Question 1

On June 1, 2015, Steve Maslan received a 20% capital interest in Gress Associates, a partnership, in return for services rendered plus a contribution of assets with a basis to Maslan of $15,000 and a fair market value of $20,000. The fair market value of Maslan’s 20% interest was $38,000. How much is Maslan’s basis for his interest in Gress? 1. $15,000 2. $20,000 3. $33,000 4. $38,000

Accepted Answer

$33,000 Since Maslan received a capital interest with a FMV of $38,000 in exchange for property worth $20,000 and services, Maslan must recognize compensation income of $18,000 ($38,000 − $20,000) on the transfer of services for a capital interest. Thus, Maslan’s basis for his partnership interest consists of the $15,000 basis of assets transferred plus the $18,000 of income recognized on the transfer of services, a total of $33,000.

Question 2

On January 1, 2015, the partners’ interests in the capital, profits, and losses of Mulford Partnership were Percent of capital, profits, and losses Rick - 25% Tim - 20% Jon - 55% On January 7, 2015, Tim sold his entire interest to an unrelated person. Rick sold his 25% interest in Mulford to another unrelated person on July 7, 2015. No other transfers of partnership interests took place during 2015. For tax purposes, which of the following statements is correct with respect to the Mulford Partnership? 1. Mulford terminated as of January 7, 2015. 2. Mulford terminated as of July 7, 2015. 3. Mulford terminated as of December 31, 2015. 4. Mulford did not terminate.

Accepted Answer

Mulford did not terminate. A partnership is terminated for tax purposes when there is a sale or exchange of 50% or more of the total interests in partnership capital and profits within any 12-month period. Since Tim sold his 20% interest on January 7, 2015, and Rick sold his 25% interest on July 7, 2015, there has been a sale of only 45% of the total interests in partnership capital and profits. Therefore, the partnership did not terminate.

Question 3

A $100,000 increase in partnership liabilities is treated in which of the following ways? 1. Increases each partner’s basis in the partnership by $100,000. 2. Increases the partners’ bases only if the liability is nonrecourse. 3. Increases each partner’s basis in proportion to their ownership. 4. Does not change any partner’s basis in the partnership regardless of whether the liabilities are recourse or nonrecourse.

Accepted Answer

Increases each partner’s basis in proportion to their ownership. Since partners are liable for partnership liabilities, a change in the amount of partnership liabilities affects a partner’s basis for a partnership interest. _When partnership liabilities increase, the increase is treated as if each partner individually borrowed money and then made a capital contribution of the borrowed amount._ As a result, an increase in partnership liabilities increases each partner’s basis in the partnership by each partner’s share of the increase.

Question 4

Ted King’s adjusted basis for his partnership interest in Troy Company was $24,000. In complete liquidation of his interest in Troy, King received cash of $4,000 and realty having a fair market value of $40,000. Troy’s adjusted basis for this realty was $15,000. King’s basis for the realty is 1. $ 9,000 2. $15,000 3. $16,000 4. $20,000

Accepted Answer

$20,000 In a liquidating distribution, a partner’s basis for a partnership interest is first reduced by the amount of cash received and by the partnership’s basis for any unrealized receivables and inventory received. Any remaining basis is then allocated to other property received. Here, King’s partnership basis of $24,000 is first reduced by the $4,000 cash to $20,000. This $20,000 becomes the basis of the distributed realty. Note that even though the FMV of the realty is $40,000, King recognizes no gain, since gain is recognized on a distribution only if the cash received exceeds the basis of the partnership interest.

Question 5

Campbell acquired a 10% interest in Vogue Partnership by contributing a building with an adjusted basis of $40,000 and a fair market value of $90,000. The building was subject to a $60,000 mortgage that was assumed by Vogue. The other partners contributed cash only. The basis of Campbell's partnership interest in Vogue is 1. $84,000 2. $34,000 3. $30,000 4. $0

Accepted Answer

$0 _Basis in the partnership is computed as follows:_ Adjusted basis of building contributed $40,000 Less: Debt assumed by partnership ($60,000) Plus: Campbell's 10% share of debt $6,000 = ($ 14,000) Gain recognized $14,000 _Ending basis-$0_ The computation above reflects that Campbell transferred 90% of the debt to other partners. The $14,000 of gain is recognized because basis cannot be negative. Therefore, ending basis is zero.

Question 6

Turner, Reed, and Sumner are equal partners in TRS partnership. Turner contributed land with an adjusted basis of $20,000 and a fair market value (FMV) of $50,000. Reed contributed equipment with an adjusted basis of $40,000 and an FMV of $50,000. Sumner provided services worth $50,000. What amount of income is recognized as a result of the transfers? 1. $50,000 2. $60,000 3. $90,000 4. $150,000

Accepted Answer

$50,000 Turner and Reed do not recognize gain on the formation since they contributed property in return for their partnership interests. Sumner received her interest in return for services, so she must recognize $50,000 of wage income.

Question 7

The method used to depreciate partnership property is an election made by 1. The partnership and must be the same method used by the "principal partner." 2. The partnership and may be any method approved by the IRS. 3. The "principal partner." 4. Each individual partner.

Accepted Answer

The partnership and may be any method approved by the IRS. The partnership elects the method used to depreciate partnership property with the results passed through to the partners. This method may be any type approved by the IRS. If any of the partners do not use the same treatment as the partnership and do not notify the IRS of the different treatment, the IRS may adjust the partner's return to conform to the return of the partnership with the additional tax being assessed.

Question 8

The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date 1. The partner is admitted to the partnership. 2. The partner transfers the asset to the partnership. 3. The partner's holding period of the capital asset began. 4. The partner is first credited with the proportionate share of partnership capital.

Accepted Answer

The partner's holding period of the capital asset began. The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date the partner's holding period of the capital asset began.

Question 9

Juan contributed land with a basis of $10,000 and a fair market value of $15,000 to the Sounds Partnership. He also contributed services with a value of $25,000. In return, he received a partnership interest in Sounds with a value of $40,000. What is Juan's basis in his partnership interest? 1. $0 2. $10,000 3. $35,000 4. $40,000

Accepted Answer

$35,000 Juan receives basis in his partnership interest equal to the basis of the property contributed. He also must recognize $25,000 of wage income for receiving a portion of the partnership interest in return for services rendered. Therefore, he also receives $25,000 of basis for this income recognition. Thus, his total basis is $10,000 + $25,000, or $35,000.

Question 10

Strom acquired a 25 percent interest in Ace Partnership by contributing land having an adjusted basis of $16,000 and a fair market value of $50,000. The land was subject to a $24,000 mortgage, which was assumed by Ace. No other liabilities existed at the time of the contribution. What was Strom's basis in Ace? 1. $0 2. $16,000 3. $26,000 4. $32,000

Accepted Answer

$0 A partner's initial basis in a partnership is equal to the amount of cash that the partner contributed plus the partner's adjusted basis for property when contributed. If the partnership assumes indebtedness from the contributed property, the contributing partner's basis is reduced by the amount of indebtedness assumed by the other partners. Strom's basis in the contributed property was $16,000. However, the property was subject to a $24,000 mortgage. Strom's partners assumed $18,000 of the mortgage, $24,000 multiplied by 75 percent (the percentage of the partnership not owned by Strom). Subtracting the $18,000 in liabilities assumed by the other partners, gives Strom a negative basis. However, a partner's basis in the partnership's interest cannot be negative. Thus, Strom's basis in the partnership is zero. Note that Strom also recognizes a gain of $2,000 to insure that the basis is not negative.

Question 11

Dean is a 25 percent partner in Target Partnership. Dean's tax basis in Target on January 1, 2015, was $20,000. At the end of 2015, Dean received a nonliquidating cash distribution of $8,000 from Target. Target's 2015 accounts recorded the following items: Municipal bond interest income $12,000 Ordinary income $40,000 What was Dean's tax basis in Target on December 31, 2015? 1. $15,000 2. $23,000 3. $25,000 4. $30,000

Accepted Answer

$25,000 A partner's basis in the partnership interest is _increased_ by: 1. additional contributions; 2. additional interest's purchased or inherited; 3. the partner's share of the partnership's income (including tax-exempt income); and 4. any increases in the partner's share of partnership liabilities. A partner's basis in the partnership interest is _decreased_ by: 1. cash and the partnership's adjusted basis of property received by the partner in a nonliquidating distribution; 2. the adjusted basis allocable to any part of the partner's interest sold or transferred; 3. the partner's share of the partnership's losses; and 4. any decreases in the partner's share of partnership liabilities. Thus, Dean's basis in the partner's interest would be increased by Dean's share of the partnership's income (including tax-exempt income) and decreased by the nonliquidating cash distribution. The partnership's income is $52,000, ordinary income of $40,000 plus municipal bond interest income of $12,000. Dean's 25 percent share is $13,000. Hence, adding the $13,000 in income and subtracting the $8,000 distribution to Dean's beginning tax basis in the partnership of $20,000, puts Dean's ending tax basis in the partnership at $25,000. This response correctly added Dean's share of the tax-exempt income to and subtracts the nonliquidating distribution from the basis.

Question 12

Able and Baker are equal members in Apple, an LLC. Apple has elected not to be treated as a corporation. Able contributes $7,000 cash and Baker contributes a machine with a basis of $5,000 and a fair market value of $10,000, subject to a liability of $3,000. What is Apple's basis for the machine? 1. $2,000 2. $5,000 3. $8,000 4. $10,000

Accepted Answer

$5,000 Upon a partnership formation the partnership's basis in the assets received from the contributing partners is the basis in the hands of the partner. Thus, Apple's basis is $5,000. There is no mention of the liability being assumed by the partnership!

Question 13

On June 1, 2015, Kelly received a 10% interest in Rock Co., a partnership, for services contributed to the partnership. Rock's net assets at that date had a basis of $70,000 and a fair market value of $100,000. In Kelly's 2015 income tax return, what amount must Kelly include as income from transfer of partnership interest? 1. $7,000 ordinary income. 2. $7,000 capital gain. 3. $10,000 ordinary income. 4. $10,000 capital gain.

Accepted Answer

$10,000 ordinary income. When an individual contributes services to a partnership for a capital interest in the partnership, the individual reports taxable income equal to the fair market value of the transferred capital interest. Capital interests received are treated as guaranteed payments, which means the capital interest is viewed a salary payment and, as such, reported as ordinary income by the partner. Since the fair market value of the partnership's net assets is $100,000 and Kelly contributed services for a 10 percent interest in the partnership, Kelly must recognize $10,000 of ordinary income.

Question 14

What is the tax treatment of net losses in excess of the at-risk amount for an activity? 1. Any loss in excess of the at-risk amount is suspended and is deductible in the year in which the activity is disposed of in full. 2. Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity. 3. Any losses in excess of the at-risk amount are deducted currently against income from other activities; the remaining loss, if any, is carried forward without expiration. 4. Any losses in excess of the at-risk amount are carried back two years against activities with income and then carried forward for 20 years.

Accepted Answer

Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity.

Question 15

Dale was a 50% partner in D&P Partnership. Dale contributed $10,000 in cash upon the formation of the partnership. D&P borrowed $10,000 to purchase equipment. During the first year of operations, D&P had $15,000 net taxable income, $2,000 tax-exempt interest income, a $3,000 distribution to each partner, and a $4,000 reduction of debt. At the end of the first year of operation, what amount would be Dale's basis? 1. $16,500 2. $17,500 3. $18,500 4. $21,500

Accepted Answer

$18,500 Dale's basis is computed as follows: Cash contributed $10,000 Equipment debt (50%) $5,000 Taxable income (50%) $7,500 Tax-exempt income (50%) $1,000 Debt reduction (50%) ($2,000) _Distribution ($3,000)_ Ending basis $18,500

Question 16

Dale's distributive share of income from the calendar-year partnership of Dale & Eck was $50,000 in 2015. On December 15, 2015, Dale, who is a cash-basis taxpayer, received a $27,000 distribution of the partnership's 2015 income, with the $23,000 balance paid to Dale in May 2016. In addition, Dale received a $10,000 interest-free loan from the partnership in 2015. This $10,000 is to be offset against Dale's share of 2015 partnership income. What total amount of partnership income is taxable to Dale in 2015? 1. $23,000 2. $37,000 3. $50,000 4. $60,000

Accepted Answer

$50,000 Partners must report their share of the partnership's income, deductions and other items on the partner's income tax return in the calendar year in which the partnership's tax year ends. Dale's share of Dale and Eck's 2015 income was $50,000. Thus, Dale must report $50,000 of partnership income in 2015. Partners cannot defer their share of partnership income by deferring payment and that loans from the partnership to a partner are included in the partner's share of partnership income.

Question 17

Don Wolf became a general partner in Gata Associates on January 1, 2015 with a 5% interest in Gata's profits, losses, and capital. Gata is a distributor of auto parts. Wolf does not materially participate in the partnership business. For the year ended December 31, 2015, Gata had an operating loss of $100,000. In addition, Gata earned interest of $20,000 on a temporary investment. Gata has kept the principal temporarily invested while awaiting delivery of equipment that is presently on order. The principal will be used to pay for this equipment. Wolf's passive loss for 2015 is 1. $0 2. $4,000 3. $5,000 4. $6,000

Accepted Answer

$5,000 Passive activity losses are the amount that total losses from passive activities exceed total gains from passive activities. The characterization of a partner's share of the partnership's income as passive or nonpassive depends on the partner's participation in the partnership's income earning activities. Since Wolf did not materially participate in the partnership business, his share of the partnership's operating loss, $5,000, is considered a loss from a passive activity. Passive income does not include portfolio income. As a result, Wolf's share of the $20,000 in interest income would not be passive. Therefore, since Wolf had no gains from passive activities to offset the loss from his share of the partnership's operating loss, Wolf would have a passive loss of $5,000, equal to his share of the partnership's operating loss.

Question 18

Which of the following limitations will apply in determining a partner's deduction for that partner's share of partnership losses? 1. At-risk 2. Passive loss

Accepted Answer

BOTH. At-risk rules limit the amount of loss deductions from investment activities to the amount the taxpayer had at-risk. The amount that a taxpayer had at risk is the amount of cash and basis of property contributed to an activity. Borrowed amounts are considered to be at risk to the extent that the taxpayer is personally liable for repayment. At-risk rules do not apply to partnerships, but the rules do apply to the individual partners. Passive activity rules prevent the offsetting of nonpassive income with passive losses and credits from passive activities. Passive activity rules do not apply to partnerships, but the rules do apply to the individual partners. This response correctly indicates that at-risk and passive activity rules apply in determining a partner's deduction for that partner's share of partnership losses.

Question 19

Alt Partnership, a cash basis calendar year entity, began business on October 1, 2015. Alt incurred and paid the following in 2015: Legal fees to prepare the partnership agreement $12,000 Accounting fees to prepare the representations in offering materials $15,000 Ignoring amortization, what was the maximum amount that Alt could expense on the 2015 partnership return?

Accepted Answer

$5,000 of organizational expenses may be deducted, but the $5,000 is reduced by the amount of expenditures incurred that exceed $50,000. Expenses not deducted must be capitalized and amortized over 180 months, beginning with the month that the corporation begins its business operations. Deductions are not allowed to the partnership or any partner for expenses incurred to sell partnership interests. Hence, $5,000 of the legal fees to prepare the partnership agreement may be deducted. However, the accounting fees to prepare the representations in offering materials may not be expensed or amortized because these expenses are related to selling partnership interests.

Question 20

PDK, LLC had three members with equal ownership percentages. PDK elected to be treated as a partnership. For the tax year ending December 31, year 1, PDK had the following income and expense items: Revenues$120,000 Interest income6,000 Gain on sale of securities8,000 Salaries36,000 Guaranteed payments10,000 Rent expense21,000 Depreciation expense18,000 Charitable contributions3,000 What would PDK report as nonseparately stated income for year 1 tax purposes?

Accepted Answer

$35,000. Non-separately stated income is the ordinary business income of the LLC, computed as follows: Revenues $120,000 Salaries ($36,000) Guaranteed payments ($10,000) Rent expense ($21,000) Depreciation expense ($18,000) Ordinary income $35,000

Question 21

Abe, Betsy, and Dan decide to form the equal ABD partnership at the beginning of Year One. Abe contributed depreciable assets that he has owned for five years that have a basis of $15,000 and a value of $20,000. Betsy contributed $20,000 cash. Dan contributed $12,000 in cash and land with a basis of $5,000 and a value of $8,000. How much income is allocated to Abe if the partnership sells the assets contributed by Abe for $18,000? 1. $0 2. $1,000 3. $3,000 4. $5,000

Accepted Answer

$3,000 The realized gain on the sale of the assets is $3,000 ($18,000 – $15,000 basis in assets). Abe's built in gain on the contribution is $5,000. The amount of gain allocated to Abe is the _lower of the realized gain or built-in gain_, so $3,000 is the allocation.

Question 22

Peters has a one-third interest in the Spano Partnership. During 2015, Peters received a $16,000 guaranteed payment, which was deductible by the partnership, for services rendered to Spano. Spano reported a 2015 operating loss of $70,000 before the guaranteed payment. What is(are) the net effect(s) of the guaranteed payment? I. The guaranteed payment increases Peters's tax basis in Spano by $16,000. II. The guaranteed payment increases Peters's ordinary income by $16,000.

Accepted Answer

2 ONLY Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. This treatment is for purposes of determining gross income and deductible business expenses only.

Question 23

Under the Internal Revenue Code sections pertaining to partnerships, guaranteed payments are payments to partners for 1. Payments of principal on secured notes honored at maturity. 2. Timely payments of periodic interest on bona fide loans that are not treated as partners' capital. 3. Services or the use of capital without regard to partnership income. 4. Sales of partners' assets to the partnership at guaranteed amounts regardless of market values.

Accepted Answer

Services or the use of capital without regard to partnership income. Under the Internal Revenue Code sections pertaining to partnerships, guaranteed payments are payments to partners for services or the use of capital without regard to partnership income. Thus, guaranteed payments are treated similarly to salary payments to the partner, not as partnership distributions.

Question 24

Guaranteed payments made by a partnership to partners for services rendered to the partnership, that are deductible business expenses under the Internal Revenue Code, are I. Deductible expenses on the U.S. Partnership Return of Income, Form 1065, in order to arrive at partnership income (loss). II. Included on schedules K-1 to be taxed as ordinary income to the partners. 1. I only. 2. II only. 3. Both I and II. 4. Neither I nor II.

Accepted Answer

Both I and II. Guaranteed payments from a partnership for the services of a partner are treated as salary payments and, as a result, receive similar treatment under the Internal Revenue Code. Therefore, in contrast to provisions applying to other withdrawals of assets from partnerships by partners, guaranteed payments are deductible by the partnership. The deduction for guaranteed payments may create an ordinary loss for the partnership. Guaranteed payments are required to be reported separately from the partner's share of the partnership's income on the partner's K-1. Thus, guaranteed payments made by a partnership to partners for services rendered to the partnership, that are deductible business expenses under the Internal Revenue Code, are deductible expenses on the U.S. Partnership Return of Income, Form 1065, in order to arrive at partnership income (loss) and included on schedules K-1 to be taxed as ordinary income to the partners.

Question 25

A guaranteed payment by a partnership to a partner for services rendered, may include an agreement to pay I. A salary of $5,000 monthly without regard to partnership income. II. A 25 percent interest in partnership profits.

Accepted Answer

1 ONLY. Guaranteed payments from a partnership for the services of a partner are treated as salary payments and, as a result, are made without regard to the partner's share of the partnership's income. Thus, a guaranteed payment by a partnership to a partner for services rendered may include an agreement to pay a salary of $5,000 monthly without regard to partnership income and may not include an agreement to pay 25 percent interest in partnership profits.

Question 26

Evan, a 25% partner in Vista Partnership, received a $20,000 guaranteed payment in 2015 for deductible services rendered to the partnership. Guaranteed payments were not made to any other partner. Vista's 2015 partnership income consisted of: Net business income before guaranteed payments $80,000 Net long-term capital gains $10,000 What amount of income should Evan report from Vista Partnership on her 2015 tax return? 1. $37,500 2. $27,500 3. $22,500 4. $20,000

Accepted Answer

$37,500 Guaranteed payments from a partnership for the services of a partner are treated as salary payments and, as a result, are made without regard to the partner's share of the partnership's income. Thus, Evan would treat the $20,000 payment from the partnership for services rendered as income on her 2015 tax return. She also must report her share of the partnership's net income. Since the guaranteed payments qualify as a deductible expense, Vista's partnership income may be reduced by the amount of the expense. Hence, the partnership's income would be $70,000; $80,000 in net business income before guaranteed payments plus the $10,000 net long-term capital gain less the $20,000 guaranteed payment. Evan's 25 percent share of the partnership's income would be $17,500 (25 percent × $70,000). Thus, Evan would report $37,500 in income from the Vista Partnership on her 2015 tax return − the sum of the guaranteed payment ($20,000) and her share of the partnership's income ($17,500).

Question 27

When the AQR partnership was formed, partner Acre contributed land with a fair market value of $100,000 and a tax basis of $60,000 in exchange for a one-third interest in the partnership. The AQR partnership agreement specifies that each partner will share equally in the partnership's profits and losses. During its first year of operation, AQR sold the land to an unrelated third party for $160,000. What is the proper tax treatment of the sale? 1. Each partner reports a capital gain of $33,333. 2. The entire gain of $100,000 must be specifically allocated to Acre. 3. The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by the other two partners. 4. The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership.

Accepted Answer

The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership.

Question 28

White has a one-third interest in the profits and losses of Rapid Partnership. Rapid's ordinary income for the 2015 calendar year is $30,000, after a $3,000 deduction for a guaranteed payment made to White for services rendered. None of the $30,000 ordinary income was distributed to the partners. What is the total amount that White must include from Rapid as taxable income in his 2015 tax return? 1. $3,000 2. $10,000 3. $11,000 4. $13,000

Accepted Answer

$13,000 Guaranteed payments to partners from their partnership for partnership services or capital are not treated as partnership distributions. Instead, the payments are treated as salary payments to employees or interest payments. Hence, White would have to include the $3,000 guaranteed payment on his 2015 tax return. In addition, since partnerships are pass-through for tax purposes, White must include his share of the partnership's income on his tax return. White share of the partnership's income would be $10,000 (= $30,000 in partnership income multiplied by White's 1/3 share in profits and losses). Therefore, the total amount that White must include from Rapid Partnership as taxable income in his 2015 tax return is $13,000, the sum of the $3,000 in guaranteed payments made to White and White's share of the partnership's income.

Question 29

Baker is a partner in BDT with a partnership basis of $60,000. BDT made a liquidating distribution of land with an adjusted basis of $75,000 and a fair market value of $40,000 to Baker. What amount of gain or loss should Baker report? 1. $35,000 loss 2. $20,000 loss 3. $0 4. $15,000 gain

Accepted Answer

$0 - Only a money distribution can cause gain recognition. Generally no gain or loss is recognized upon the complete liquidation of a partner’s partnership interest, although a loss can be recognized if the liquidating distribution consists of only cash, receivables, and inventory. Since Baker received land in complete liquidation of the partnership interest, Baker’s loss cannot be recognized and his unrecovered partnership basis of $60,000 becomes the basis for the land to Baker.

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