Course Hero Logo

Chapter_21_Solutions_Part_1_2017 - CHAPTER 21 PARTNERSHIPS...

Course Hero uses AI to attempt to automatically extract content from documents to surface to you and others so you can study better, e.g., in search results, to enrich docs, and more. This preview shows page 1 - 4 out of 13 pages.

CHAPTER 21PARTNERSHIPSSOLUTIONS TO PROBLEM MATERIALSDISCUSSION QUESTIONS1.(LO 1) A partnership agreement (or an operating agreement for an LLC) is an agreement among thepartnersregarding the rights and obligations of the partners, the allocation of partnership incomeanddeductions, allocation and distribution of partnership cash flows, requirements for current andfuturecapital contributions, conditions under which the partnership is terminated, and other matters.2.(LO 1) In a general partnership (GP), each owner is a general partner and may participate inmanagement ofthe entity; however, these partners also have unlimited liability for the entity’sdebts. In a limitedliability company (LLC), each member may also participate in management;however, absent apersonal guarantee, the members havenoliability for the entity’s debts. Becausethe owners of both aGP and an LLC may run the business, there are few situations in which a generalpartnership providesan equivalent benefit to an LLC. GPs are usually used only for arrangementssuch as corporate jointventures where the corporate partners are established with limited assets.LLCs, on the other hand,should be the entity form of choice for an operating partnership.3.(LO 2) A partnership is not a tax-paying entity; however, it must still file a tax return. The partnershipreportsits income and expenses on Form 1065. Partnership income is comprised of income fromoperationsand separately stated income and expenses. The income and expenses from operatingactivities arereported on page 1 of the Form 1065. A separately stated item is any item (income orexpense) thatcould differently affect the tax liabilities of different partners. Separately stated itemsare reported inthe partnership return on Schedule K.Under the “entity” theory, the partnership files a return and makes most elections regarding thetreatment of partnership items. However, under the “aggregate” theory, the partnership does notgenerally calculate or pay any tax with the return.4.(LO 3) As a general rule, both §§ 721 and 351 provide that no gain or loss is recognized whenproperty istransferred on the formation of a partnership or corporation. However, § 351 appliesonly if thosepersons transferring property to a corporation are in control of the corporationimmediately after theexchange, whereas § 721 does not include a control requirement. Section 721not only applies to initialtransfers in forming the partnership but to all subsequent contributions fromany partner.
Under § 721, the contributor must receive an interest in the partnership, while under § 351, thetransferor must receive stock in the corporation. Under both §§ 721 and 351, if the transfer ofpropertyinvolves the receipt of money or other consideration, the transaction may be deemeda sale orexchange rather than a tax-free transfer.
5.(LO 3, 4) For property contributed by a partner to a partnership, the partnership “steps into theshoes” of the

Upload your study docs or become a

Course Hero member to access this document

Upload your study docs or become a

Course Hero member to access this document

End of preview. Want to read all 13 pages?

Upload your study docs or become a

Course Hero member to access this document

Term
Spring
Professor
N/A
Tags
Depreciation, Types of business entity, partner

Newly uploaded documents

Show More

Newly uploaded documents

Show More

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture