Ch 9 Part 3

Question 0

What does basis prevent?

Answer 0

Basis prevents a second tax levy on distribution of income that
Was taxed previously as partner’s distributive share

Question 1

Sec. 752 Treasury Regulations require that recourse liabilities be allocated to…

Answer 1

The partner who will bear the economic loss if partnership

Can’t pay debt

Question 2

What 2 operation items of a partnership increase basis?

Answer 2

1 partnership taxable income

2 tax exempt income of partnership

Question 3

What 2 operation items decrease basis?

Answer 3

1 partnership losses

2 expenditures that aren’t deductible for tax purposes and that
Aren’t capital expenditures

Question 4

Sec. 704 limitation on partnership loss deduction

Answer 4

Limits partner’s loss deduction to amount of his basis in

Partnership interest before the loss

Question 5

What happens to losses that are disallowed due to lack of basis in partnership interest?

Answer 5

Losses are suspended until partner obtains additional basis

Question 6

What is the beginning basis of a partnership interest for property contributed?

Answer 6

Substituted basis from property contributed plus gain

Recognized in contributions from investment partnership

Question 7

What is the beginning basis of a partnership interest for services contributed?

Answer 7

Amount of income recognized for services rendered

Plus any additional amount contributed

Question 8

What is the beginning basis of a partnership interest for purchase of partnership interest?

Answer 8

Cost

Question 9

What is the beginning basis of a partnership interest if it is gifted?

Answer 9

Donor’s basis plus gift tax on appreciation

Question 10

What is the beginning basis of a partnership interest if inherited?

Answer 10

FMV at date of death or alternative valuation date

Question 11

Liability impact of basis in partnership interest: increase in basis

Answer 11

Increases in the partner’s share of partnership liabilities

Liabilities of partnership assumed by partner in his individual
Capacity

Question 12

Liability impact on basis in partnership interest: decrease basis

Answer 12

Decreases in partner’s share of partnership liabilities

Liabilities of partner assumed by partnership

Question 13

Operations impact on basis of partnership interest: increase in basis 3 things

Answer 13

1 partner’s share of ordinary income and separately stated income
And gain items (including tax exempt items
2 additional contributions to partnership
3 precontribution gain recognized

Question 14

Operations impact on basis of partnership interest: decrease in basis 3 things

Answer 14

1 distributions from partnership to partner
2 partner’s share of ordinary loss and separately stated loss
And deduction items (including items not deductible for tax
Purposes and aren’t capital expenditures)
3 precontribution loss recognized

Question 15

Special loss limitations: at risk rules

Answer 15

Limit losses to amount called at-risk basis

Question 16

What do passive activity loss or credit limitation rules do?

Answer 16

Disallow most net passive activity losses

Question 17

At-risk basis

Answer 17

Same amount as partnership basis with exception that liabilities
Increase that at risk basis only if partner is at risk for such an
Amount

Question 18

What entities do at risk rules apply to? Not apply to?

Answer 18

Apply to individuals and closely held C corporations

Don’t apply to widely held C corporations

Question 19

What liabilities are not included in partner’s at risk basis?

Why?

Answer 19

Non recourse liabilities

Because partner would not have to pay non recourse liabilities
Even if partnership became worthless

Question 20

If partner has significant amount of non recourse liabilities, at risk rules will…

Answer 20

Make a partner’s loss deduction substantially less

Question 21

One significant exception to application of at risk rules

Answer 21

At-risk rules don’t apply to nonrecourse debt if it is qualified real
Estate financing

Question 22

The partner is considered at risk for his real estate financing if all 3 of the following requirements are met

Answer 22

1 financing is secured by real estate used in partnership’s real
Estate activity
2 debt is not convertible to any kind of equity interest in
Partnership
3 financing is from qualified person or government

Question 23

Qualified person

Answer 23

Unrelated person who is in trade or business of lending money

Ex. Bank, financial institutions, mortgage broker

Question 24

Passive activity limitations: sec. 469 three categories for income

Answer 24

1 amounts derived from passive activities
2 active income (salary, bonuses, income from business where
Taxpayer materially participates)
3 portfolio income (dividends, interest, capital gains from
investments)

Question 25

Passive losses

Answer 25

1Can’t be used to offset active income or portfolio income
2 Carry over to future years where they offset passive income in
Those years
3 passive losses allowed in full when taxpayer disposes of
Entire interest in passive activity
4 passive rental activity deducted $25k/yr.

Question 26

Passive activity

Answer 26

Any trade or business where taxpayer does not materially

Participate

Question 27

Under sec. 707, no loss can be deducted on the sale or exchange of property…

Answer 27

Between a partnership and a person who directly or indirectly
Owns more than 50% of partnership’s capital or profits interests

Question 28

Indirect ownership

Answer 28

Includes ownership by related parties such as family members

Question 29

What is sec. 707 similar to?

Answer 29

Section 267 related party losses in chapter 3

Question 30

If the seller is disallowed a loss under sec. 707, the purchaser can reduce…

Answer 30

Any subsequent gain realized on the sale of property by a

disallowed loss

Question 31

When a gain is recognized on the sale of a capital asset between a partnership and related partner, sec. 707 requires that the gain be…

Answer 31

Be ordinary if property will not be capital asset to its new owner

Question 32

Is a partner an employee of a partnership?

What does this mean for fringe benefits?

Answer 32

partner is generally not an employee of partnership

Fringe benefits are disallowed for partner who is “employed” by
His partnership

Question 33

Guaranteed payment 2 things

Answer 33

Payment to partner who provides ongoing services to partnership
Is compensated like an employee

Payments made to partner for use of invested capital

Question 34

No guaranteed payment occurs under arrangement unless

Partner’s distributive share is less than his…

Answer 34

Guaranteed minimum

Question 35

How are guaranteed payments treated? By partner, by partnership .

Answer 35

Taxed as ordinary income to partner

Included in partner’s income statement, the same year the
Partnership deducts or capitalizes the payments

Question 36

If a guaranteed payment exceeds partnership’s ordinary income, the payment creates…

Answer 36

An ordinary loss that is allocated among partners

Question 37

Family partnership: 3 tests to determine if family members are real partners under sec. 704 safe harbor rules

Answer 37

1 partnership interest must be capital interest
2 capital must be a material income producing factor in
Partnership’s business activity
3 family member must be true owner of the interest

Question 38

What does a capital interest give the partner the right to receive?

Answer 38

Right to receive assets if partnership liquidates immediately
Upon partner’s acquisition of interest

Question 39

Capital is seldom considered a material income producing factor if the partnership is…

Answer 39

In a service business

Question 40

Family partnerships: if donor gifts ownership interest of partnership, when will they be taxed?

Answer 40

If the donor retains control

Question 41

Family partnership: what 4 factors demonstrate donor retained control?

Answer 41

1 retention control over distributions of income
2 over assets essential to business
3 limitation of donee partner’s right to liquidate and sell his interest
4 retention of management control