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Tax 21

Which of the following statements, if any, about a multi-member LLC is false?
a. A multi-member LLC is usually taxed like a partnership.
b. “Members” of an LLC generally have limited personal liability for debts of the LLC, except for the managing member who has unlimited liability for LLC debts.
c. “Members” of an LLC can participate in management of the LLC unless the member agrees not to participate.
d. An LLC can specially allocate income items, as long as the substantial economic effect rules of § 704(b) are followed.
e. None of the above statements is false.
b
The BLM LLC’s balance sheet on August 31 of the current year is as follows.

Adjusted
Basis FMV
Cash $ 60,000 $ 60,000
Receivables -0- 150,000
Capital assets 90,000 300,000
$150,000 $510,000

Nonrecourse debt $ 90,000 $ 90,000
Barney, capital 20,000 140,000
Lillie, capital 20,000 140,000
Marshall, capital 20,000 140,000
$150,000 $510,000
The nonrecourse debt is shared equally among the LLC members. On that date, Lillie sells her one-third interest to Robyn for $170,000, including cash and relief of Lillie’s share of the nonrecourse debt. Lillie’s outside basis for her interest in the LLC is $50,000, including her share of the LLC’s debt. How much capital gain and/or ordinary income will Lillie recognize on the sale?
a. $100,000 capital gain; $50,000 ordinary income.
b. $120,000 capital gain; $0 ordinary income.
c. $150,000 capital gain; $0 ordinary income.
d. $70,000 capital gain; $50,000 ordinary income.
e. None of the above.

d
Nicholas is a 25% owner in the DDBN LLC (a calendar year entity). At the end of the last tax year, Nicholas’s basis in his interest was $50,000, including his $20,000 share of LLC liabilities. On July 1 of the current tax year, Nicholas sells his LLC interest to Anna for $80,000 cash. In addition, Anna assumes Nicholas’s share of LLC liabilities, which, at that date, was $15,000. During the current tax year, DDBN’s taxable income is $120,000 (earned evenly during the year). Nicholas’s share of the LLC’s unrealized receivables is valued at $6,000 ($0 basis). At the sale date, what is Nicholas’s basis in his LLC interest, how much gain or loss must he recognize, and what is the character of the gain or loss?
a. $45,000 basis; $6,000 ordinary income; $44,000 capital gain.
b. $60,000 basis; $6,000 ordinary income; $29,000 capital gain.
c. $60,000 basis; $35,000 capital gain.
d. $75,000 basis; $0 ordinary income; $20,000 capital gain.
e. $75,000 basis; $6,000 ordinary income; $14,000 capital gain.
b
Which of the following statements is true regarding the sale of a partnership interest?
a. The selling partner’s share of partnership liabilities is disregarded in determining the proceeds from the sale of a partnership interest.
b. For purposes of computing the selling partner’s gain or loss, the partner’s basis in the partnership interest is determined as of the last day of the partnership tax year ending before the year in which the interest is sold.
c. If a partner sells an interest in a partnership, income related to that interest for the year of the sale is allocated to the purchaser.
d. The selling partner could be required to report both ordinary income and a capital loss on sale of the partnership interest.
e. The partner’s share of partnership “hot assets” is disregarded in determining the character of the partner’s gain on the sale of the partnership interest.
d
Which of the following statements correctly reflects one of the rules regarding proportionate liquidating distributions?
a. Relief of liabilities is treated as a distribution of cash but only to the extent that the cash distribution does not exceed the partner’s basis in the partnership interest.
b. A partner’s basis in distributed unrealized receivables is the lesser of the partnership’s basis in the receivables or their fair market value.
c. The basis of unrealized receivables cannot be stepped up to their fair market value unless the partner has adequate unabsorbed basis.
d. Assets are deemed distributed in the following order: cash, unrealized receivables and inventory and finally, capital assets.
e. The partner can recognize gain, but not loss, on a proportionate liquidating distribution.
d
In a proportionate liquidating distribution, Sara receives a distribution of $40,000 cash, accounts receivable (basis of $0, fair market value of $30,000), and inventory (basis of $50,000, fair market value of $60,000). Sara’s basis in the entity immediately before the distribution was $120,000. As a result of the distribution, what is Sara’s basis in the accounts receivable and inventory, and how much gain or loss does she recognize?
a. $0 basis in accounts receivable; $50,000 basis in inventory; $30,000 loss.
b. $0 basis in accounts receivable; $80,000 basis in inventory; $0 gain or loss.
c. $40,000 basis in accounts receivable; $40,000 basis in inventory; $0 gain or loss.
d. $30,000 basis in accounts receivable; $50,000 basis in inventory; $30,000 loss.
e. $30,000 basis in accounts receivable; $60,000 basis in inventory; $10,000 gain.
a
In a proportionate liquidating distribution, Ashleigh receives a distribution of $30,000 cash, accounts receivable (basis of $0, fair market value of $40,000), and land (basis of $40,000, fair market value of $50,000). In addition, the partnership repays all liabilities, of which Ashleigh’s share was $70,000. Ashleigh’s basis in the entity immediately before the distribution was $60,000. As a result of the distribution, what is Ashleigh’s basis in the accounts receivable and land, and how much gain or loss does she recognize?
a. $0 basis in accounts receivable; $0 basis in land; $40,000 gain.
b. $0 basis in accounts receivable; $30,000 basis in land; $0 gain or loss.
c. $0 basis in accounts receivable; $40,000 basis in land; $0 gain or loss.
d. $40,000 basis in accounts receivable; $20,000 basis in land; $0 gain.
e. $40,000 basis in accounts receivable; $20,000 basis in land; $100,000 gain.
a
In a proportionate liquidating distribution, Sam receives a distribution of $30,000 cash, accounts receivable (basis of $0, fair market value of $50,000), and land (basis of $20,000, fair market value of $50,000). In addition, the partnership repays all liabilities, of which Sam’s share was $40,000. Sam’s basis in the entity immediately before the distribution was $120,000. As a result of the distribution, what is Sam’s basis in the accounts receivable and land, and how much gain or loss does he recognize?
a. $0 basis in accounts receivable; $50,000 basis in land; $0 gain or loss.
b. $0 basis in accounts receivable; $90,000 basis in land; $0 gain or loss.
c. $50,000 basis in accounts receivable; $40,000 basis in land; $0 gain or loss.
d. $50,000 basis in accounts receivable; $50,000 basis in land; $50,000 gain.
e. $0 basis in accounts receivable; $70,000 basis in land; $30,000 loss.
a
Suzy owns a 30% interest in the JSD LLC. In liquidation of the entity, Suzy receives a proportionate distribution of $30,000 cash, inventory (basis of $16,000, fair market value of $18,000), and land (basis of $25,000, fair market value of $30,000). Suzy’s basis in the entity immediately before the distribution was $80,000. As a result of the distribution, what is Suzy’s basis in the inventory and land, and how much gain or loss does she recognize?
a. $0 basis in inventory; $25,000 basis in land; $0 gain or loss.
b. $16,000 basis in inventory; $34,000 basis in land; $0 gain or loss.
c. $16,000 basis in inventory; $25,000 basis in land; $9,000 loss.
d. $18,000 basis in inventory; $32,000 basis in land; $0 gain.
e. $25,000 basis in inventory; $25,000 basis in land; $0 gain or loss.
b
Michelle receives a proportionate liquidating distribution when the basis of her partnership interest is $50,000. The distribution consists of $58,000 cash and noninventory property (adjusted basis to the partnership of $10,000 and fair market value of $12,000). The partnership has no hot assets. How much gain or loss does Michelle recognize, and what is her basis in the distributed property?
a. $0 gain or loss; $0 basis in property.
b. $0 gain or loss; $50,000 basis in property.
c. $8,000 ordinary income; $0 basis in property.
d. $8,000 capital gain; $10,000 basis in property.
e. $8,000 capital gain; $0 basis in property.
e
Jonathon owns a one-third interest in a liquidating partnership. Immediately before the liquidation, Jonathon’s basis in the partnership interest is $60,000. The partnership distributes cash of $32,000 and two parcels of land (each with a fair market value of $10,000). Parcel A has a basis of $2,000 to the partnership and Parcel B has a basis of $6,000. Jonathon’s basis in the two parcels of land is:
a. Parcel A, $2,000; Parcel B, $6,000.
b. Parcel A, $7,000; Parcel B, $21,000.
c. Parcel A, $10,000; Parcel B, $10,000.
d. Parcel A, $14,000; Parcel B, $14,000.
e. Parcel A, $15,000; Parcel B, $45,000.
d
Landis received $90,000 cash and a capital asset (basis of $50,000, fair market value of $60,000) in a proportionate liquidating distribution. His basis in his partnership interest was $120,000 prior to the distribution. How much gain or loss does Landis recognize and what is his basis in the asset received?
a. $0 gain or loss; $30,000 basis.
b. $0 gain or loss; $50,000 basis.
c. $0 gain or loss; $60,000 basis.
d. $20,000 gain; $50,000 basis.
e. $30,000 gain; $60,000 basis.
a
Beth has an outside basis of $100,000 in the BTDE Partnership as of December 31 of the current year. On that date the partnership liquidates and distributes to Beth a proportionate distribution of $50,000 cash and inventory with an inside basis to the partnership of $10,000 and a fair market value of $16,000. In addition, Beth receives an antique desk (not inventory) which has an inside basis and fair market value of $0 and $5,000, respectively. None of the distribution is for partnership goodwill. How much gain or loss will Beth recognize on the distribution, and what basis will she take in the desk?
a. $40,000 loss; $0 basis.
b. $35,000 loss; $5,000 basis.
c. $0 gain or loss; $5,000 basis.
d. $0 gain or loss; $40,000 basis.
e. None of the above.
d
Anthony’s basis in the WAM Partnership interest was $200,000 just before he received a proportionate liquidating distribution consisting of investment land (basis of $90,000, fair market value of $100,000), and inventory (basis of $30,000, fair market value of $70,000). After the distribution, Anthony’s recognized gain or loss and his basis in the land and inventory are:
a. $80,000 loss; $90,000 (land); $30,000 (inventory).
b. $70,000 loss; $100,000 (land); $30,000 (inventory).
c. $30,000 loss; $100,000 (land); $70,000 (inventory).
d. $0 gain or loss; $170,000 (land); $30,000 (inventory).
e. None of the above.
d
Nicky’s basis in her partnership interest was $150,000, including her $40,000 share of partnership liabilities. The partnership decides to liquidate, and after repaying all liabilities, distributes all remaining assets proportionately to the partners. Nicky receives $30,000 cash and accounts receivable with a $50,000 basis and a $48,000 fair market value to the partnership. What gain or loss does Nicky recognize, and what is her basis in the accounts receivable?
a. $70,000 loss; $50,000 basis.
b. $30,000 loss; $50,000 basis.
c. $32,000 loss; $48,000 basis.
d. $72,000 loss; $48,000 basis.
e. $0 loss; $80,000 basis.
b
Misha receives a proportionate nonliquidating distribution when the basis of her partnership interest is $60,000. The distribution consists of $80,000 cash and inventory (adjusted basis to the partnership of $10,000, fair market value of $20,000). How much gain or loss does Misha recognize, and what is her basis in the distributed inventory and in her partnership interest following the distribution?
a. $0 gain or loss; $10,000 basis in inventory; $0 basis in partnership interest.
b. $0 gain or loss; $20,000 basis in inventory; $50,000 basis in partnership interest.
c. $20,000 capital gain; $0 basis in inventory; $0 basis in partnership interest.
d. $20,000 capital gain; $10,000 basis in inventory; $0 basis in partnership interest.
e. $20,000 ordinary income; $0 basis in inventory; $20,000 basis in partnership interest.
c
Catherine’s basis was $50,000 in the CAR Partnership just before she received a proportionate nonliquidating distribution consisting of land held for investment with a basis to CAR of $40,000 (value of $60,000), and inventory with a basis of $40,000 (value of $40,000). After the distribution, Catherine’s bases in the land and inventory are:
a. $40,000 (land); $40,000 (inventory).
b. $40,000 (land); $10,000 (inventory).
c. $10,000 (land); $40,000 (inventory).
d. $25,000 (land); $25,000 (inventory).
e. None of these statements is correct.
c
Alyce owns a 30% interest in a continuing partnership. The partnership distributes a $35,000 year-end cash payment to Alyce. In a proportionate nonliquidating distribution, the partnership also distributed property (basis of $20,000, fair market value of $30,000) to Alyce. Immediately before the distributions of cash and property, Alyce’s basis in the partnership interest was $60,000. As a result of the distribution, Alyce recognizes:
a. No gain or loss.
b. Ordinary loss of $5,000.
c. Capital loss of $5,000.
d. Ordinary gain of $5,000.
e. Capital gain of $5,000.
a
Frank receives a proportionate nonliquidating distribution from the AEF Partnership. The distribution consists of $10,000 cash and property (adjusted basis to the partnership of $54,000 and fair market value of $60,000). Immediately before the distribution, Frank’s adjusted basis in the partnership interest was $50,000. His basis in the noncash property received is:
a. $0.
b. $40,000.
c. $54,000.
d. $60,000.
e. None of the above.
b
Mack has a basis in a partnership interest of $200,000, including his share of partnership debt. At the end of the current year, the partnership distributed to Mack, in a proportionate nonliquidating distribution, cash of $20,000, inventory (basis to the partnership of $30,000 and fair market value of $40,000), and land (basis to the partnership of $40,000 and fair market value of $42,000). In addition, Mack’s share of partnership debt decreased by $12,000 during the year. What basis does Mack take in the inventory and land and in the partnership interest (including debt share) following the distribution?
a. $30,000 basis in inventory; $40,000 basis in land, $98,000 basis in partnership.
b. $30,000 basis in inventory; $42,000 basis in land, $110,000 basis in partnership.
c. $40,000 basis in inventory; $40,000 basis in land, $86,000 basis in partnership.
d. $40,000 basis in inventory; $42,000 basis in land, $98,000 basis in partnership.
e. $40,000 basis in inventory; $42,000 basis in land, $110,000 basis in partnership.
a
Mark receives a proportionate nonliquidating distribution. At the beginning of the partnership year, the basis of his partnership interest is $100,000. During the year, he received a cash distribution of $40,000 and a property distribution (basis of $30,000, fair market value of $25,000). In addition, Mark’s share of partnership liabilities was reduced by $10,000 during the year. How much gain or loss does Mark recognize; what is his basis in the property he received; and what is his remaining basis in the partnership interest?
a. $25,000 loss; $25,000 basis in property; $0 remaining basis.
b. $30,000 loss; $30,000 basis in property; $0 remaining basis.
c. $0 gain or loss; $25,000 basis in property; $25,000 remaining basis.
d. $0 gain or loss; $30,000 basis in property; $20,000 remaining basis.
e. $0 gain or loss; $20,000 basis in property; $30,000 remaining basis.
d
Megan’s basis was $120,000 in the MYP Partnership interest just before she received a proportionate nonliquidating distribution consisting of land held for investment (basis of $100,000, fair market value of $130,000) and inventory (basis of $80,000, fair market value of $70,000). After the distribution, Megan’s bases in the land and inventory are, respectively:
a. $100,000 (land) and $20,000 (inventory).
b. $120,000 (land) and $0 (inventory).
c. $50,000 (land) and $70,000 (inventory).
d. $40,000 (land) and $80,000 (inventory).
e. None of the above.
d
At the beginning of the year, Elsie’s basis in the E&G Partnership interest is $90,000. She receives a proportionate nonliquidating distribution from the partnership consisting of $10,000 of cash, unrealized accounts receivable (basis of $0, fair market value $40,000), and land (basis of $30,000, fair market value of $50,000). After the distribution, Elsie’s bases in the accounts receivable, land, and partnership interest are:
a. $0; $30,000; and $50,000.
b. $0; $50,000; and $30,000.
c. $40,000; $30,000; and $10,000.
d. $40,000; $40,000; and $0.
e. None of the above.
a
Dan receives a proportionate nonliquidating distribution when the basis of his partnership interest is $30,000. The distribution consists of $10,000 in cash and property with an adjusted basis to the partnership of $24,000 and a fair market value of $26,500. Dan’s basis in the noncash property is:
a. $26,500.
b. $24,000.
c. $20,000.
d. $10,000.
e. None of the above.
c
Which of the following is not a correct statement regarding the advantage of the partnership entity form over the subchapter C corporate form?
a. A partnership typically has easier administrative and filing requirements than does a C corporation.
b. Partnership income is subject to a single level of taxation; corporate income is double taxed.
c. Partnerships may specially allocate income and expenses among the partners, provided the substantial economic effect requirements are met; corporate dividends must be proportionate to shareholdings.
d. Partners in a general partnership have less personal liability for entity claims than shareholders of a C corporation.
e. All of the above are advantages of partnership taxation.
d
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?
a. $100,000
b. $120,000
c. $220,000
d. $223,000
e. None of the above
c
Paul sells one parcel of land (basis of $100,000) for its fair market value of $160,000 to a partnership in which he owns a 60% capital interest. Paul held the land for investment purposes. The partnership is in the real estate development business, and will build residential housing (for sale to customers) on the land. Paul will recognize:
a. $0 gain or loss.
b. $36,000 ordinary income.
c. $36,000 capital gain.
d. $60,000 ordinary income.
e. $60,000 capital gain.
d
At the beginning of the tax year, Zach’s basis for his partnership interest and his amount at risk in the partnership was $30,000. His share of partnership items for the year consisted of tax-exempt interest income of $2,000 and an ordinary loss of $44,000. He also received a distribution from the partnership of $20,000 cash during the year. For the tax year, Zach will report:
a. A nontaxable distribution of $20,000, an ordinary loss of $10,000, and a suspended loss carryforward of $34,000.
b. An ordinary loss of $32,000, a suspended loss carryforward of $12,000, and a taxable distribution of $20,000.
c. A nontaxable distribution of $20,000, an ordinary loss of $12,000, and a suspended loss carryforward of $32,000.
d. An ordinary loss of $44,000 and a nontaxable distribution of $20,000.
c
Rebecca is a limited partner in the RST Partnership, which is not publicly traded. Her allocable share of RST’s passive ordinary losses from a nonrealty activity for the current year is ($60,000). Rebecca has a $40,000 adjusted basis (outside basis) for her interest in RST (before deduction of any of the passive losses). Her amount “at risk” under § 465 is $30,000 (before deduction of any of the passive losses). She also has $25,000 of passive income from other sources. How much of her ($60,000) allocable loss can Rebecca deduct on her current year’s tax return?
a. $25,000
b. $30,000
c. $40,000
d. $60,000
e. None of the above
a
Which of the following is not a specific adjustment to the partners’ basis in the partnership interest?
a. Increased by contributions the partner made to the partnership.
b. Decreased by the amount of guaranteed payments shown on the partner’s Schedule K-1.
c. Increased by the partner’s share of tax-exempt income.
d. Decreased by any decrease in the partner’s share of partnership liabilities.
e. Increased by the partner’s share of separately stated income items.
b
During the current tax year, Jordan and Whitney each contributed $50,000 to form the J&W LLC. Each member has a 50% interest in LLC capital, profits, and losses (including deemed losses in the “constructive liquidation scenario”), except that depreciation expense is allocated 40% to Jordan and 60% to Whitney. During the first year, the LLC reported income (before depreciation expense) of $20,000 and had depreciation expense of $10,000. The LLC incurred recourse debt (that was personally guaranteed by both of the LLC members) of $60,000. Partnership assets are $170,000 at the end of the year. Under the constructive liquidation scenario, how is the recourse debt allocated to Jordan and Whitney?
a. The recourse debt is shared equally ($30,000 each) by Jordan and Whitney.
b. The recourse debt is allocated $36,000 to Whitney and $24,000 to Jordan.
c. The recourse debt is allocated $31,000 to Whitney and $29,000 to Jordan.
d. The recourse debt is allocated $29,000 to Whitney and $31,000 to Jordan.
e. The recourse debt is allocated $24,000 to Whitney and $36,000 to Jordan.
c
Sharon contributed property to the newly formed QRST Partnership. The property had a $100,000 adjusted basis to Sharon and a $160,000 fair market value on the contribution date. The property was also encumbered by a $120,000 nonrecourse debt, which was transferred to the partnership on that date. Another partner, Rochelle, shares 30% of the partnership income, gain, loss, deduction, and credit. Under IRS regulations, Rochelle’s share of the nonrecourse debt for basis purposes is:
a. $20,000.
b. $30,000.
c. $36,000.
d. $100,000.
e. $120,000.
b
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. Immediately after formation, Alicia’s basis in the partnership equals the cash contributed by Alicia.
b. Immediately after formation, Alicia’s basis in the partnership equals the cash she contributed plus her share of the recourse debt contributed by Barry.
c. Because the debt is recourse, the constructive liquidation scenario is not applicable for determining the allocation of debt to the partners.
d. AB’s basis in the land contributed by Barry equals Barry’s basis in the land immediately before the contribution date, less the amount of the recourse debt assumed by the partnership.
e. None of the above.
b
Which of the following statements is correct regarding the manner in which partnership liabilities are reflected in the partners’ bases in their partnership interests?
a. Nonrecourse debt is allocated to the partners according to their loss-sharing ratios.
b. Recourse debt is allocated to the partners to the extent of the partnership’s minimum gain in the property.
c. An increase in partnership debts results in a decrease in the partners’ bases in the partnership interest.
d. A decrease in partnership debt is treated as a distribution from the partnership to the partner and reduces the partner’s basis in the partnership interest.
e. Partnership debt is not reflected in the partners’ bases in their partnership interests.
d
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.
c
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?
a. $116,000
b. $120,000
c. $126,000
d. $128,000
e. $138,000
a
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:
a. $36,000.
b. $38,000.
c. $60,000.
d. $70,000.
e. None of the above.
b
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 (before the following payments to the partners). In addition, BAM made an ordinary distribution of $8,000 to Allison and paid partner Brian a $20,000 consulting fee. 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:
a. $2,000.
b. $50,000.
c. $58,000.
d. $70,000.
e. None of the above.
b
Ryan is a 25% partner in the ROCC Partnership. At the beginning of the tax year, Ryan’s basis in the partnership interest was $90,000, including his share of partnership liabilities. During the current year, ROCC reported net ordinary income of $100,000. In addition, ROCC distributed $10,000 to each of the partners ($40,000 total). At the end of the year, Ryan’s share of partnership liabilities increased by $10,000. Ryan’s basis in the partnership interest at the end of the year is:
a. $90,000.
b. $100,000.
c. $115,000.
d. $125,000.
e. None of the above.
c
Stephanie is a calendar year cash basis taxpayer. She owns a 50% profit and loss interest in a cash basis partnership with a September 30 year-end. The partnership’s operating income (after deducting guaranteed payments) was $120,000 ($10,000 per month) and $144,000 ($12,000 per month), respectively, for the partnership tax years ended September 30, 2014 and 2015. The partnership paid guaranteed payments to Stephanie of $2,000 and $3,000 per month during the fiscal years ended September 30, 2014 and 2015. How much will Stephanie’s adjusted gross income be increased by these partnership items for her tax year ended December 31, 2014?
a. $60,000
b. $72,000
c. $84,000
d. $90,000
e. $108,000
c
Molly is a 30% partner in the MAP Partnership. During the current tax year, the partnership reported ordinary income of $200,000 before payment of guaranteed payments and distributions to partners. The partnership made an ordinary cash distribution of $20,000 to Molly, and paid guaranteed payments to partners Molly, Amber, and Pat of $20,000 each ($60,000 total guaranteed payments). How much will Molly’s adjusted gross income increase as a result of the above items?
a. $42,000
b. $60,000
c. $62,000
d. $80,000
e. None of the above
c
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?
a. $0
b. $9,000
c. $24,000
d. $36,000
e. None of the above
c
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
a
Which of the following statements is not a requirement of the substantial economic effect test?
a. Income, gains, losses, and deductions must be allocated to the partners in accordance with their capital contributions.
b. An allocation of income must increase the partner’s capital account balance, and an allocation of deduction must decrease the partner’s capital account balance.
c. A partner with a negative capital account balance must “restore” that capital account, generally by contributing cash to the partnership.
d. On liquidation of the partner’s interest in the partnership, the partner must receive assets that have a fair market value equal to that partner’s (positive) capital account balance.
e. All of the above statements are requirements of the substantial economic effect test.
a
ABC LLC reported the following items on the LLC’s Schedule K: ordinary income, $100,000; interest income, $3,000; long-term capital loss, ($4,000); charitable contributions, $1,000; post-1986 depreciation adjustment, $10,000; and cash distributions to partners, $50,000. How much will ABC show as net income (loss) on its Analysis of Income (Loss)?
a. $68,000
b. $78,000
c. $95,000
d. $98,000
e. $102,000
d
On a partnership’s Form 1065, which of the following statements is not true?
a. The partnership reconciles its net (tax basis) income (including separately stated items) to book income on Schedule M-1 or M-3.
b. The partnership balance sheet on Schedule L is generally presented on a financial (book) basis.
c. All partnership income and expense items are reported on Form 1065, page 1.
d. The partnership’s equivalent of taxable income is reported in the “Analysis of Income (Loss).”
e. None of the above statements are true.
c
Which one of the following is not shown on the partnership’s Schedule K on Page 4 of Form 1065?
a. The partnership’s self-employment income.
b. The partnership’s separately stated income and deductions.
c. The partnership’s tax preference and adjustment items.
d. The partnership’s net operating loss carryforward.
e. All of the above.
d
Kristie is a 30% partner in the KKM Partnership. During the current year, KKM reported gross receipts of $280,000 and a charitable contribution of $30,000. The partnership paid office expenses of $80,000. In addition, KKM distributed $20,000 each to partners Kaylyn and Megan, and the partnership paid partner Kaylyn $20,000 for administrative services. Kristie reports the following income from KKM during the current tax year:
a. $54,000 ordinary income; $9,000 charitable contribution.
b. $60,000 ordinary income; $9,000 charitable contribution.
c. $36,000 ordinary income.
d. $54,000 ordinary income.
e. None of the above.
a
In the current year, the POD Partnership received revenues of $200,000 and paid the following amounts: $50,000 in rent and utilities, and $20,000 as a distribution to partner Olivia. In addition, the partnership earned $6,000 of long-term capital gains during the year. Partner Donald owns a 50% interest in the partnership. How much income must Donald report for the tax year?
a. $68,000 ordinary income.
b. $78,000 ordinary income.
c. $65,000 ordinary income; $3,000 of long-term capital gains.
d. $75,000 ordinary income; $3,000 of long-term capital gains.
e. None of the above.
d
Fern, Inc., Ivy, Inc., and Jeremy formed a general partnership. Fern owns a 50% interest and Ivy and Jeremy each own 25% interests. Fern, Inc. files its tax return on an October 31 year-end; Ivy, Inc., files with a May 31 year-end, and Jeremy is a calendar year taxpayer. Which of the following statements is true regarding the taxable year the partnership can choose?
a. The partnership must choose the calendar year because it has no principal partners.
b. The partnership must choose an October year-end because Fern, Inc., is a principal partner.
c. The partnership can request permission from the IRS to use a January 31 fiscal year under § 444.
d. The partnership must use the “least aggregate deferral” method to determine its “required” taxable year.
e. None of the above.
d
Which of the following statements is always true regarding accounting methods available to a partnership?
a. If a partnership is a tax shelter, it can use the cash method of accounting.
b. If a non-tax-shelter partnership had “average annual gross receipts” of less than $5 million in all prior years, it can use the cash method.
c. If a partnership has a partner that is a personal service corporation, it cannot use the cash method.
d. If a partnership has a partner that is a C corporation, it cannot use the cash method.
e. All of the above statements are false.
b
Which of the following statements is always correct regarding assets acquired by a newly formed partnership? If a partner contributes:
a. Depreciable property: the partnership treats the property as newly acquired depreciable property, and may claim a § 179 deduction.
b. Unrealized (cash-basis) receivables: the partnership will report a capital gain when the receivable is collected.
c. Inventory (in the partner’s hands): the partnership reports ordinary income if the property is held as a capital asset and sold within five years of the contribution date.
d. Land valued at less than its basis: the partnership reports a § 1231 loss if the property is sold at a loss.
e. None of these statements is correct.
c
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?
a. TEC treats the contributed property as a new MACRS asset placed in service on the date the property title is transferred.
b. TEC must amortize the $10,000 of organizational expenses over 180 months.
c. TEC’s deducts the first $5,000 of startup expenses and amortizes the remainder over 180 months.
d. TEC must capitalize the transfer tax and treat it as a new asset placed in service on the date the property is contributed.
e. None of the above statements are true.
d
Which of the following is an election or calculation made by the partner rather than the partnership?
a. Calculation of a § 199 deduction amount.
b. Whether to capitalize, amortize, or expense research and experimental costs.
c. The partnership’s overall accounting method.
d. Whether to claim a § 179 deduction related to property acquired by the partnership.
e. All of the above elections are made by the partnership.
a
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.)
a. A 10% interest in the capital of the partnership that will vest in 3 years.
b. A 20% interest in the future profits of the partnership received in exchange for future services to be performed for the partnership.
c. A 25% interest in the capital of the partnership where there are no restrictions on transferability of the interest.
d. A 30% interest in ongoing profits of the partnership where the partnership is not a publicly-traded partnership and the income stream is not assured.
e. All of the above.
c
Tara and Robert formed the TR Partnership four years ago. Because they decided the company needed some expertise in multimedia presentations, they offered Katie a 1/3 interest in partnership capital if she would come to work for the partnership. On July 1 of the current year, the unrestricted partnership interest (fair market value of $25,000) was transferred to Katie. How should Katie treat the receipt of the partnership interest in the current year?
a. Nontaxable.
b. $25,000 ordinary income.
c. $25,000 short-term capital gain.
d. $25,000 long-term capital gain.
e. None of the above.
b
In which of the following independent situations would the transaction most likely be characterized as a disguised sale?
a. Partner George contributes appreciated property to the GM Partnership, and three years later GM distributes $100,000 proportionately to the partners.
b. Brianna contributes property with a basis of $20,000 and a fair market value of $50,000 to the BGB Partnership in exchange for a 20% interest therein. The partnership agrees to distribute $20,000 to Brianna in fifteen months, if partnership cash flows from operations exceed $100,000 at that time. The partnership does not expect to produce operating cash flows of over $100,000 for at least five years.
c. Luis contributes appreciated property to the BLP Partnership. Thirty months later, he receives a distribution from the partnership of $15,000 cash. None of the other partners received a distribution. There was no agreement that BLP would make the distribution, and Luis would have made the contribution whether or not the partnership made the distribution.
d. None of the above transactions will be treated as a disguised sale.
e. a., b., and c. are all treated as disguised sales.
d
When property is contributed to a partnership in exchange for a capital and profits interest, when does the partner’s holding period begin for the partnership interest?
a. The day after the contribution date.
b. The day the property was contributed.
c. The day the contributed property was purchased.
d. The day the partnership interest was acquired.
e. Either (or both) c. and d. may be true, depending upon the types of property contributed.
e
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?
a. Tim’s basis in his partnership interest is $120,000.
b. Al realizes and recognizes a loss of $10,000.
c. Pat realizes a gain of $40,000 but recognizes $0 gain.
d. TAP has a basis of $80,000, $50,000, and $0 in the land and property (excluding cash) contributed by Tim, Al, and Pat, respectively.
e. All of these statement are correct.
b
On January 1 of the current year, Anna and Jason form an equal partnership. Anna contributes $50,000 cash and a parcel of land (adjusted basis of $100,000; fair market value of $150,000) in exchange for her interest in the partnership. Jason contributes property (adjusted basis of $180,000; fair market value of $200,000) in exchange for his partnership interest. Which of the following statements is true concerning the income tax results of this partnership formation?
a. Jason recognizes a $20,000 gain on his property transfer.
b. Jason has a $200,000 tax basis for his partnership interest.
c. Anna has a $150,000 tax basis for her partnership interest.
d. The partnership has a $150,000 adjusted basis in the land contributed by Anna.
e. None of the statements is true.
c
A partnership will take a carryover basis in an asset it acquires when:
a. The partnership acquires the asset through a § 1031 like-kind exchange.
b. A partner owning 25% of partnership capital and profits sells the asset to the partnership.
c. The partnership leases the asset from a partner on a one-year lease.
d. The partnership acquires the asset from a partner as a contribution to partnership capital under § 721(a).
e. None of the above.
d
Which of the following is a correct definition of a concept related to partnership taxation?
a. The aggregate concept treats partners and partnerships as separate units and gives the partnership its own tax “personality.”
b. A partner’s capital sharing ratio is defined as the percent of partnership assets (capital) that would be allocated to the partner upon liquidation of the partnership.
c. The partnership’s outside basis is defined as the sum of each partner’s capital account balance.
d. A special allocation is defined as an amount that could differently affect the tax liabilities of two or more partners.
e. None of these statements is correct.
b
Which one of the following statements regarding partnership taxation is incorrect?
a. A partnership is a taxable entity for Federal income tax purposes.
b. Partnership income is comprised of ordinary partnership income or loss and separately stated items.
c. A partnership is required to file a return with the IRS.
d. A partner’s profit-sharing percent may differ from the partner’s loss-sharing percent.
e. All of these statements are correct.
a
Which of the following entity owners cannot participate in management of the entity?
a. A general partner in a general partnership.
b. A member of a limited liability company.
c. A partner in a limited liability partnership.
d. A limited partner in a limited liability limited partnership.
e. None of the above.
d

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