Ch 9 Part 2

Question 0

Contribution to partnership: 3 exceptions for when recognition of gain loss or income is taxable for property

Answer 0

1 liabilities assumed by partnership exceed partner’s
predistribution basis
2 partnership formed is investment partnership
3 contribution followed by distribution is treated as sale

Question 1

Contribution to Partnership - recognition of gain, loss or income by partner: property

Answer 1

Usually nontaxable

Question 2

Contribution to partnership - recognition of gain, loss or income of partner: services

Answer 2

Taxable to partner

Equal to FMV of partnership interest received in exchange for
Services

Question 3

Contribution to partnership - basis of partnership interest: property basis equation

Answer 3

Basis of partnership interest for contributed property =
Substituted basis from contributed property
+ share of partnership liabilities assumed
- partner’s liabilities assumed by partnership
+ (gain recognized if investment company)

Question 4

Contribution to partnership - basis of partnership interest for services equation

Answer 4

Basis of partnership interest for services =
Amount of income recognized
+ share of partnership liabilities assumed by partner
- partner’s liabilities assumed by partnership

Question 5

Contribution to partnership - gain or loss recognized by partnership for property

Answer 5

No gain or loss recognized by partnership

Question 6

Contribution to partnership - gain or loss recognized by partnership for services 2 things

Answer 6

1 deduction or capitalized expense is created depending on
Type of service rendered

2 gain or loss recognized equals difference between FMV of
Portion of assets used to pay service partner and basis of
Portion of assets

Question 7

Contribution to a partnership - basis of assets to the partnership for property: 3 things (basis in formation, assumption of partner’s liabilities, sale transaction)

Answer 7

Carryover basis used, only increased by partner’s gain
Recognized if gain results from formation of investment company

No basis adjustment when assumption of partner’s liabilities
Results in partner’s gain recognition

In sale transaction assets take cost basis

Question 8

Contribution to partnership - basis of assets to the partnership for services

Answer 8

Increased or decreased to reflect FMV of assets paid to the

Service partner

Question 9

Majority partners define, what does section 706 restrict

Answer 9

Have aggregate interest in partnership profits and capital
Exceeding 50%

Sec. 706: Partnership must have same tax year as one or more
Majority partner

Question 10

Principal partner define, section 706 restriction

Answer 10

Partner who owns 5% or more interest in capital or profits

Sec. 706: partnership must use tax year concurrent with principal
Partners, if they don’t share tax year, must use tax year with least
Aggregate tax deferral of months

Question 11

If a partnership has a business purpose for using some tax year other than year prescribed in rules…

Answer 11

The IRS must approve use of another tax year beacause

Acceptable business purpose

Question 12

Section 444 provides an election that permits a partnership to…

Answer 12

Use year end results in a deferral of lesser of current deferral
Period or 3 months

Question 13

Deferral period sec. 444

Answer 13

Time from beginning of partnership’s fiscal year to close of

First required tax year ending December 31

Question 14

Section 444 election is available to both…

Answer 14

New partnerships making initial tax year election or existing
Partnerships that are changing tax years

Question 15

When is sec. 444 election not needed?

Answer 15

When partnership satisfies sec. 706 requirements or

Has an established business purpose

Question 16

Mandatory required payment from making section 444’election

Answer 16

Required payment assesses tax on partnership’s deferred income
At highest individual marginal tax rate + 1%

Question 17

What does section 703 require a partnership to do?

Answer 17

Requires partnership make all elections that can affect computation
Of taxable income derived from partnership

Question 18

3 elections reserved to individual partners that relate to income

Answer 18

1 discharge of indebtedness
2 deduction and recapture of certain mining exploration
expenditures
3 deducting or crediting foreign income taxes

Question 19

3 elections partnership makes at entity level

Answer 19

1 accounting method

2 inventory method

3 depreciation method

Question 20

Section 706 requires that a partnership select the highest ranked tax year end from ranking the following 3 items

Answer 20

1 tax year end used by partners who own majority interest in
Partnership capital and profits
2 tax year end used by all principal partners
3 tax year end determined by least aggregate deferral test

Question 21

The IRS may grant permission for the partnership to use a fiscal year end if the partnership has a natural business year. If the partnership doesn’t have natural business year, it must either… 2 things

Answer 21

1 use tax yearned required by sec. 706
Or
2 elect fiscal year end under sec. 444 and make required payment

Question 22

Required payment under Sec. 444

Answer 22

Approximates tax due on deferred income

Question 23

Why does that IRC require a partnership to calculate partnership taxable income even though a partnership is not a taxable entity?

Answer 23

In order to adjust partners’ basis in their partnership interest

Question 24

Partnership taxable income is calculated similarly to taxable income for individuals, what are some differences? 2

Answer 24

1 taxable income divided into separately stated items and ordinary
Income or loss

2 section 703 specifies list of deductions available to individuals
That can’t be claimed by partnership

Question 25

What are 4 forbidden deductions to partnerships .

Answer 25

1 taxes paid/accrued to foreign country or US possession
2 charitable contributions
3 oil and gas depletion
4 NOL carry backs and carry forwards

Question 26

3 separately stated items for partnerships?

Answer 26

1 taxes paid/accrued to foreign country or US possession
2 charitable contributions
3 oil and gas depletion

Question 27

When are NOLs used

Answer 27

Used at partner level without any regard to partnership entity

Question 28

10 common separately stated items

Answer 28

1 net ST and LT capital gains/losses
2 Sec. 1231 gains/losses
3 Unrecaptured sec. 1250 gains
4 sec. 179 expense
5 charitable contributions
6 dividends and interest income
7 taxes paid or accrued to foreign country or US possession
8 tax exempt/partial tax exempt interest
9 investment income and expenses
10 any items subject to special allocations

Question 29

As a general rule, an item must be separately stated if The income tax liability of any partner that would result from Treating item separately is…

Answer 29

different from liability that would result if item were included in
Partnership ordinary income

Question 30

Once partnership separately states each item and allocates distributive share to each partners, the partners report separately stated items on their tax returns as…

Answer 30

If the partnership entity did not exist

Question 31

Partnership ordinary income or loss

Answer 31

All taxable items of income, gain, loss or deduction that don’t have
To be separately stated and are combined into total

Question 32

Partnership taxable income equation

Answer 32

Partnership taxable income =

separately stated items + partnership ordinary income or loss

Question 33

4 common items included in determining partnership’s ordinary income

Answer 33

1 gross profit on sales
2 administrative expenses
3 employee salaries
4 sec. 1245 depreciation recapture

Question 34

Where is partnership ordinary income allocated and reported in a partnership tax return?

Corporate tax return?

Answer 34

Partnership: schedules K and K-1 form 1065

Corporate partner: other income category Form 1120

Question 35

Where does an individual partner report his or her share of ordinary income or deductible distribution share of ordinary loss?

Answer 35

Schedule E form 1040

Question 36

Partner’s distributive share

Answer 36

Portion of partnership taxable and nontaxable income that

Partner has agreed to report for other tax purposes

Question 37

A partnership agreement may describe either…

Answer 37

1 a partner’s distributive share by indicating partner’s profits
And loss interest
Or
2 it may indicate separate profits and loss interests

Question 38

If a partner has a 20% profits interest and 30% loss interest, when is the loss interest calculated?

Answer 38

A partner’s loss percentage is only used in years when the

Partnership has a net loss

Question 39

Varying interest rule

Answer 39

If partnership’s ownership interest changes during partnership
Tax year, the income or loss allocation takes into account
Partner’s varying interest

Calculations applied on pro rata basis

Question 40

What do special allocations allow?

Answer 40

Flexibility in sharing specific items of income or loss among
Partners

Question 41

2 categories of special allocations

Answer 41

1 Sec 704 requires certain special allocations with respect to
Contributed property

2 special allocations that meet tests in Treasury Regulations
For having substantial economic benefit

Question 42

Section 704 requires precontribution gains or losses to be…

Answer 42

Allocated to contributing partner

Question 43

The allocation of depreciation is another common example of…

Answer 43

The special deduction allocation related to contributed property

Question 44

under Sec. 704 where the allocation has economic effect if it meets all 3 criteria

Answer 44

1 allocation results in appropriate increase/decrease in partner’s
Capital account
2 proceeds if any liquidation at any time in partnership’s life
Cycle are distributed in accordance with positive capital acct.
Balances
3 partners must make up negative capital acct. balances upon
Liquidation of partnership

Question 45

partners must make up negative capital acct. balances upon

Liquidation of partnership

Answer 45

These contributions are used to pay partnership debts or are

Allocated to partners having positive capital account balances

Question 46

Allocations: shifting (occurs when 2 conditions are present)

Answer 46

1 net change in partner’s capital accounts will be same for normal
Allocation and special allocation

2 total tax liability of partners will be less with special allocation
Than with normal allocation

Question 47

A partner can acquire partnership interest by methods others than…

Answer 47

Contributing property or services to partnership

Question 48

If a person purchases a partnership interest from an existing partner, what is the new partner’s basis

Answer 48

New partner’s basis =
(price paid for partnership interest)
+ (assumption of partnership liabilities

Question 49

If a person inherits the partnership interest, what is the heir’s basis?

Answer 49

Heir’s basis = FMV of partnership interest on decedent’s date of death
Or alternative valuation date but not less than liabilities assumed

Question 50

If person receives partnership interest as a gift, what is the donee’s basis?

Answer 50

Donee’s basis = donor’s basis + portion of gift tax paid by donor

Question 51

What 2 changes in partner’s liabilities are considered contribution of cash by the partner to the partnership?

Answer 51

1 increase in partner’s share of partnership liabilities

2 have partner assume partnership liabilities in his individual
Capacity

Question 52

Equation for partner’s basis in partnership interest based on changes in liabilities

Answer 52

Partner’s basis in partnership interest =
Partner’s basis before changes in liabilities
+ increases in share of partnership liabilities
- decreases in share of partnership liabilities
+ partnership liabilities assumed by this partner
- this partner’s liabilities assumed by partnership

Question 53

Recourse loan

Answer 53

Usual kind of loan that borrower remains liable for until loan is
Paid

Question 54

Nonrecourse loan

Answer 54

Loan where lender may sell property used as security if loan

Isn’t paid, but no partner is liable for any deficiency

Question 55

Recourse debt increases a limited partner’s basis only to extent that the partner has…

Answer 55

Risk of economic loss

Question 56

Non recourse debts increase limited partner’s basis based primarily on…

Answer 56

The profit ratio