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Exam 14: Forming and Operating Partnerships

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Question 21

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On June 12,20X9,Kevin,Chris,and Candy Corp.came together to form Scrumptious Sweets General Partnership.Now,Scrumptious Sweets must decide which tax year-end to use.Kevin and Chris have calendar year-ends and each holds a 35% profits and capital interest.However,Candy Corp.has a September 30ᵗʰ year-end and holds the remaining 30% profits and capital interest.What tax year-end must Scrumptious Sweets adopt and what rule mandates this year-end?

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Scrumptious Sweets must use a calendar y...

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Question 22

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Partners must generally treat the value of profits interests they receive in exchange for services as ordinary income.

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B) False

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Question 23

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What general accounting methods may be used by a partnership and how and by whom are they selected?

What is the difference between a partner's tax basis and at-risk amount?

On March 15,20X9,Troy,Peter,and Sarah formed Picture Perfect General Partnership.This partnership was created to sell a variety of cameras,picture frames,and other photography accessories.The following items were contributed by each partner in exchange for a 1/3 capital and profits interest: -Troy - cash of $3,000,inventory with a FMV and tax basis $5,000,and a building with a FMV of $8,000 and adjusted basis of $10,000.Additionally,the building is secured by a $10,000 mortgage. -Peter - cash of $5,000,accounts payable with a FMV and tax basis of $19,000,and land with a FMV and tax basis of $20,000. -Sarah - cash of $2,000,accounts receivable with a FMV and tax basis of $1,000,and equipment with a FMV of $26,000 and adjusted basis of $4,000.Also,the equipment is secured by a $23,000 note payable.   What is the partnership's inside basis in each asset? How much gain or loss must Picture Perfect recognize? Prepare Picture Perfect's balance sheet reflecting the partners' capital accounts on both a tax basis and 704(b)/FMV basis.

Income earned by flow-through entities is usually taxed only once at the entity level.

Tom is talking to his friend Bob,who has an interest in Freedom,LLC,about purchasing his LLC interest.Bob's outside basis in Freedom,LLC is $10,000.This includes his $2,500 one-fourth share of the LLC's debt.Bob's 704(b) capital account is $17,000.If Tom bought Bob's LLC interest for $17,000,what would Tom's outside basis be in Freedom,LLC?

Jerry,a partner with 30% capital and profit interest,received his Schedule K-1 from Plush Pillows,LP.At the beginning of the year,Jerry's tax basis in his partnership interest was $50,000.His current year Schedule K-1 reported an ordinary loss of $15,000,long-term capital gain of $3,000,qualified dividends of $2,000,$500 of non-deductible expenses,a $10,000 cash contribution,and a reduction of $4,000 in his share of partnership debt.What is Jerry's adjusted basis in his partnership interest at the end of the year?

Tax elections are rarely made at the partnership level.

On January 1,20X9,Mr.Blue and Mr.Grey each contributed $100,000 to form the B&G general partnership.Their partnership agreement states that they will each receive a 50% profits and loss interest.The partnership agreement also provides that Mr.Blue will receive an annual $36,000 guaranteed payment.B&G began business on January 1,20X9.For its first taxable year,its accounting records contained the following information: $\begin{array}{lll}\text { Gross receipts from sales } & \$ & 150,000 \\\text { Cost of sales } & \$ & (220,000) \\\text { Gross profit } & \$ & (70,000) \\\text { Guaranteed payments to Mr. Blue } & \$ & (36,000) \\\text { Interest paid on business debt } & \$ & (3,000) \\\text { Dividend income } & \$ & 500 \\\text { Tax exempt interest } & \$ & 1,500 \\\text { Operating expenses } & \$&(138,000) \\\text { Depreciation expense } & \$ & (9,000) \\\text { Sec. } 1231 \text { Gains } & \$ & 8,000\end{array}$ The $3,000 of interest was paid on a $60,000 loan made to B&G by Key Bank on June 30,20X9.B&G repaid $10,000 of the loan on December 15,20X9.Neither of the partners received a cash distribution from B&G in 20X9. Complete the following table related to Mr.Blue's interest in B&G partnership: $\begin{array}{lccc} \text { Item } & \text { Amount} \\ \text { Mr. Blue's ordinary business income (loss) allocation for 20X 9 } \\ \text { Mr. Blue's self-employment earnings (loss) for 20X9 } \\ \text { Mr. Blue's tax basis in his B \&G interest on December 31, 20X9 } \\\end{array}$

A partner's tax basis or at-risk amount can be increased by making capital contributions,by paying off partnership debt,or by increasing the profitability of the partnership.

On March 15,20X9,Troy,Peter,and Sarah formed Picture Perfect general partnership.This partnership was created to sell a variety of cameras,picture frames,and other photography accessories.When it was formed,the partners received equal profits and capital interests and the following items were contributed by each partner: -Troy - cash of $3,000,inventory with a FMV and tax basis of $5,000,and a building with a FMV of $22,000 and adjusted basis of $10,000.Additionally,the building was secured by a $10,000 nonrecourse mortgage. -Peter - cash of $5,000,accounts payable of $12,000 (recourse debt for which each partner becomes equally responsible),and land with a FMV of $27,000 and tax basis of $20,000. -Sarah - cash of $2,000,accounts receivable with a FMV and tax basis of $1,000,and equipment with a FMV of $40,000 and adjusted basis of $3,500.Sarah also contributed a $23,000 nonrecourse note payable secured by the equipment. What is each partner's outside basis and how much gain (loss)must the partners recognize in 20X9 when Picture Perfect was formed?

For partnership tax years ending after December 31,2015,partnerships can request up to a six-month extension by filing IRS Form 7004 prior to the original due date of the partnership return.

Which requirement must be satisfied in order to specially allocate partnership income or losses to partners?

Which of the following statements regarding capital and profit interests received for services contributed to a partnership is false?

Lincoln,Inc.,Washington,Inc.,and Adams,Inc.form Presidential Suites Partnership on February 15,20X9.Now,Presidential Suites must adopt its required tax year-end.The partners' year-ends,profits interests,and capital interests are reflected in the table below.Given this information,what tax year-end must Presidential Suites use and what rule requires this year-end?   $\begin{array} { l c c c } & \text { Presidential Suites Partrarship } & \\& \text { Year-End } & \text { Profits } & \text { Capital } \\\text { Lincoln, Inc. } & 3 / 31 & 35 \% & 30 \% \\\text { Washington, Inc } & 7 / 31 & 30 \% & 40 \% \\\text { Adarns, Inc. } & 11 / 3 \mathrm { C } & 35 \% & 30 \%\end{array}$  

Which of the following items will affect a partner's tax basis?

On 12/31/X4,Zoom,LLC reported a $60,000 loss on its books.The items included in the loss computation were $30,000 in sales revenue,$15,000 in qualified dividends,$22,000 in cost of goods sold,$50,000 charitable contribution,$20,000 in employee wages,and $13,000 of rent expense.How much ordinary business income (loss) will Zoom report on its X4 return?

Clint noticed that the Schedule K-1 he just received from ABC Partnership included a $20,000 ordinary business loss allocation.His tax basis in ABC at the beginning of ABC's most recent tax year was $10,000.Comparing the Schedule K-1 he recently received from ABC with the Schedule K-1 he received from ABC last year,Clint noted that his share of ABC partnership debt changed as follows: recourse debt increased from $0 to $2,000,qualified nonrecourse debt increased from $0 to $3,000,and nonrecourse debt increased from $0 to $3,000.Finally,the Schedule K-1 Clint recently received from ABC reflected a $1,000 cash contribution he made to ABC during the year. Clint is not a material participant in ABC partnership,and he received $10,000 of passive income from another investment during the same year he received the loss allocation from ABC.How much of the $20,000 loss from ABC can Clint deduct currently,and how much of the loss is suspended because of the tax basis,the at-risk,and the passive activity loss limitations?

Alfred,a one-third profits and capital partner in Pizzeria Partnership needs help in adjusting his tax basis to reflect the information contained in his most recent Schedule K-1 from the partnership.Unfortunately,the Schedule K-1 he recently received was for year 3 of the partnership,but Alfred only knows that his tax basis at the beginning of year 2 of the partnership was $23,000.Thankfully,Alfred still has his Schedule K-1 from the partnership for years 1 and 2. Using the following information from Alfred's year 1,year 2,and year 3 Schedule K-1,calculate his tax basis the end of year 2 and year 3. $\begin{array}{l}\text { Year 1: }\\\begin{array}{lcc}\text { Ordinary business income } & \$ 10,000\\\text { Cash distribution } & \$ 7,000 \\\text { Alfred's share of partnership debt } & \$ 85,000 \\\text { Guaranteed payment } & \$ (4,500) \\\text { Nondeductible expense } & \$ (1,000) \\\text { Tax-exempt income } & \$ 1,200 \\\text { Year 2: } & & \\\text { Ordinary business loss } & \$ (5,000) \\\text { Cash contribution } & \$ 10,000 \\\text { Alfred's share of partnership debt } & \$ 73,000 \\\text { Guaranteed payment } & \$(7,500) \\\text { Nondeductible expense } & \$(3,000) \\\text { Tax-exempt income } & \$ 1,500) \\\text { Year 3: } & \\\text { Ordinary business loss } & \$(13,000)\\\text { Alfred's share of partnership debt } &\$ 58,000 \\\text { Nondeductible expenses } &\$(3,000) \\\text { Guaranteed payment } & \$(7,500) \end{array}\end{array}$