Partnership 1 - Formation and Basis

Question 1

Who has unlimited liability?

Answer 1

General partner.

Question 2

Which role must all partnership have?

Answer 2

One general partner.

Question 3

What does general partner do?

Answer 3

Participate in management.

Question 4

What are limited partners liable for?

Answer 4

Only up to their investment.

Question 5

What happens when limited partners participate in management?

Answer 5

Lose the status

Question 6

What liability do LLC Members have? What do they do?

Answer 6

Limited liability.

Participate in management.

Question 7

What are 4 entities that are taxed as partnership?

Answer 7

• General partnerships (all GPs).
• Limited partnerships (at least one GP and at least one LP.
• Limited liability companies (all members have limited liability).
• Limited liability partnerships (liability protection may be more limited than for LLC members.

Question 8

Check-the-Box Regulations: Non-incorporated entities: what is the classification for tax purpose if there is only one business owner?

Answer 8

The entity is disregarded and taxed as solo proprietorship on Schedule C.

Question 9

Check-the-Box Regulations: Non-incorporated entities: what is the classification for tax purpose if there is more than one business owner? What can they elect to be taxed?

Answer 9

Partnership.

As corporation if they wish.

Question 10

What are advantages of partnerships?

Answer 10

• Substantial flexibility.
• Limited liability/management ability (for LLC).
• Can usually get into and out of a partnership without recognizing a gain.
• Single taxation.

Question 11

Formation: what does a partner and partnership recognize from the contribution of property in exchange for a partnership interest.?

Answer 11

No gain or loss.

Question 12

Formation: what does a partner and partnership recognize when contributing services?

Answer 12

Wage income is recognized equal to the FMV of the partnership interest.

Question 13

Who elect almost all tax elections?

Answer 13

By partnership as opposed to by the partners.

Question 14

What are the basis of partnership interest? For the partnership in the asset? - when liability is attached?

Answer 14

The basis of an asset contributed.
The carryover basis.
The carryover basis still.

Question 15

What happens to the partners’ basis once the partnership begins operation?

Answer 15

Adjusted to reflect the results of operations.

Question 16

What will be the holding period in partnership interest?

Answer 16

• Holding period of assets tacks on for capital assets and Sec. 1231 assets.
• Holding period starts new for other assets.

Question 17

What will be the holding period in property received by the partnership?

Answer 17

The holding period partner had in property.

Question 18

What increases the partner’s initial basis?

Answer 18

• The partner’s share of taxable and nontaxable income
• Increases in the partner’s share of partnership debt.
• Additional contribution

Question 19

What decreases the partner’s initial basis?

Answer 19

• Share of the deductions, losses, nondeductible and noncapitalizable expenditures of the partnership
• Decrease in the partner’s share of partnership debt
• Any distributions from the partnership to the partner

Question 20

Where is the information of share of income, losses, deductions and credits found?

Answer 20

Form K-1.

Question 21

When is the partner’s basis computed?

Answer 21

At the last day of the tax year.

Question 22

What is the order for adjusting the partner’s basis?

Answer 22

1. Increase for all income items (including tax-exempt income).
2. Decrease for distributions.
3. Decrease by deductions and losses (including nondeductible items not charged to capital).

Question 23

Question:
A partner with a basis of $50 for the partnership interest receives a $30 cash distribution, is allocated a $60 distributive share of partnership ordinary loss, and an $8 distributive share of capital gain.
Ending basis?

Answer 23

1. 50+8=58
2. 58-30=28
3. Although loss is $60, he can deduct only the amount of basis he has. Therefore, 28-28=0

Question 24

What are 2 cases of liability that increases the partner’s basis?

Answer 24

• An increase in the partnership’s liabilities.

* An increase in a partner’s individual liability by assuming the partnership liabilities.

Question 25

What are 2 cases of liability that decreases the partner’s basis?

Answer 25

• A decrease in the partnership’s liabilities.

* A decrease in a partner’s individual liability by assuming the partnership liabilities.

Question 26

What is recourse? If the question does not state, which one should be assumed; recourse or non-recourse?

Answer 26

The legal right to demand compensation or payment.

Recourse.

Question 27

What is non-recourse debt?

Answer 27

The lender has no right to demand pmt except to take the property back when the borrower defaults.

Question 28

For recourse debt, how is the partner’s share of debt measured?

Answer 28

By his economic risk of loss, assuming a “constructive liquidation scenario” occurred.

Question 29

What is the amount of recourse debt allocated to limited partners?

Answer 29

Limited partners are not allocated any share of recourse debt.

Question 30

How is the non-recourse debt is allocated to partners?

Answer 30

Based on the partners’ profit sharing ratio.

Question 31

What is the amount of non-recourse debt allocated to limited partners?

Answer 31

Based on the partners’ profit sharing ratio.

Question 32

Question: A contributed land (FMV: $75,000, AB: $25,000) to a partnership in exchange for a 30% interest. The partnership assumed A’s $10,000 recourse mortgage on the land.
What is A’s basis for his partnership interest?

Answer 32

Beginning basis: 25,000
- Debt assumed by the partnership: 10,000
+ Partner’s share of debt: 10,000x30%
= Basis in partnership interest: $18,000

Question 33

When is the tax year end for partnership?

Answer 33

1. Same as ALL majority interest partner(s) (more than 50% capital interest and profits interest).
2. If the partnership has no single year for the majority test, then the partnership uses same year-end as all of ALL principal partners (5% or more profits interest).
3. If test 1 and 2 are not met, Least Aggregate Deferral method is used to determine.

Question 34

What is an alternative to 3 steps of determining the year end?

Answer 34

Section 444 election: allows a year-end different from required year-end as long as deferral does not exceed 3 months.

Question 35

When an existing partner sells a partnership interest, what must be considered in computing the basis of a partner’s interest acquired from another partner?

Answer 35

The consideration received by the transferor partner, and the basis of the transferee’s partnership interest includes both the cash actually paid by the transferee to the transferor, as well as the transferee’s assumption of the transferor’s share of partnership liabilities.

Question 36

When an asset contributed has liability that is greater than the AB of the asset, what is the implication?

Answer 36

Gain recognized and AB in the partnership interest is $0.

Question 37

When providing service in exchange of partnership interest, what value must be used to determine the income for the service?

Answer 37

FMV.