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Exam 14: Partnerships and Limited Liability Entities

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Question 31

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Match each of the following statements with the terms below that provide the best definition. -Domestic production activities deduction

A) Adjusted basis of each partnership asset.
B) Operating expenses incurred after entity is formed but before it begins doing business.
C) Each partner's basis in the partnership.
D) Reconciles book income to "taxable income."
E) Tax accounting election made by partnership.
F) Tax accounting calculation made by partner.
G) Tax accounting election made by partner.
H) Does not include liabilities.
I) Designed to prevent excessive deferral of taxation of partnership income.
J) Amount that may be received by partner for performance of services for the partnership.
K) Theory under which a partnership's recourse debt is shared among the partners.
L) Will eventually be allocated to partner making tax-free property contribution to partnership.
M) Partner's share of partnership items.
N) Must generally be satisfied by any allocation to the partners.
O) Justification for a tax year other than the required taxable year.
P) No correct match is provided.

Q) E) and P)
R) I) and O)

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Question 32

Multiple Choice

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Match each of the following statements with the terms below that provide the best definition. -Separately stated item

A) Organizational choice of many large accounting firms.
B) Partner's percentage allocation of current operating income.
C) Might affect any two partners' tax liabilities in different ways.
D) Brokerage and registration fees incurred for promoting and marketing partnership interests.
E) Transfer of asset to partnership followed by immediate distribution of cash to partner.
F) Must have at least one general and one limited partner.
G) All partners are jointly and severally liable for entity debts.
H) Theory treating the partner and partnership as separate economic units.
I) Partner's basis in partnership interest after tax-free contribution of asset to partnership.
J) Partnership's basis in asset after tax-free contribution of asset to partnership.
K) Owners are "members."
L) Theory treating the partnership as a collection of taxpayers joined in an agency relationship.
M) Allows many unincorporated entities to select their Federal tax status.
N) No correct match provided.

O) C) and J)
P) B) and C)

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Question 33

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If a partnership allocates losses to the partners, the partners must first apply the passive loss limitations, then the basis limitation, and finally the at-risk limitations.If all three hurdles are met, the partner may deduct the loss.

Sharon and Sue are equal partners in the S&S Partnership.On January 1 of the current year, each partner's adjusted basis in S&S was $80,000 (including each partner's $20,000 share of the partnership's $40,000 of liabilities).During the current year, S&S repaid $30,000 of the debt and borrowed $20,000 for which Sharon and Sue are equally liable.In the current year ended December 31, S&S also sustained a net operating loss of $40,000 and earned $10,000 of interest income from investments.If liabilities are shared equally by the partners, on January 1 of the next year how much is each partner's basis in her interest in S&S?

Match each of the following statements with the terms below that provide the best definition. -Business purpose

The primary purpose of the partnership agreement is to document the various tax elections made by the partners regarding depreciation methods, treatment of research and experimental costs, calculation of the § 199 deduction, and the § 754 election.

Blaine contributes property valued at $50,000 (basis of $40,000) in exchange for a 25% interest in the BIKE Partnership.If the property is later sold for $70,000, gain of $15,000 will be allocated to Blaine.

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.

Sarah contributed fully depreciated ($0 basis) property valued at $50,000 to the RSTU Partnership in exchange for a 25% interest in partnership capital and profits.During the first year of partnership operations, RSTU had net taxable income of $200,000 and tax-exempt income of $4,000.The partnership distributed $10,000 cash to Sarah.Her share of partnership recourse liabilities on the last day of the partnership year was $20,000.What is Sarah's adjusted basis (outside basis) for her partnership interest at the end of the tax year?

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:

Match each of the following statements with the terms below that provide the best definition. -Carryover

Match each of the following statements with the terms below that provide the best definition. -Limited liability company

George received a fully-vested 10% interest in partnership capital and a 20% interest in future partnership profits in exchange for services rendered to the GHP, LLC (not a publicly-traded partnership interest).The future profits of the partnership are subject to normal operating risks.George will report ordinary income equal to the fair market value of the profits interest, but the capital interest will not be currently taxed to him.

Maria owns a 60% interest in the KLM Partnership.Four years ago her father gave her a parcel of land.The gift basis of the land to Maria is $60,000.In the current year, Maria had still not figured out how to use the land for her own personal or business use; consequently, she sold the land to the partnership for $50,000.The partnership immediately started using the land as a parking lot for its employees.Maria may recognize her $10,000 loss on the sale.

During the current year, MAC Partnership reported the following items of receipts and expenditures: $600,000 sales, $80,000 utilities and rent, $200,000 salaries to employees, $20,000 guaranteed payment to partner Antonio, investment interest income of $4,000, a charitable contribution of $8,000, and a distribution of $30,000 to partner Carl.Antonio is a 25% general partner.Based on this information, what items will be reflected on Antonio's Schedule K-1?

The JPM Partnership is a US-based manufacturing company.JPM calculates the domestic production activities deduction (§ 199) and deducts that amount on its Form 1065.

Which of the following entity owners cannot participate in management of the entity?

Katherine invested $80,000 this year to purchase a 30% interest in the KLM Partnership.The partnership reported $200,000 of net income from operations, a $2,000 short-term capital loss, and a $10,000 charitable contribution.In addition, the partnership distributed $20,000 to Katherine and $10,000 each to partners Lauren and Missy.Assuming the partnership has no beginning or ending liabilities, what is Katherine's basis in her partnership interest at the end of the year?

Match each of the following statements with the terms below that provide the best definition. -Entity concept

Seven years ago, Paul purchased residential rental estate that he has been depreciating as MACRS property over 27.5 years.This year, when his adjusted basis in the property was $250,000, Paul transferred the property to the newly formed PLA LLC in exchange for a one-third interest in the LLC.PLA incurred $10,000 of transfer taxes and fees related to the property.PLA must treat the $260,000 basis in the property, fees, and expenses, as new MACRS property depreciable over 27.5 years.