. The entity theory of partnerships predominates in the Subchapter K Code sections dealing with the tax consequences of cash and property distributions made by partnerships to partners.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
Test Bank
22-3
28. 29.
A partner never recognizes loss upon the receipt of a current distribution from a partnership. A partnership that distributes an asset the FMV of which exceeds its inside basis must recognize gain equal to the excess. Current cash distributions from partnerships are nontaxable unless they exceed the partner's basis in the partnership. When a partner's basis in his partnership interest is less than the partnership's basis in a distributed asset, the partner's basis in his partnership interest is allocated among the assets according to their relative fair market values. Proportionate liquidating distributions of noncash partnership assets cannot result in recognized gain, but may result in the recipient partner recognizing loss. If a partner receives a property distribution consisting of partnership inventory, and in a subsequent year sells the distributed property at a gain, such gain must always be recognized as ordinary income. If a liquidating distribution results in a capital gain or loss to the recipient partner, the partnership must make a positive or negative adjustment to the basis of its remaining capital or 1231 assets equal to such gain or loss. The tax effects are identical whether a partner sells his or her interest to another partner, the partnership, or a person who has not been a partner, assuming the amount of cash to be received is the same. When a partner's capital interest is retired, liquidating distributions can include payment for goodwill and unrealized receivables if the partnership agreement so specifies. The seller of a partnership interest may recognize ordinary gain on the sale, but will never recognize ordinary loss. The purchaser of a partnership interest takes an outside basis in the interest equal to his proportionate share of the inside basis of partnership assets plus any amount of partnership debt apportionable to the purchased interest. When an interest in a partnership with appreciated assets is sold and no 754 election is made, the new partner's outside basis exceeds his inside basis due to the applicability of the entity concept. The death of a partner closes the partnership taxable year with respect to that partner. Whenever a partnership is dissolved under state law, it is terminated for federal tax purposes. If a partnership satisfies a $50,000 guaranteed payment obligation by distributing property to the partner with a fair market value of $50,000 and an adjusted basis of $40,000, the partner receiving the payment must recognize $10,000 of gain.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40. 41. 42.
Multiple Choice
43.
Based on the entity concept of partnerships, which of the following statements is false? a. b. c. d. e. A partnership may enter into taxable transactions with partners. A partnership is legally liable for debts of the partners. A partnership must file an annual tax return (Form 1065) reporting the results of operations. A partnership is required to make tax elections for partnership activities that are applicable to all partners. A partnership may hold title to property in its own name.
22-4
Chapter 22
Taxation of Partnerships and Partners
44.
An individual received a 70 percent capital interest in a general partnership by contributing the following:
l
l l
Investment land purchased 10 years ago for $60,000 and valued at $90,000. There was a $50,000 nonrecourse debt on the land that was also transferred to the partnership. Services to organize the partnership valued at $2,500. Business inventory purchased nine months ago for $10,000 and valued at $8,000.
This general partner's basis in the partnership after the contribution is a. b. c. d. e. 45. $0 $2,500 $22,500 $57,500 $72,500
T transfers a building ($60,000 market value, $40,000 basis), plus a $30,000 nonrecourse debt on the building, to a partnership in exchange for a 30 percent capital interest valued at $30,000. The partnership has no other debt. T's basis in his partnership interest is a. b. c. d. e. $0 $10,000 $19,000 $30,000 $40,000
46.
G is a 50% general partner and L is a 50% limited partner in the GL limited partnership. The partnership's ordinary business income for the year is $60,000. G receives a guaranteed payment of $15,000 for managing the partnership and L receives a guaranteed payment of $5,000 for helping to arrange some financing for GL. How much of this income is subject to the self-employment tax? a. b. c. d. $30,000 for G and $30,000 for L $45,000 for G and $35,000 for L $45,000 for G and $5,000 for L $15,000 for G and and $5,000 for L
47.
On January 1, 2010, F exchanged proprietorship equipment ($10,200 market value and $8,400 basis) for a 20 percent capital interest in a partnership. The calendar year partnership's 2010 and 2011 depreciation deductions for this equipment total $8,400. How much of the $8,400 should be allocated to F? a. b. c. d. $1,680 $800 $240 $232
48.
R exchanged a proprietorship parking lot ($23,000 market value and $15,000 basis) for a 10 percent capital interest in a partnership. The partnership uses the property for four years and then sells it for $25,000. R must recognize income from the sale of a. b. c. d. $10,000 $8,200 $1,000 $200
Test Bank
22-5
49.
An accountant performed services for EZ Partnership and, in lieu of her normal fee, accepted a 10 percent unrestricted capital interest in the partnership with a fair market value of $7,500. How much income from this arrangement should the accountant report on her tax return? a. b. c. d. $7,500 $5,000 $2,500 $0
50.
Individual D contributes $15,000 cash and investment land (FMV $35,000 and basis $22,000) and Individual E contributes business assets (FMV $50,000 and basis $60,000) to create the new DE Partnership. Which of the following statements is accurate? a. b. c. d. e. Both D and E have initial capital balances of $50,000. D's outside basis in his interest is $37,000 and E's outside basis in his interest is $60,000. Both D and E have initial capital balances of $50,000. D's outside basis in his interest is $22,000 and E's outside basis in his interest is $60,000. Both D and E have initial capital balances and outside bases in their interests of $50,000. D's initial capital account balance and outside basis in his interest are $37,000 and E's initial capital account balance and outside basis in his interest are $60,000. Because D and E have equal capital account balances, they must share partnership profits and losses equally.
51.
QT Partnership, which operates a retail clothing store, had the following information at year-end: Gross sales Cost of goods sold Repairs Depreciation Employee salaries Charitable contributions Section 1231 gain Short-term capital gain Dividends $580,000 377,000 1,500 2,000 32,000 ,500 ,200 ,350 ,750
What is QT Partnership's ordinary income for the year? a. b. c. d. e. 52. $167,500 $167,700 $167,850 $168,050 $168,300
At the beginning of the current year, K's basis in her partnership interest was $35,000. At the end of the year, K received a K-1 from the partnership that showed the following: Increase in share of partnership liabilities Cash withdrawal Partnership taxable income Dividend income Short-term capital loss Charitable contribution Special allocation of depreciation $ 8,700 20,000 13,500 5,000 1,400 ,500 1,800
22-6
Chapter 22
Taxation of Partnerships and Partners
Based on these facts compute K's basis in her partnership interest at the beginning of the next year. a. b. c. d. e. 53. $31,200 $42,200 $31,700 $38,500 $39,900
Two years ago, J contributed a capital asset (FMV $10,000 and basis $16,000) to the JKL Partnership. The asset was a nondepreciable 1231 asset to the partnership. During the current year, the partnership sold the asset for $8,000. As a result of the sale, the partnership should recognize: a. b. c. d. e. An $8,000 1231 loss A $6,000 capital loss and a $2,000 1231 loss An $8,000 capital loss A $2,000 1231 loss A $2,000 capital loss
54.
At the beginning of the current year, Corporation M had a $50,000 basis in its 50% interest in the M&N Partnership. For the year, M&N incurred a $168,000 net operating loss and a $32,000 capital loss and received $20,000 of dividend income. The amount of the partnership's debts did not change during the year and it made no distributions to its partners. Based on these facts, what amount of M&N's ordinary loss and capital loss may M recognize during the current year? a. b. c. d. e. $42,000 ordinary loss and $8,000 capital loss $50,000 ordinary loss $50,400 ordinary loss and $9,600 capital loss $54,000 ordinary loss and $16,000 capital loss $60,000 ordinary loss
55.
Which of the following is false regarding a guaranteed payment? a. b. c. d. e. It is recognized as income by the recipient partner in the taxable year received. It is either a deductible expense or a capital expenditure to the partnership. It is ordinary income to the partner receiving the payment. It is determined without regard to partnership income. It is added to a partner's distributive share of ordinary income in calculating self-employment income.
56.
Partner A owns a 60% interest in the capital and profits of the ABC Partnership. During the year A sells marketable securities to the partnership for their FMV of $30,000. The partnership intends to hold the securities as an investment. Based on these facts, which of the following is accurate? a. b. c. d. e. If A's basis in the securities was $25,000, A must recognize a $5,000 ordinary gain on the sale. If A's basis in the securities was $25,000, A recognizes no gain on the sale. If A's basis in the securities was $40,000, A may recognize a $10,000 capital loss on the sale. If A's basis in the securities was $40,000, A recognizes no loss on the sale. None of the above is accurate.
57.
G and H are individual partners in GH Partnership and share equally in its profits and losses. G had a basis of $5,000 in the partnership, before considering the $14,000 ordinary loss reported by GH for 2010. In 2011, the partnership reports a $6,000 ordinary gain on Form 1065. What income or loss should G properly report on his 2011 individual return? Assume that there are no other transactions that affect G's basis in the partnership for 2010 and 2011. a. b. c. d. e. $0 $2,000 loss $1,000 income $2,000 income $3,000 income
Test Bank
22-7
58.
Partner Z received a current distribution from the XYZ Partnership consisting of $3,000 cash and partnership inventory (FMV $10,000 and basis $7,800). The distribution did not change Z's profit and loss sharing ratio. Immediately prior to the distribution, Z's outside basis in his partnership interest was $11,000. Because of the distribution Z must: a. b. c. d. e. Recognize a $2,000 gain and reduce outside basis to zero Recognize no gain or loss and reduce outside basis to $8,000 Recognize no gain or loss and reduce outside basis to zero Recognize no gain or loss and reduce outside basis to $200 Recognize a $200 loss and reduce outside basis to zero
59.
Partner R received a current distribution from the RST Partnership consisting of $20,000 cash, $6,000 of partnership zero basis accounts receivables, and land (FMV $7,000 and basis $1,500). The distribution did not change R's profit and loss sharing ratio. Immediately prior to the distribution, R's outside basis in his partnership interest was $25,000. After the distribution, what basis does R have in the receivables, the land, and his partnership interest? a. b. c. d. e. Receivables $0, land $1,500, and interest $3,500 Receivables $0, land $5,000, and interest $0 Receivables $2,500, land $2,500, and interest $0 Receivables $6,000, land $7,000, and interest $12,000 Receivables $0, land $1,500, and interest $23,500
60.
Mega Partnership distributed inventory (FMV $50,000 and basis $19,000) to partner Q in complete liquidation of her interest in Mega. Immediately prior to the distribution, Q's outside basis in her interest was $27,500. If Mega has a 754 election in effect, which of the following statements is accurate? a. b. c. d. e. Mega must recognize a $31,000 ordinary gain on the distribution of its inventory. Mega may increase the basis in its remaining inventory by $31,000. Mega must decrease the basis in its capital and 1231 assets by $8,500. Mega must decrease the basis in its remaining inventory by $8,500. The property distribution has no effecton the basis of Mega's assets because the inventory retains its $19,000 basis in Q's hands.
61.
Summa Partnership distributed $10,000 cash and a capital asset (FMV $5,000 and basis $3,400) to partner D in complete liquidation of her interest in Summa. Immediately prior to the distribution, D's outside basis in her interest was $7,500. If Summa has a 754 election in effect, which of the following statements is accurate? a. b. c. d. e. Summa may increase the basis in its capital and 1231 assets by $2,500. Summa may increase the basis in its capital and 1231 assets by $5,000. Summa may increase the basis in its capital and 1231 assets by $3,400. Summa may increase the basis in its capital and 1231 assets by $5,900. The property distribution has no effect on the basis of Summa's assets.
62.
A partnership is owned by a mother (60%) and her son (40%). Their capital accounts are maintained in the same ratio. The son received his ownership interest as a gift from his mother several years ago. Partnership income for the current year was $50,000. Although the mother performed services valued at $10,000, there was no entry on the partnership books and she received no cash for her services. To avoid a reallocation by the IRS, what amount of current year income should be allocated to the mother? a. b. c. d. e. $20,000 $30,000 $34,000 $40,000 $50,000
22-8
Chapter 22
Taxation of Partnerships and Partners
63.
Individuals T, U, and V formed the calendar year Trio Partnership in 1999 as equal partners. On June 2, 2011, T died and his interest was inherited by his grandson G, whom U and V welcomed as a new equal partner in their business. November On 13, 2011, V sold his interest to individual B. On January 19, 2012, B sold this same interest to Corporation C. Which of the following statements is accurate? a. b. c. d. e. The original Trio partnership is still in existence for federal tax purposes. The original Trio partnership terminated for federal tax purposes on June 2, 2011 because T's death dissolved the partnership under state law. The original Trio partnership terminated for federal tax purposes on November 13, 2011. The original Trio partnership terminated for federal tax purposes on December 31, 2011. The original Trio partnership terminated for federal tax purposes on January 19, 2012.
64.
O purchased a 20% interest in the OOPS partnership for $20,000 on January 1, 2011. He purchased another 10% interest in OOPS for $10,000 on December 1, 2011. As of January 1, 2012, what is O's holding period in his partnership interest? a. b. c. d. One year One month One year for 50% of his interest and one month for 50% of his interest One year for 67% of his interest and one month for 33% of his interest
65.
M and E are equal partners in the ME Partnership. E decides to leave the partnership and receives a liquidating distribution of $15,000 cash and two items of inventory. Inventory R has a basis of $1,000 and a fair market value of $7,000 and Inventory S has a basis of $2,000 and a fair market value of $5,000. E's adjusted basis for her partnership interest is $40,000. In addition to the cash and inventory, E also receives two parcels of land that are investment assets. Parcel A has a basis to the partnership of $12,000 and a fair market value of $16,000. Parcel B has a basis to the partnership of $20,000 and a fair market value of $18,000. What is Carol's basis in Parcel A and Parcel B? Assume that this distribution is proportionate. a. b. c. d. Parcel A's basis is $8,800; Parcel's B basis is $13,200. Parcel A's basis is $12,000; Parcel's B basis is $20,000. Parcel A's basis is $12,000; Parcel's B basis is $18,000. Parcel A's basis is $11,000; Parcel's B basis is $11,000.
22
Taxation of Partnerships and Partners
Solutions to Test Bank
True or False
1. True. Each owner must retain a separate and undivided ownership interest in order for the election to be valid. (See p. 22-3.) 2. True. There are no restrictions placed on who or what qualifies as a partner. The Code and Regulations simply state that the word partner "means a member of a partnership." [See pp. 22-3 and 761(b).] 3. False. All partnerships must have at least one general partner. (See p. 22-3.) 4. True. If a limited partner does participate in management, this may convert a limited partner to general partner status. (See p. 22-4.) 5. False. If a partner contributes either 1231 or capital assets to a partnership, the holding period for the partner's interest in the partnership includes the period of time the partner owned the contributed assets. [See p. 22-5 and 1223(1).] 6. False. The aggregate theory applies when a partner contributes property to a partnership in exchange for a partnership interest. In this case, B recognizes no gain and the partnership takes a $1,500 carryover basis in the contributed property. (See Example 2, pp. 22-5 and 22-6, and 721 and 722.) 7. False. The aggregate theory applies. Consequently, when noncash assets are exchanged for an interest in a partnership, the transfer is usually considered to be tax-free at both the partnership and partner levels. (See pp. 22-5 and 22-6, and 721, 722, and 723.) 8. False. The partnership's holding period includes the period of time the contributing partner held the assets. [See p. 22-5 and 1223(2).] 9. False. Each partner's share of liabilities is based on his or her economic risk of loss for recourse debt, but it is based on the profit-sharing ratio for nonrecourse debt. (See Example 6 and 7, pp. 22-7 through and 22-9, and 752.) 10. 11. True. This is the statutory rule of 752(b). (See p. 22-7.) True. This freedom of allocation, however, is not available for precontribution income, gain, or loss when noncash assets are contributed. [See Example 19, pp. 22-19 and 22-20, and 704(c).]
22-9
22-10 Chapter 22
Taxation of Partnerships and Partners
12. 13.
False. The special allocation is mandatory. [See pp. 22-10 and 22-20 and 704(c).] True. The tax-free exchange provisions apply to property contributed to a partnership but not to services contributed. (See Example 10, p. 22-11, and 721.) False. Organization costs must be capitalized. If an election is made, up to $5,000 of organization costs can be expensed with the remaining costs amortized over a period of 180 months. [See p. 22-14 and 709(b).] False. Syndication fees paid or accrued by a partnership remain on the books as intangible assets until the partnership is liquidated. (See p. 22-14 and 709.) True. Section 703 specifies that most elections must be made at the partnership level and that all partners are required to use the same methods for reporting their share of partnership income, deductions, credits, and losses. (See p. 22-15.) True. The current liquidation value of a future profits interest is zero. (See Example 11 and p. 22-12.) False. Such losses are disallowed only to a partner who directly or indirectly owns 50 percent or more of the capital or profits interest in a partnership. [See pp. 22-22 and 22-23 and 707(b)(1)(A).] True. The character of the gain (short-term or long-term) is determined at the partnership level. [See p. 22-15 and 702(b).] False. The entity concept does not apply to transactions between a partnership and a partner who directly or indirectly owns more than 50 percent of the capital or profits interest of the partnership if the transaction results in a loss. Such a partner cannot recognize the loss. [See pp. 22-22 and 22-23 and 707(b)(1)(A).] False. A partnership must adopt the taxable year of those partners owning a majority interest in the partnership. If the majority of the partners do not have the same taxable year, the partnership must adopt the taxable year of its principal partners. If the principal partners do not have the same year, the partnership must adopt the taxable year resulting in the least aggregative deferral of partnership income. A partnership may select another taxable year, subject to IRS approval. Normally the IRS will approve another taxable year, such as a January 31 taxable year, only if the taxpayer can establish a valid business purpose. [See Example 13, p. 22-14, and 706(b).] True. A partnership may adopt the tax year of its majority owners without IRS approval. [See p. 22-13 and 706(b).] False. In this context, a principal partner is one who owns 5 percent or more of the partnership. (See p. 22-13.) True. Any losses that exceed a partner's basis may be carried over indefinitely to be deducted when the basis is increased. [See Example 23, p. 22-21, and 704(d).] True. All distributions, contributions, and changes in partnership liabilities are considered to occur before the flow-through of partnership losses. (See p. 22-17 and 705.) True. This is the statutory rule of 707(c). (See p. 22-22.) False. The aggregate theory clearly underlies 731 through 735, the Code sections pertaining to partnership distributions. (See p. 22-24.) True. Loss may be recognized on a liquidating distribution but not on a current distribution. [See pp. 22-24 and 22-27 and 731(a)(2).] False. A partnership never recognizes gain or loss upon the distribution of property to its partners. [See pp. 22-24 and 22-27 and 731(b).]
14.
15.
16.
17. 18.
19.
20.
21.
22.
23.
24.
25.
26. 27.
28.
29.
Solutions to Test Bank
22-11
30. 31.
True. Cash distributions in excess of a partner's basis are treated as gain recognized on the sale of the partnership interest. [See p. 22-24 and 731(a)(1).] False. Per 732(c), outside basis is first allocated to distributed unrealized receivables and inventory in an amount not to exceed the partnership's inside basis in such assets. An remaining outside basis is allocated to any other distributed partnership assets. Within these two categories, basis is allocated to specific assets based on the assets' carryover basis, followed by any necessary basis decrease based on unrealized depreciation in the assets. (See Example 33 and pp. 22-26 and 22-27.) True. However, recognition of loss occurs only if the liquidating partner receives only unrealized receivables or inventory and the partner's basis in the partnership exceeds the partnership's basis in the distributed assets. [See Example 39, pp. 22-29 and 22-30, and 731(a)(2).] False. If the partner has held the distributed property for at least five years since its distribution by the partnership, the character of gain recognized on sale will be determined by reference to the partner's use of the property. (See Example 48, p. 22-34, and 735.) False. A 734(b) basis adjustment is required only if the partnership has a 754 election in effect or if the partners loss on the distribution and the basis increase to the distributed properties totals more than $250,000. (See Examples 49 and 50 and pp. 22-35 and 22-36.) False. Although the amount of gain is the same, the character may differ if the partnership purchases the capital interest. This occurs because partnership payments for goodwill may be characterized as ordinary income payments (rather than property payments). If this occurs, the liquidating partner has more ordinary income and the partnership has a deduction for the payment. Consequently, the remaining partners report less net income from the partnership (or more net loss). [See Example 46 and 47, pp. 22-32 through 22-34, and 736(a) and (b).] False. The partnership agreement may specify that a partner is to receive a liquidating payment for his or her share of partnership goodwill, but any payment for a partner's share of unrealized receivables is always considered a 736(a) payment that the partner must recognize as ordinary income. (See Example 46, pp. 22-32 and 22-33, and 736.) True. The sale of an interest in a partnership with hot assets can trigger recognition of ordinary income per 751(a). If the partnership has no hot assets, the sale of a partnership interest results in either capital gain or loss per 741. (See Examples 54 and 55, and pp. 22-38 through 22-40.) False. The purchaser takes a cost basis in the partnership interest. This basis includes any amount of partnership liabilities assumed by the new partner. (See Example 59, pp. 22-41 and 22-42, and 742.) True. Unless specifically elected otherwise, the new partner's outside basis exceeds the inside basis (basis in the partnership's assets). The purchasing partner's outside basis is composed of the purchase price plus this partner's share of partnership liabilities. In contrast, the purchasing partner's inside basis is composed of the selling partner's inside basis (i.e., his or her share of the basis in the partnership's total assets). [See Example 59, pp. 22-41 and 22-42, and 743(a).] True. [See Example 66, p. 22-46, and 706(c)(2)(A)(ii).] False. A partnership is terminated only under the specific statutory provisions of 708. (See p. 22-47.) False. The partner receiving the payment will recognize ordinary income of $50,000 for the guaranteed payment. The partnership will recognize $10,000 of gain for using appreciated property to satisfy the obligation.
32.
33.
34.
35.
36.
37.
38.
39.
40. 41. 42.
22-12 Chapter 22
Taxation of Partnerships and Partners
Multiple Choice
43. 44.
b. d.
According to the entity concept, a partnership has no responsibility for its partner's debts. (See p. 22-4.) The basis in the interest equals $57,500 [$60,000 land basis $2,500 ordinary income recognized on performance of services $10,000 inventory basis $15,000 net relief of debt (30% of $50,000)]. (See pp. 22-11, 22-12, 22-16, and 22-17 and 722 and 752.) T's basis is computed as follows: Basis of contributed property Share of partnership debt ($30,000 30%) Reduction in personal debt Total basis $ 40,000 9,000 (30,000) $ 19,000
45.
c.
(See Example 8 and pp. 22-10 and 22-11.) 46. c. All guaranteed payments receive by partners, whether general or limited, in return for services rendered are included in self-employment income. A general partner's distributive share of income is also self-employment income, but a limited partner's share is usually not. Thus, G has $45,000 of selfemployment income ($30,000 $15,000) and L has $5,000.
(See p. 22-23.) 47. c. The other partners should be allocated their 80 percent share based on the $10,200 market value: $8,160 ($10,200 80%). F is allocated the remainder of $240 ($8,400 $8,160). [See Example 21, p. 22-20, and 704(c).] R must be allocated income equal to the appreciation at the time the property is contributed to the partnership of $8,000 ($23,000 $15,000) plus 10 percent of the income equal to the appreciation that occurred while the partnership held the property of $200 ($25,000 $23,000 = $2,000 10%). [See Example 19, pp. 22-19 and 22-20, and 704(c).] Because the accountant received an unrestricted capital interest in exchange for services, the FMV of that interest is includible ordinary income to her and becomes her basis in the partnership. [See Example 10, p. 22-11, and Reg. 1.721-1(b)(1).] Capital accounts are credited with the fair market value of contributed property while outside basis equals the tax basis of contributed property. (See Example 2 and pp. 22-5 and 22-6.) Charitable contributions, dividends, 1231 gains, and capital gains are stated separately and are not used to calculate ordinary income. QT's ordinary income is calculated as follows: Gross sales Cost of goods sold Gross income Repairs Depreciation Employee salaries $ 580,000 (377,000) $ 203,000 (1,500) (2,000) (32,000) $ 167,500
48.
b.
49.
a.
50.
a.
51.
a.
(See Example 15, p. 22-16, and 702.) 52. d. K's basis equals the $35,000 beginning basis increased by her distributive share of ordinary and dividend income ($18,500) and by the increase in her share of partnership liabilities ($8,700) and decreased by her distributive share of capital loss, charitable contributions, and depreciation ($3,700) and her $20,000 cash withdrawal. (See Example 16, p. 22-17, and 705, 733, and 752.)
Solutions to Test Bank
22-13
53.
b.
The $6,000 excess of the asset's basis over FMV at date of contribution must be recognized as capital loss. The $2,000 remaining loss is a 1231 loss. (See Example 20, p. 22-20, and 724.) Corporation M may increase its $50,000 basis by its $10,000 distributive share of partnership dividend income. It may then deduct a total of $60,000 of its distributive shares of partnership net operating loss ($84,000) and capital loss ($16,000). The $50,000 deduction is allocated proportionally between the two categories of losses. [See Example 23, pp. 22-22, and 704(d).] A partner recognizes a guaranteed payment in his or her taxable year that includes the last day of the partnership taxable year in which the partnership accounted for the guaranteed payment. [See Examples 25 and 26, pp. 22-23 and 22-24, and 707(c).] Per 707(b), a partner who owns more than a 50% interest in a partnership may not recognize loss upon the sale of property to the partnership. (See Example 29 and pp. 22-25 and 22-26.) G's share of the loss in 2010 is $7,000 (50% of $14,000). However, since G's basis before loss distribution is only $5,000, G's deduction on his 2010 return is limited to $5,000. Thus, G starts 2011 with a beginning basis of $0. In 2011, G's share of profits is $3,000. G's unused 2010 distributed loss of $2,000 is subtracted from G's 2011 $3,000 share of profits and results in net partnership income of $1,000 for G to report in 2011. Note that G has a basis in GH Partnership of $1,000 after the receipt of his distributive share of the 2011 partnership profit ($3,000). [See Example 23, p. 22-21, and 704(d).] Z must reduce his outside basis to $200 ($11,000 original basis 6 $3,000 cash $7,800 inside basis of distributed inventory). (See Example 31, pp. 22-25 and 22-27, and 733.) R must reduce his outside basis in his partnership interest to $3,500 ($25,000 original basis $20,000 cash $1,500 inside basis of distributed land). He takes a zero carryover basis in the accounts receivables and a $1,500 carryover basis in the land. [See Example 32, pp. 22-26 through 22-27, and 732(a) and 733.] Partner Q took a $19,000 basis in the distributed inventory and recognized his $8,500 unrecovered basis in his partnership interest as a capital loss. Under 734(b)(2), Mega must decrease the basis of its capital and 1231 assets by this capital loss. (See Examples 49 and 50, pp. 22-35 through 22-36.) Partner D recognized a $2,500 capital gain and took a zero basis in the distributed capital asset. Under 734(b)(1), Summa may increase the basis of its capital and 1231 assets by the gain recognized and the $3,400 "lost" basis in the capital asset. (See Example 49 and 50, pp. 22-35 through 22-36.) The first $10,000 would be allocated to the mother. Sixty percent of the remaining $40,000 would be allocated to her, the rest to her son. Her total income allocation is $34,000 ($10,000 $24,000) and his is $16,000. [See Examples 64 and 65, pp. 22-45 and 22-46, and 704(e).] During the 12-month period ending on January 19, 2011 only a single one-third interest (V's original interest) was sold. Therefore, no technical termination of the original TUV Partnership occurred. (See Example 67, pp. 22-47 and 22-48, and 708.) When a partner acquires his partnership interest at different times, holding period is apportioned to the interest based on the fair market value of the interest purchased. As of January 1, 2012, O has a one-year holding period in two-thirds of his partnership interest ($20,000/$30,000, and a one-month holding period for one-third ($10,000/$30,000) of his interest. (See p. 22-6.)
54.
c.
55.
a.
56.
d.
57.
c.
58.
d.
59.
a.
60.
c.
61.
d.
62.
c.
63.
a.
64.
d.
22-14 Chapter 22
Taxation of Partnerships and Partners
65.
a.
E's outside basis is reduced by the basis of the property distributed, as follows: E's Basis $ 40,000 (15,000) $ 25,000 (1,000) (2,000) $ 22,000 (22,000) $ , 0
Cash Inventory R Inventory S Capital assets
E has a basis of $0 in his partnership interest. E has a basis of $1,000 and $2,000, respectively, in inventory items R and S. The $22,000 basis for the investment assets must be pro-rated between the assets as follows: Excess of Basis Over Value $ ,000 $2,000 Basis Reduced by Excess $12,000 $18,000
Capital assets A Capital assets B
Inside Basis $12,000 $20,000
*Decrease Formula $3,200 $4,800
R's Basis $ 8,800 $13,200
*Decrease formula: Capital assets 1 [($12,000/$30,000 $8,000] = $3,200 Capital assets 2 [($18,000/$30,000 $8,000} = $4,800 [See Example 41, pp. 22-30 and 22-31]