Partnerships

Question 1

Each partner is taxed on his or her share of partnership income whether or not it is distributed.

Answer 1

Each partner is taxed on his or her share of partnership income whether or not it is distributed. A partner’s distributive share of any partnership item is allocated by the partnership agreement.

Question 2

The character of distributive shares of partnership items is generally determined by the individual partners.

Answer 2

The character of distributive shares of partnership items is generally determined at the partnership level.

Question 3

Basis is adjusted for variations in a partner’s allocable share of partnership liabilities during the year.

Answer 3

Basis is adjusted for variations in a partner’s allocable share of partnership liabilities during the year, e.g., by payments on principal. However, partner capital accounts are NOT adjusted for partnership liability variations.

Question 4

Excess loss over the partner’s adjusted basis is not deductible in a subsequent year.

Answer 4

A partnership’s ordinary loss is a negative balance of taxable income. A partner’s distributive share of a partnership ordinary loss is allowable as a deduction to the partner only to the extent of the partner’s adjusted basis in his or her interest in the partnership at the end of the year. Excess loss is deductible in a subsequent year in which adjusted basis is greater than zero.

Question 5

A sale or exchange of a partnership interest (not attributable to Sec. 751 assets) results in capital gain or loss.

Answer 5

A sale or exchange of a partnership interest (not attributable to Sec. 751 assets) results in capital gain or loss. Gain or loss realized includes the selling partner’s share of partnership liabilities.

Question 6

Gain realized on the sale of a partnership is ordinary income to the extent attributable to the partner’s share of unrealized receivables and inventory.

Answer 6

Gain realized on the sale of a partnership is ordinary income to the extent attributable to the partner’s share of unrealized receivables and inventory.

Question 7

Gains are generally recognized upon the gift of a partnership interest.

Answer 7

Generally, NO GAIN is recognized upon the gift of a partnership interest. However, if partnership liabilities allocable to the gifted interest exceed the AB of the partnership interest, the donor must recognize gain. No loss is recognized on the gift.

Question 8

A services partnership is one in which capital is not a material income-producing factor.

Answer 8

A services partnership is one in which capital is not a material income-producing factor. In a family partnership, a family member is treated as a services partner only to the extent (s)he provides services that are substantial or vital to the partnership.

Question 9

A partnership, being merely a conduit, does not need to file a return.

Answer 9

A partnership, as a conduit, is not subject to federal income tax. But it must report information including partnership items of income, loss, deduction, and credit to the IRS.

Question 10

Realized gain or loss is recognized by a partner when a partnership interest is received in exchange for property contributed to the partnership.

Answer 10

Realized gain or loss is not recognized by a partner when a partnership interest is received in exchange for property contributed to the partnership.

Question 11

To the extent liabilities assumed by the partnership exceed the partner’s aggregate AB in all property contributed, the partner recognizes gain.

Answer 11

o the extent liabilities assumed by the partnership exceed the partner’s aggregate AB in all property contributed, the partner recognizes gain. Note that a partner still bears responsibility for his or her share of the liabilities assumed by the partnership.

Question 12

A partner who receives a partnership interest in exchange for services recognizes compensation income equal to the FMV of the partnership interest.

Answer 12

A partner who receives a partnership interest in exchange for services recognizes compensation income equal to the FMV of the partnership interest. Gross income must be reported when an interest received is subject to neither substantial risk of forfeiture nor restrictions on transfer. The income reported is ordinary.

Question 13

The holding period (HP) of the partner’s interest does not include the HP of contributed capital and Sec. 1231 assets.

Answer 13

The holding period (HP) of the partner’s interest includes the HP of contributed capital and Sec. 1231 assets.

Question 14

The basis in a partnership interest purchased from a partner is its cost, which is the purchase price minus the partner’s share of partnership liabilities.

Answer 14

The basis in a partnership interest purchased from a partner is its cost, which is the sum of the purchase price and the partner’s share of partnership liabilities.

Question 15

A year other than one required for a partnership may be adopted for a business purpose, with IRS approval.

Answer 15

A year other than one required for a partnership may be adopted for a business purpose, with IRS approval.

Question 16

Elections, such as the partnership accounting methods and tax year, are made by the individual partners.

Answer 16

Elections are generally made by the partnership. However, a partner makes certain elections for his or her distributive share.

Question 17

When a partner performs services for the partnership that are customarily performed by a partner, the partner’s return is generally his or her share of profits of the partnership business.

Answer 17

When a partner performs services for the partnership that are customarily performed by a partner, the partner’s return is generally his or her share of profits of the partnership business. It is gross income, not as compensation, but as a distributive share of partnership income.

Question 18

Guaranteed payments (GP) are not ordinary income to the partner.

Answer 18

For purposes of determining the partner’s gross income, the GP is treated as if made to a nonpartner. The partner separately states the GP from any distributive share. The payment is ordinary income to the partner.

Question 19

Payments to a partner without regard to income of the partnership for property or for services not customarily performed by a partner are generally treated as if the transaction took place between two unrelated persons after arm’s-length negotiations.

Answer 19

Payments to a partner without regard to income of the partnership for property or for services not customarily performed by a partner are generally treated as if the transaction took place between two unrelated persons after arm’s-length negotiations.

Question 20

When a partner contributes property to a partnership and immediately receives a distribution, no gain is recognized.

Answer 20

When a partner contributes property to a partnership and immediately receives a distribution, the transaction is essentially a sale. Gain realized is recognized to the extent the contributed property is deemed purchased by the other partners.

Question 21

A liability is a recourse liability if the creditor has no claim against the partnership or any partners.

Answer 21

A liability is a recourse liability if the creditor has a claim against the partnership or any partner for payment if the partnership defaults. A liability is a nonrecourse liability if the creditor has no claim against the partnership or any partners.

Question 22

The partnership recognizes no gain when distributing money to a partner.

Answer 22

A partnership does not recognize a gain when it distributes money to a partner. A partner recognizes gain only to the extent the distribution exceeds the AB in the partnership interest immediately before the distribution.

Question 23

A partnership terminates for federal tax purposes only when operations of the partnership cease or 25% or more of the total partnership interests are sold or exchanged within any 12-month period

Answer 23

A partnership terminates for federal tax purposes only when operations of the partnership cease or 50% or more of the total partnership interests are sold or exchanged within any 12-month period.

Question 24

An electing large partnership is any partnership with 100 or more nonservice partners during the preceding tax year.

Answer 24

An electing large partnership is any partnership with 100 or more nonservice partners during the preceding tax year. Service partnerships and commodity trading partnerships may not make this election.