Chapter 19 Flashcards
Taxation of Partners and Partnerships
If a partner lends money to his or her partnership as an outsider—namely, not as a partner—then the basis of his or her partnership interest is not affected.
False
When a partner lends money to his or her partnership as an outsider, his or her partnership basis is increased by his or her share of the partnership’s liability to him or her.
A limited liability company has the same limited liability protection as a corporation, but may be taxed as a partnership.
True
A manufacturing partnership can deduct payments for unrealized receivables when liquidating a retiring partner’s interest.
False
Payments to a retiring partner that are attributable to unrealized receivables are not deductible by a manufacturing partnership. Although the retiring partner will treat such amounts as ordinary income, the partnership treats such amounts as made-for-partnership property. No deduction is allowed.
When a partner contributes appreciated assets to a partnership, he or she recognizes gain on the transfer.
False
No gain is recognized on the transfer of appreciated assets to a partnership. The contributor-partner will generally take as his or her original basis for his or her partnership interest the basis he or she had in the property contributed at the time of contribution.
A partner’s distributive share of items of partnership income or loss is included in his or her personal tax return.
True
Upon the liquidation of an interest in a service partnership, payments for goodwill are treated as capital gain regardless of whether they are mentioned as such in the partnership agreement.
False
If the partnership agreement specifies that payments will be made for goodwill, the partners receiving liquidating distributions will report payments for goodwill as capital gain, but the payments are not deductible by the partnership. If the agreement is silent as to goodwill, the payments are taxable to the partners as ordinary income and are deductible by the partnership.
A retiring partner’s share of the gain attributable to inventory is treated as ordinary income when the partnership liquidates the retiring partner’s interest.
True
Generally, limited partners are limited in authority.
True
A family partnership is recognized as a partnership for tax purposes if the partnership arrangement has economic reality.
True
The basis of a contributing partner’s partnership interest is generally the amount of cash contributed plus the adjusted basis of the property he or she contributes to the partnership.
True
In a family partnership where capital is not a material income-producing factor, a donee of a partnership interest must contribute services in order to be treated as a partner for tax purposes.
True
A partner’s distributive share is generally determined in accordance with the partnership agreement.
True
Profits earned by a partnership are taxed twice: once to the partnership itself and also to its owners.
False
The partnership itself is not a taxpayer. Therefore profits are taxed only once to each partner.
The aggregate theory and the entity theory are two theories of partnership taxation used in tax law relating to partnerships and their partners.
True
Business organizations that are unincorporated under state law may generally choose whether to be taxed as partnerships or corporations.
True