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CHAPTER21REVIEWQUESTIONS - ch10

CHAPTER21REVIEWQUESTIONS - ch10 - CHAPTER 21 PARTNERSHIPS...

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CHAPTER 21 PARTNERSHIPS TRUE/FALSE 1. Unlike a subchapter C corporation, a partnership is subject to only one level of taxation and can often liquidate in a tax-deferred manner. ANS: T A partnership is a flow-through entity subject to only one level of taxation. Liquidation of the partnership is generally tax-deferred. PTS: 1 REF: p. 21-2 | p. 21-3 2. Section 721 provides that no gain or loss is recognized on 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. ANS: T A contribution of property to a partnership followed by a distribution soon thereafter may be recharacterized as a disguised sale of the property by the partner to the partnership. A disguised sale does not receive tax-deferred treatment under § 721. PTS: 1 REF: p. 21-10 3. Jim and Nancy formed an equal partnership on June 1 of the current year. Jim contributed $10,000 cash and land with a basis of $8,000 and a fair market value of $6,000. Nancy contributed equipment with a basis of $14,000 and a value of $16,000. Nancy’s tax basis in her interest is $14,000; Jim’s tax basis is $18,000. ANS: T Jim’s basis includes the $8,000 substituted basis for the contributed land plus $10,000 cash, for a total of $18,000. Nancy’s basis is $14,000, a substituted basis from the contributed equipment. PTS: 1 REF: Example 7 | Example 14 21-1
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21-2 2008 Comprehensive Volume/Test Bank 4. Rachel and Barry formed the equal RB Partnership during the current year, with Rachel contributing $100,000 in cash and Barry contributing land (basis of $60,000, fair market value of $80,000) and equipment (basis of $0, fair market value of $20,000). Barry recognizes a $40,000 gain on the contribution and his basis in his partnership interest is $100,000. ANS: F Under § 721, neither the partnership nor a partner will generally recognize gain or loss on contribution of property to a partnership. Barry’s substituted basis in his partnership interest is his $60,000 basis in the assets contributed ($60,000 basis in land plus $0 basis in equipment). PTS: 1 REF: Example 8 | Example 9 5. John and Ken formed the equal JK Partnership during the current year, with John contributing $50,000 in cash and Ken contributing land (basis of $30,000, fair market value of $20,000) and equipment (basis of $0, fair market value of $30,000). Ken recognizes no gain or loss on the contribution and his basis in his partnership interest is $30,000. ANS: T Under § 721, neither the partnership nor a partner will generally recognize gain or loss on contribution of property to a partnership. Ken’s basis in his partnership interest is the $30,000 basis in the assets contributed ($30,000 basis in land plus $0 basis in equipment). PTS: 1 REF: Example 8 | Example 9 6. Julie is a real estate developer and owns property that is treated as inventory (not a capital asset) in her business. She contributed a parcel of this land (basis $60,000; fair market value $58,000) to a partnership, which will also hold it as inventory. After three years, the partnership sells the land for $56,000. The partnership will recognize a $4,000 ordinary loss on sale of the property.
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