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Exam 21: Partnerships

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Question 41

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Morgan and Kristen formed an equal partnership on August 1 of the current year. Morgan contributed $60,000 cash and land with a basis of $18,000 and a fair market value of $40,000. Kristen contributed equipment with a basis of $42,000 and a value of $100,000. Kristen and Morgan both have a basis of $100,000 in their partnership interests.

A) True
B) False

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Question 42

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Midway through the current tax year, Georgie sells her 40% interest in the GHI Partnership to new partner Kelly for $150,000, including Georgie's share of partnership liabilities. At the beginning of the tax year, Georgie's basis in her partnership interest was $40,000 (excluding her share of partnership debt). The partnership reported income of $120,000 for the year, and Georgie's share of partnership debt was $50,000 at the sale date. (Assume that the partnership uses a monthly proration of income.) On the sale date, the partnership's assets consist of cash ($195,000), land (basis of $90,000, fair market value of $120,000), and unrealized receivables (basis of $0, fair market value of $60,000). Georgie will recognize ordinary income of $24,000 and a capital gain of $12,000, for a total of $36,000 on the sale.

A) True
B) False

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Question 43

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Hannah sells her 25% interest in the HIJK Partnership to Alyssa for $120,000 cash. At the end of the year prior to the sale, Hannah's basis in HIJK was $70,000. The partnership allocates $15,000 of income to Hannah for the portion of the year she was a partner. On the date of the sale, the partnership assets and the agreed fair market values were as follows. $\begin{array}{lrr}&\text {Adjusted}&\\&\text {Basis}&\text {FMV}\\\text { Cash } & \$ 100,000 & \$ 100,000 \\\text { Accounts Receivable } & -0- & 80,000 \\\text { Land } & \underline{240,000} & \underline{220,000} \\\text { Total } & \underline{\$ 340,000} & \underline{\$ 400,000}\end{array}$ on the sale.

Which of the following statements correctly reflects one of the rules regarding proportionate liquidating distributions?

Beth has an outside basis of $100,000 in the BJDE 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) that has an inside basis (and fair market value) of $5,000. 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?

If a partnership earns tax-exempt income, the income should not affect the partners' bases in their partnership interests. Do you agree with this statement? Explain.

Jeordie and Kendis created the JK Partnership by contributing $100,000 each. The $200,000 cash was used by the partnership to acquire a depreciable asset. The partnership agreement provides that the partners' capital accounts will be maintained in accordance with Reg. § 1.704-1(b) (the economic effect Regulations) and that any partner with a deficit capital account will be required to restore that capital account when the partner's interest is liquidated. The partnership agreement provides that MACRS will be allocated 20% to Jeordie and 80% to Kendis. All other items of partnership income, gain, loss, deduction, and credit will be allocated equally between the partners. In the first year, MACRS is $40,000 and no other operating transactions occur. The property is sold at the end of the year for $160,000 (which, coincidentally, corresponds to JK's basis in the property), and the partnership is liquidated immediately thereafter. To satisfy the economic effect test, how much of the $160,000 cash (from the sale) is allocated each to Jeordie and Kendis?

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 and allocated using the monthly proration method) . 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?

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. Her adjusted basis (outside basis) for her partnership interest at year-end is:

An example of the aggregate concept underlying partnership taxation is the fact that the partners (rather than the partnership) pay tax on partnership income.

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

Section 721 provides that no gain or loss is recognized on a 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 is made.

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?

Match each of the following statements with the terms below that provide the best definition. -Economic effect test

The primary purpose of the partnership agreement is to document the various tax elections made by the partners regarding items such as depreciation methods, treatment of research and experimental costs, and the § 754 election.

George and James are forming the GJ Partnership. George contributes $600,000 cash and James contributes nondepreciable property with an adjusted basis of $400,000 and a fair market value of $750,000. The property is subject to a $150,000 liability, which is transferred into the partnership and is shared equally by the partners for basis purposes. George and James share in all partnership profits equally except for any precontribution gain, which must be allocated according to the statutory rules for built-in gain allocations. a. What is James's adjusted tax basis for his partnership interest immediately after the partnership is formed? b. What is the partnership's adjusted basis for the property contributed by James? c. If the partnership sells the property contributed by James for $800,000, how is the tax gain allocated between the partners?

Tim and Darby are equal partners in the TD Partnership. Partnership income for the year is $60,000. Tim needs cash to pay tax on his share of the partnership income, but Darby wants to leave the cash in the partnership for expansion. If the partners agree, it is acceptable for TD to distribute $8,000 to Tim but no cash or other property to Darby.

Which of the following allocations is most likely to meet the substantial test in the substantial economic effect rules? (Assume all economic effect tests are met.)

PaulCo, DavidCo, and Sean form a partnership with cash contributions of $80,000, $50,000 and $30,000, respectively, and agree to share profits and losses in the ratio of their original cash contributions. PaulCo uses a January 31 fiscal year-end, whereas DavidCo and Sean use a November 30 and December 31 year-end, respectively. The partnership must use the least aggregate deferral method to determine its year-end.

Nick sells his 25% interest in the LMNO Partnership to new partner Katrina for $67,500. The partnership's assets consist of cash ($100,000), land (basis of $90,000, fair market value of $110,000), and inventory (basis of $40,000, fair market value of $60,000). Nick's basis in his partnership interest was $57,500. On the sale, Nick will recognize ordinary income of $5,000 and a capital gain of $5,000.