Chapter 9: Homework

Question 1

Complete the sentence that defines what a partnership agreement is.

A partnership agreement is an agreement among the partners regarding the rights and obligations of the partners.

Regarding provisions of a partnership agreement, classify each of the following as “Yes” it would be included or “No” it would not.

The rights and obligations of the partners.

Answer 1

Yes

A partnership is an association formed by two or more persons to carry on a trade or business, with each contributing money, property, labor, or skill, and with all expecting to share in profits and losses.

Question 2

Regarding provisions of a partnership agreement, classify each of the following as “Yes” it would be included or “No” it would not.

The allocation of income, deductions, and cash flows.

Answer 2

Yes

A partnership is an association formed by two or more persons to carry on a trade or business, with each contributing money, property, labor, or skill, and with all expecting to share in profits and losses.

Question 3

Regarding provisions of a partnership agreement, classify each of the following as “Yes” it would be included or “No” it would not.

The persons (individuals) that can be partners.

Answer 3

No

A partnership is an association formed by two or more persons to carry on a trade or business, with each contributing money, property, labor, or skill, and with all expecting to share in profits and losses.

Question 4

Regarding provisions of a partnership agreement, classify each of the following as “Yes” it would be included or “No” it would not.

The conditions for terminating the partnership.

Answer 4

Yes

A partnership is an association formed by two or more persons to carry on a trade or business, with each contributing money, property, labor, or skill, and with all expecting to share in profits and losses.

Question 5

Regarding provisions of a partnership agreement, classify each of the following as “Yes” it would be included or “No” it would not.

The initial and future capital contribution requirements.

Answer 5

Yes

A partnership is an association formed by two or more persons to carry on a trade or business, with each contributing money, property, labor, or skill, and with all expecting to share in profits and losses.

Question 6

Indicate what is the difference between a general partnership and a limited liability company and when might each type of entity be used by completing the table below. Classify each characteristic as belonging to a “General partnership”, a “Limited liability company”, or both a “General partnership and limited liability company”.

Partners are considered members

Answer 6

Limited Liability Company

The types of entities that may be taxed as partnerships include general partnerships, limited partnerships, limited liability partnerships, limited liability limited partnerships, and limited liability companies.

Question 7

Indicate what is the difference between a general partnership and a limited liability company and when might each type of entity be used by completing the table below. Classify each characteristic as belonging to a “General partnership”, a “Limited liability company”, or both a “General partnership and limited liability company”.

Permitted to participate in management of the entity

Answer 7

General partnership and limited liability company

The types of entities that may be taxed as partnerships include general partnerships, limited partnerships, limited liability partnerships, limited liability limited partnerships, and limited liability companies.

Question 8

Indicate what is the difference between a general partnership and a limited liability company and when might each type of entity be used by completing the table below. Classify each characteristic as belonging to a “General partnership”, a “Limited liability company”, or both a “General partnership and limited liability company”.

Creditors collect from both partnership assets and partners.

Answer 8

General partnership

The types of entities that may be taxed as partnerships include general partnerships, limited partnerships, limited liability partnerships, limited liability limited partnerships, and limited liability companies.

Question 9

Indicate what is the difference between a general partnership and a limited liability company and when might each type of entity be used by completing the table below. Classify each characteristic as belonging to a “General partnership”, a “Limited liability company”, or both a “General partnership and limited liability company”.

The partners have unlimited liability for the entity’s debt.

G

Answer 9

General partnership

The types of entities that may be taxed as partnerships include general partnerships, limited partnerships, limited liability partnerships, limited liability limited partnerships, and limited liability companies.

Question 10

Indicate what is the difference between a general partnership and a limited liability company and when might each type of entity be used by completing the table below. Classify each characteristic as belonging to a “General partnership”, a “Limited liability company”, or both a “General partnership and limited liability company”.

Absent a personal guarantee, no liability for the entity’s debt.

Answer 10

Limited Liability Company

The types of entities that may be taxed as partnerships include general partnerships, limited partnerships, limited liability partnerships, limited liability limited partnerships, and limited liability companies.

Question 11

Indicate what is the difference between a general partnership and a limited liability company and when might each type of entity be used by completing the table below. Classify each characteristic as belonging to a “General partnership”, a “Limited liability company”, or both a “General partnership and limited liability company”.

Usually used for corporate joint ventures where the corporate partners are established with limited assets.

Answer 11

General partnership

The types of entities that may be taxed as partnerships include general partnerships, limited partnerships, limited liability partnerships, limited liability limited partnerships, and limited liability companies.

Question 12

Considering the differences and similarities between provision § 721 (non-recognition of gain or loss on contributions to a partnership) and § 351 (corporation formation); Refer to Chapter 4 for the nonrecognition provisions related to corporate formation. For each statement below, select one of the following: “Applies to § 351” or “Applies to § 721” or “Applies to Both”.

Non-recognition of gain or loss on contributions applies only if those persons transferring property to the entity are in control of the entity immediately after the exchange.

Answer 12

Applies to 351

As a general rule, both section 721 and section 351 provide that no gain or loss is recognized when property is transferred in the formation of a partnership or corporation.

Question 13

Considering the differences and similarities between provision § 721 (non-recognition of gain or loss on contributions to a partnership) and § 351 (corporation formation); Refer to Chapter 4 for the nonrecognition provisions related to corporate formation. For each statement below, select one of the following: “Applies to § 351” or “Applies to § 721” or “Applies to Both”.

Non-recognition of gain or loss on contributions applies to initial transfers as well as all subsequent contributions to the entity.

Answer 13

Applies to Both

As a general rule, both section 721 and section 351 provide that no gain or loss is recognized when property is transferred in the formation of a partnership or corporation.

Question 14

Considering the differences and similarities between provision § 721 (non-recognition of gain or loss on contributions to a partnership) and § 351 (corporation formation); Refer to Chapter 4 for the nonrecognition provisions related to corporate formation. For each statement below, select one of the following: “Applies to § 351” or “Applies to § 721” or “Applies to Both”.

If the transfer of property involves the receipt of money or other consideration, the transaction may be deemed a sale or exchange rather than a tax-free transfer.

Answer 14

Applies to Both

As a general rule, both section 721 and section 351 provide that no gain or loss is recognized when property is transferred in the formation of a partnership or corporation.

Question 15

Considering the differences and similarities between provision § 721 (non-recognition of gain or loss on contributions to a partnership) and § 351 (corporation formation); Refer to Chapter 4 for the nonrecognition provisions related to corporate formation. For each statement below, select one of the following: “Applies to § 351” or “Applies to § 721” or “Applies to Both”.

Non-recognition provisions do not apply to all transfers made by the owners.

Answer 15

Applies to Both

As a general rule, both section 721 and section 351 provide that no gain or loss is recognized when property is transferred in the formation of a partnership or corporation.

Question 16

Indicate whether each of the following partnerships can use the cash method of accounting. Select “Yes” or “No”, whichever is applicable.

A partnership engaging in the business of farming.

Answer 16

Yes

Like a sole proprietorship, a newly formed partnership may adopt either the cash or accrual method of accounting or a hybrid of these two methods. However, a few special limitations on cash basis accounting apply to partnerships.

Question 17

Indicate whether each of the following partnerships can use the cash method of accounting. Select “Yes” or “No”, whichever is applicable.

A partnership with partners that are C corporations (other than personal service corporations) and the partnership does not meet the $30,000,000 gross receipts test.

Answer 17

No

Like a sole proprietorship, a newly formed partnership may adopt either the cash or accrual method of accounting or a hybrid of these two methods. However, a few special limitations on cash basis accounting apply to partnerships.

Question 18

Indicate whether each of the following partnerships can use the cash method of accounting. Select “Yes” or “No”, whichever is applicable.

A partnership that is a tax shelter.

Answer 18

No

Like a sole proprietorship, a newly formed partnership may adopt either the cash or accrual method of accounting or a hybrid of these two methods. However, a few special limitations on cash basis accounting apply to partnerships.

Question 19

Indicate whether each of the following partnerships can use the cash method of accounting. Select “Yes” or “No”, whichever is applicable.

A partnership with a C corporation partner which meets the $30,000,000 gross receipts test.

Answer 19

Yes

Like a sole proprietorship, a newly formed partnership may adopt either the cash or accrual method of accounting or a hybrid of these two methods. However, a few special limitations on cash basis accounting apply to partnerships.

Question 20

Regarding a partner’s basis in the partnership interest, classify each of the following as either an item that “Increases basis” or one that “Decreases basis”.

Distribution from the partnership

Answer 20

Decreases basis

Question 21

Regarding a partner’s basis in the partnership interest, classify each of the following as either an item that “Increases basis” or one that “Decreases basis”.

Gain recognized under § 721(b)

Answer 21

Increases basis

Question 22

Regarding a partner’s basis in the partnership interest, classify each of the following as either an item that “Increases basis” or one that “Decreases basis”.

Partner’s liability assumed by the partnership

Answer 22

Decreases basis

Question 23

Regarding a partner’s basis in the partnership interest, classify each of the following as either an item that “Increases basis” or one that “Decreases basis”.

The partner’s share of taxable income

Answer 23

Increases basis

Question 24

Regarding a partner’s basis in the partnership interest, classify each of the following as either an item that “Increases basis” or one that “Decreases basis”.

Additional contribution to the partnership

Answer 24

Increases basis

Question 25

Regarding a partner's basis in the partnership interest, classify each of the following as either an item that "Increases basis" or one that "Decreases basis". The partner's share of separately stated deductions, foreign taxes, losses, and nondeductible/noncapitalized expenses

Answer 25

Decreases basis

Question 26

Regarding a partner's basis in the partnership interest, classify each of the following as either an item that "Increases basis" or one that "Decreases basis". The partner's share of any partnership liability

Answer 26

Increases basis

Question 27

Complete the following sentences regarding a partner's basis. A partner's basis is adjusted when necessary to determine the basis for the partnership interest. A partner's basis may never be reduced below zero (i.e., no negative basis is allowed). True Basis adjustments preserve the partnership's single-level of taxation. If basis is increased by partnership income, that income would not be taxed again when the partner sells the partnership interest at its fair market value.

Answer 27

- adjusted when necessary - true - single-level - Increased - would not

Question 28

Where can you find a partner's basis calculation? The partner's basis is generally not included in the partnership tax return; instead, basis records are maintained by the partner. However, you can often approximate the partner's tax basis by adding two amounts on Schedule K–1: the partner's share of partnership liabilities, plus the partner's ending tax basis capital account balance.

Answer 28

- not included - plus

Question 29

When is partnership income subject to self-employment tax or the net investment income tax by an individual partner? A general partner must pay self-employment tax on his or her distributive share of partnership income. Any partner (general or limited) must pay self-employment tax on any guaranteed payments for services. The net investment income tax applies to "income on investment of working capital," which includes guaranteed payments for use of a partner's capital.

Answer 29

- a general partner - any partner (general or limited) - applies - includes ## Footnote A partner is not treated as an employee for tax purposes. Thus, a partner is not subject to withholding on any guaranteed payments, and the partnership cannot generally deduct its payments for any fringe benefits paid to the partners. Certain types of partnership income allocated to a partner who is an individual taxpayer may be considered "net earnings from self-employment" (subject to self-employment (SE) tax) or "net investment income".

Question 30

Complete the e-mail below by classifying each of the situations as an "Advantage of partnership" or a "Disadvantage of partnership" over operating as a C or S corporation. If the entity plans to distribute its excess cash flow to the owners on a regular basis.

Answer 30

Advantage of partnership ## Footnote Proper Federal tax planning should be used at all stages of entity formation and operations to ensure the results match the owners' expectations. A partnership often provides tax advantages over a C or S corporation. When selecting a legal form in which to conduct business, a complete analysis, then, must consider the expected types and amounts of income for both the entity and the owners, plans to distribute cash flows, and whether additional taxes might apply.

Question 31

Complete the e-mail below by classifying each of the situations as an "Advantage of partnership" or a "Disadvantage of partnership" over operating as a C or S corporation. If the entity owners are individuals, and the income will be eligible for the qualified business income deduction.

Answer 31

Advantage of partnership ## Footnote Proper Federal tax planning should be used at all stages of entity formation and operations to ensure the results match the owners' expectations. A partnership often provides tax advantages over a C or S corporation. When selecting a legal form in which to conduct business, a complete analysis, then, must consider the expected types and amounts of income for both the entity and the owners, plans to distribute cash flows, and whether additional taxes might apply.

Question 32

Complete the e-mail below by classifying each of the situations as an "Advantage of partnership" or a "Disadvantage of partnership" over operating as a C or S corporation. If the entity currently operates as a C corporation and has substantial built-in gains on its assets.

Answer 32

Disadvantage of partnership ## Footnote Proper Federal tax planning should be used at all stages of entity formation and operations to ensure the results match the owners' expectations. A partnership often provides tax advantages over a C or S corporation. When selecting a legal form in which to conduct business, a complete analysis, then, must consider the expected types and amounts of income for both the entity and the owners, plans to distribute cash flows, and whether additional taxes might apply.

Question 33

Complete the e-mail below by classifying each of the situations as an "Advantage of partnership" or a "Disadvantage of partnership" over operating as a C or S corporation. If special allocations of income, expenses, and cash flows can be made by the entity owners.

Answer 33

Advantage of partnership ## Footnote Proper Federal tax planning should be used at all stages of entity formation and operations to ensure the results match the owners' expectations. A partnership often provides tax advantages over a C or S corporation. When selecting a legal form in which to conduct business, a complete analysis, then, must consider the expected types and amounts of income for both the entity and the owners, plans to distribute cash flows, and whether additional taxes might apply.

Question 34

Complete the e-mail below by classifying each of the situations as an "Advantage of partnership" or a "Disadvantage of partnership" over operating as a C or S corporation. The entity has taxable losses that the owners can utilize on their individual tax returns.

Answer 34

Advantage of partnership ## Footnote Proper Federal tax planning should be used at all stages of entity formation and operations to ensure the results match the owners' expectations. A partnership often provides tax advantages over a C or S corporation. When selecting a legal form in which to conduct business, a complete analysis, then, must consider the expected types and amounts of income for both the entity and the owners, plans to distribute cash flows, and whether additional taxes might apply.

Question 35

Complete the e-mail below by classifying each of the situations as an "Advantage of partnership" or a "Disadvantage of partnership" over operating as a C or S corporation. If the entity will exist for only a short period of time.

Answer 35

Advantage of partnership ## Footnote Proper Federal tax planning should be used at all stages of entity formation and operations to ensure the results match the owners' expectations. A partnership often provides tax advantages over a C or S corporation. When selecting a legal form in which to conduct business, a complete analysis, then, must consider the expected types and amounts of income for both the entity and the owners, plans to distribute cash flows, and whether additional taxes might apply.

Question 36

Complete the e-mail below by classifying each of the situations as an "Advantage of partnership" or a "Disadvantage of partnership" over operating as a C or S corporation.

Answer 36

Advantage of partnership ## Footnote Proper Federal tax planning should be used at all stages of entity formation and operations to ensure the results match the owners' expectations. A partnership often provides tax advantages over a C or S corporation. When selecting a legal form in which to conduct business, a complete analysis, then, must consider the expected types and amounts of income for both the entity and the owners, plans to distribute cash flows, and whether additional taxes might apply.

Question 37

Complete the e-mail below by classifying each of the situations as an "Advantage of partnership" or a "Disadvantage of partnership" over operating as a C or S corporation. The entity is in a high-risk business, and the owners require protection from personal liability.

Answer 37

Disadvantage of partnership ## Footnote Proper Federal tax planning should be used at all stages of entity formation and operations to ensure the results match the owners' expectations. A partnership often provides tax advantages over a C or S corporation. When selecting a legal form in which to conduct business, a complete analysis, then, must consider the expected types and amounts of income for both the entity and the owners, plans to distribute cash flows, and whether additional taxes might apply.

Question 38

Complete the e-mail below by classifying each of the situations as an "Advantage of partnership" or a "Disadvantage of partnership" over operating as a C or S corporation. If the entity plans to lease property from the owners or the owners plan on loaning funds to the entity.

Answer 38

Disadvantage of partnership ## Footnote Proper Federal tax planning should be used at all stages of entity formation and operations to ensure the results match the owners' expectations. A partnership often provides tax advantages over a C or S corporation. When selecting a legal form in which to conduct business, a complete analysis, then, must consider the expected types and amounts of income for both the entity and the owners, plans to distribute cash flows, and whether additional taxes might apply.

Question 39

Kenisha and Shawna form the equal KS LLC, with a cash contribution of $360,000 from Kenisha and a property contribution (adjusted basis of $380,000, fair market value of $360,000) from Shawna. How much gain or loss, if any, does Shawna realize on the transfer? Does Shawna recognize any gain or loss? If so, how much? Shawna has realized loss of $20,000, of which $0 is recognized. What is Kenisha's tax basis in her LLC interest? $360,000 The § 704(b) book basis? $360,000 What is Shawna's tax basis in her LLC interest? $380,000 The § 704(b) book basis? $360,000 What tax basis does the LLC take in the property transferred by Shawna? $380,000 e. How could the transaction be restructured to maximize the tax benefits to Shawna? Sell the property to an unrelated party and contribute the cash.

Answer 39

See question